Comm. 08

TABLE OF CONTENTS
CODE OF COMMERCE 1
NEGOTIABLE INSTRUMENTS LAW 10
INSURANCE LAW 49
TRANSPORTATION LAWS 82
CORPORATION CODE 117
BANKING LAWS 193
LAW ON INTELLECTUAL PROPERTY 224
SPECIAL LAWS 251
.......................................................................... Bulk Sales Law 251
......................................................... Warehouse Receipts Law 253
............................................... General Bonded Warehouse Act 261
.................................................................... Trust Receipts Law 262
............................................................... Chattel Mortgage Law 265
............... Maceda Law/Realty Installment Buyer Protection Act 271
........................................................ Real Estate Mortgage Law 272
.......................................................................... Insolvency Law 276
................................................................... Truth In Lending Act 287
This is the Intellectual Property
of the San Beda College of Law 2008 Centralized Bar Operations.
Unauthorized use and reproduction of this material is not allowed.
COMMERCIAL LAW
CODE OF COMMERCE
CODE OF COMMERCE
Commerce
COMMERCE
Branch of human activity, the purpose of which is
to bring products to the consumer by means of
exchanges or operations which tend to supply and
extend them to him, habitually, with intent of gain,
at the proper time and place and in good quality
and quantity (1 Blanco 36, cited in Bar Review Materials in
Commercial Law, Jorge Miravite, 2007ed).
ACTS OF COMMERCE/ COMMERCI AL
TRANSACTIONS
The Code of Commerce does not attempt
anywhere to define what commercial transactions
are. It only specifies two general classes: (1)
those contained in the Code of Commerce and (2)
all others of analogous character (Art. 2, Code of
Commerce).
Moreover, an act need not be performed by a
merchant in order that it may be considered an act
of commerce (Article 2, Ibid).
GOVERNED BY:
1. Code of Commerce; or, in its absence-
2. Usages of Commerce generally observed in
each place; or in the absence of both-
3. Civil Law.
LAW MERCHANT (LEX MERCATORIA)
An old international law of merchants and
mariners growing out of their customary practices.
It was a l aw practi ced and enforced by
businessman and ship owners in their own courts
without professional judges or lawyers (Mellinkoff s
Dictionary of American Legal Usage cited in Notes on Selected
Commercial Laws, Tristan Catindig, 2003ed).
COMMERCIAL LAW
Branch of private law which regulates the juridical
relations arising from commercial acts.
It includes TRADE (business traffic within the
limitations of the state) and COMMERCE
(intercourse with foreign states).
SOURCES:
1. PRINCIPAL
a. Statute Law
b. Agreements
c. Customs
d. Court Decisions
2. AUXILIARY
a. Natural Law
b. Scientific Law
San Beda College of Law 1
2008 CENTRALIZED BAR OPERATIONS
EXECUTIVE COMMITTEE
VISMARCK UY over-all chair, APRIL CABEZA chair academics operations, ALDEAN LIM chair hotel operations, AYN
SARSABA vice chair for operations, ANTHONY PURGANAN vice chair for academics,
RONALD JOHN DECANO vice chair for secretariat, KARLA FUNTILA vice chair for finance,
JEFFREY GALLARDO vice chair for edp, ULYSSES GONZALES vice chair for logistics
COMMERCIAL LAW
REINIER PAUL R. YEBRA subject chair
ANSON T. LAPUZ assistant chair
FATIMA ANNE C. ZAMORA edp
ANSON T. LAPUZ code of commerce, JENNY VI H. MAGUGAT negotiable instruments law, CLARIBELLE S.
BAUTISTA insurance, RALPH DAVID D. SO and MARA NADIA C. ELEFAO transportation law, REXIE MAY E.
MAGSANO corporation law, FRANCESCA LOURDES M. SENGA banking laws, BETHEENA C. DIZON law on
intellectual property, PRINCESSITA M. YULDE special laws
MEMBERS: Colleen Infante, Andro Julio Quimpo, Jan Reyes, Anthony Menzon, Marife Andal, Rayhanah Abubacar,
Francis James Brillantes, , Jay Masangcay, Belle Salas, Charity Jimenez, Richardson Bassig, Leopoldo Aquino, Carlo
Bautista, Raul Canon, Karla Funtila, May Pandoy, Benedicto Claravall, Melanie Valenciano, Kring Carayugan, Eva Naparan,
Paula Laureano, Kate Asilo, Ivy Galang, Masha Mariano, Diane Therese Dauz, Robert de Guzman, Jan Allyson Vitug,
Agnes Pader, CJ Batalla, Leonardo Mendoza, Jay Celzo, Maria Teresa Flaminiano, Rodrigo Melchor Jr., Jan Ale Fajardo,
Joyce Maika Tolentino, Precious Lledo, Emilio Maraon III
c. Forei gn Statutory Law and Judi ci al
Decisions
d. Opinions of Authorities
CHARACTERISTICS: (PU-CUE)
1. Uniform - act or contract is governed by the
same set of rules;
2. Universal/ International - exists in every
civilized society;
3. Equitable - commercial transactions involve
the exchange of values or consideration;
4. Customary - embody rules that are followed
from time to time or are invoked in everyday
transactions;
5. Progressive - accumulates new ideas and
k e e p s a b r e a s t wi t h c o n t e mp o r a r y
development.
F U N D A M E N T A L P O S T U L AT E S I N
COMMERCIAL LAW:
1. HABITUALNESS IN COMMERCE/ ELEMENT
OF REPETITION- Article 3 provides that the
legal presumption of habitually engaging in
commerce shall exist from the moment the
person who intends to engage therein
announces through circulars, newspapers,
handbills, posters exhibited to the public, or in
a n y o t h e r ma n n e r wh a t s o e v e r , a n
establishment which has for its object some
commercial operation;
2. T I M E I S O F T H E E S S E N C E I N
COMMERCIAL TRANSACTIONS lies on the
principle that the expeditious enforcement and
consummation of the transactions serve the
better interests of the multitude of parties
similarly situated (Commercial Law Review, Cesar L.
Villanueva, 2007ed).
CIVIL LAW
CODE
OF
COMMERCE
Perfection
Theory of
Cognition(acceptance
made by letter or telegram
does not bind the offeror
except from the time it
came to his knowledge
and that the contract is
presumed to have been
entered into in the place
where the offer was made)
Theory of
Manifestation
(contracts shall be
perfected from the
moment an answer is
made accepting the
offer)
Designation of period
If the obligation does not
fix a period, action would
have to be filed with the
courts for the fixing of the
period
Obligations which do
not have a period
previously fixed by
the parties shall be
demandable ten (10)
days after having
been contracted if
they give rise only to
an ordinary action,
and on the next day
if they involve
immediate action
Concept of delay and default
Depends on the actuations
of the obligee or creditor
no demand, no liability,
EXCEPT if time is of the
essence in the contract
(Article 1169 of the Civil Code)
Every debtor would
be in default without
need of a demand
(mora ex re)
Note: Despite the existence of distinguishing
elements, it is opined by many authors that the
prevailing social view seems to be the MIXED
THEORY, t hat i s, t hat CI VI L LAW and
COMMERCIAL LAW supplement one another
(Gopengco, cited in Commercial Law Review, Cesar L.
Villanueva, at p.8, 2007ed).
Constitutional Provisions on Commerce and Trade
1. Economic Nationalism as Constitutional Policy
on National Economy and Commerce (Section 1,
Article XII, and Sections 19 & 20 of Article II, 1987
Philippine Constitution);
2. Equitable Distribution of Wealth (Sections 9 & 10,
Article II, Ibid);
3. Filipino First Policy and Nationalization (Section
10 & 12 of Article XII, Ibid);
4. Power of Judicial Review allowing Courts to
have a final word in Key Economic and
Commercial Matters (Section 1, Article VIII, Ibid).
COMMERCIAL LAWS STILL IN FORCE:
1. Merchants, Books of Merchants and General
Provisions on Contracts (Articles 1-63, Code of
Commerce)
2. Joint Account Associations (Articles 239-243, Ibid.)
3. Commercial Barter (Article 346, Ibid)
4. Transfers of Non-Negotiable Credits (Articles
347-348, Ibid)
5. Commer c i al Cont r ac t s of Ov er l and
Transportation (Articles 349- 379, Ibid)
6. Letters of Credit (Articles 567-572, Ibid)
2 MEMORY AID IN COMMERCIAL LAW
Code of Commerce
7. Maritime Commerce (Articles 573-869, Ibid)
8. Charter Party
9. Respondentia
10. Averages
11. Bottomry
12. Bill of Lading
13. Aval
14. Crossed Checks
15. Arrival Under Stress
16. Collision
(Commercial Law Review, Villanueva, 2007ed; Bar Review
Materials in Commercial Law, Miravite, 2007ed).
Note: Article 580 of the Code of Commerce is
deemed repealed by Section 17, P.D. 1521 or the
Ship Mortgage Decree of 1978, insofar as the
latter confers on the preferred mortgage lien on
the vessel superiority over all other claims (Poliand
Industrial Limited v. National Development Company, GR No.
143866, August 22, 2005).
SPECIAL COMMERCIAL LAWS:
1. Corporation Code
2. Negotiable Instruments Law
3. Insurance Code
4. Public Service Law
5. General Banking Law
6. Securities Regulation Code
7. Insolvency Law
8. Retail Trade Nationalization Law
9. Chattel Mortgage Law
10. Warehouse Receipts Law
EFFECT OF THE NEW CIVIL CODE ON THE
CODE OF COMMERCE
Provisions of the Code of Commerce expressly
repealed by the New Civil Code: (PAG LSD)
1. Sales
2. Partnership
3. Agency
4. Loan
5. Deposit
6. Guaranty (Article 2270 [2], New Civil Code)
Merchants
MERCHANTS IN GENERAL
One whose business is buying and selling goods
for profit. A person or entity that holds itself out as
having expertise peculiar to the goods in which it
deals, and is therefore held by the law to a higher
standard than a consumer or other non-merchant
is held (Blacks Law Dictionary).
CLASSES OF MERCHANTS:
a) Foreign merchants; and
b) Filipino Merchants (Article 15, Code of Commerce).
ESSENTIAL REQUISITES OF A MERCHANT:
FILIPINO FOREIGN
INDIVIDUAL
a. Legal capacity to
engage in
commerce;
b. Habitually engage
himself therein;
c. Must have
completed the
age of 18 (as
amended by R.A.
6809);
d. Must have free
disposition of his
property (Article 4,
Ibid).
a. Law of his
country - as to
his contractual
capacity;
b. Law of the
Philippines -
creations of
establishment,
merchant
operations and
jurisdiction of
courts.
ASSOCIATION
1. Commercial or
industrial company;
2. Created in
accordance with
existing
legislations;
3. With legal capacity
to engage in
commerce; and
4. Habitually engaged
therein (Article 1, Code
of Commerce).
Must obtain a
license from the
SEC, but the
Board of
Investments,
under P.D. 1789
may impose
requirements
other than those
set by the
Corporation Code
(Continental Airlines,
Incorporated v. Santiago,
GR No. 84764, April
18, 1989).
RULE ON MINORS
GENERAL RULE
A minor may NOT engage in commerce.
EXCEPTIONS
1. Minor continues the business of his parents
or predecessors through a guardian;
2. Investment in stocks of a corporation. PD
734 provides that a minor at least seven
years old may open a bank savings
account or time deposit and withdraw the
same without the assistance of his parent
or guardian.
DISQUALIFICATIONS:
A. Absolute Disqualification
a. Persons sufferi ng the penal ty of ci vi l
interdiction;
b. Persons declared bankrupts;
c. Persons disqualified by special laws or
provisions (Article 13, Code of Commerce).
A. Relative Disqualification
a. Justices of the Supreme Court, judges and
of f i ci al s of t he depar t ment of publ i c
prosecutors in actual service;
b. Administrative, economic or military heads of
districts, provinces or posts;
c. Employees engaged in the collection and
administration of public funds of the State,
appointed by the Government;
d. Stock or brokers of whatever class they may
be;
e. Those who by virtue of laws or special
provisions, may not engage in commerce in a
determinate territory (Art. 14, Ibid);
f. Members of Congress (Art. VI, Sec. 14, 1987
Constitution);
g. President, Vice President, members of Cabinet
and their deputies or assistants (Art. VII, Sec. 13,
1987 Constitution);
h. Members of Constitutional Commission (Art.
IX, Sec. 2 1987 Constitution);
i. President, Vice-President, Members of the
Cabinet, Congress, Supreme Court and the
Constitutional Commission, Ombudsman with
respect to any loan, guaranty, or other form of
financial accommodation for any business
purpose by any government-owned or
controlled bank to them (Art. XI, Sec. 16, 1987
Constitution).
Note: Macariola v. Asuncion (Adm. Case No.
133-J, May 31, 1982) held that Art. 14 of the
Code of Commerce providing for relative
disqualification of judges, is political in
nature, and is deemed to have been
abrogated by the transfer of sovereignty
from Spain to the US and later, with the
establishment of the Republic of the
Philippines. Since there has been no re-
enactment by the new sovereign, the
disqualification should be considered to
have lost its legal and binding force on
judges.
After the decision in Macariola, the SC
adopted the Code of Judicial Conduct,
effective October 20, 1989 (see Rule 5.02),
which supplied the void left by the
abrogation of Art. 14 (Ibid). Indeed, it is not
good for judges to engage in business
except only to the extent allowed by Rule
5.03 of the Code of Judicial Conduct (Berlin
v. Barte, AM No. MTJ-02-1443, July 31, 2002).
ABSOLUTE
INCAPACITY
RELATIVE INCAPACITY
Extends
throughout the
Philippines
Extends only to the territory
where the officer is exercising
his functions
Effect of act is
null and void
Effect is to subject the violator to
disciplinary action or punishment
COMMERCIAL REGISTRIES
1. A BOOK where entries are made of merchants
and of documents affecting their commercial
transactions; OR
2. An OFFICE established for the purpose of
copying and recording verbatim certain classes
of documents of commercial nature.
Code of Commerce
RULE ON COMMERCIAL REGISTRIES
Individual Merchants Juridical Persons Shipowners
1. Where to
register
In Metro Manila Bureau of
Domestic Trade
In the province Register of
Deeds
Securities and Exchange
Commission
Bureau of Coast Guard at the
various ports of entry in the
Philippines
2. Optional/
Mandatory
Optional
Compulsory for
corporations and
partnerships with capital of
P3,000 / more, or
contributions of real estate
Compulsory for Phil. Vessels
with gross tonnage of more than
3 tons
Issuance of Certificate of Phil.
Registry compulsory if more
than 15 tons gross; optional if
15 tons gross or less
3. Effect of
failure to
register
Cannot request the
inscription of any document
in the mercantile registry, nor
take advantage of its effects.
(Article 18, Code of Commerce)
CORPORATION - does
NOT create the corporation.
PARTNERSHIP - does
NOT affect the existence of
juridical personality.
BOOKS OF MERCHANT:
A. Under the Code of Commerce
a. Book of inventories and balances containing a
statement of assets, liabilities and capital;
b. Journal containing day to day operations;
c. Ledger containing the accounts classified as to
objects or persons, transferred from the
journal;
d. Book for letters or telegrams sent out;
e. Other books required by special laws
B. Under Special Laws
a. Book of Minutes in case of juridical persons,
containing the resolutions passed.
b. Stock and Transfer Book if the juridical person
is a corporation.
C. Under the National Internal Revenue Code
a. Bookkeeping records authorized by the
Finance Department if merchant, natural or
juridical, has gross quarterly sales, earnings,
receipts or output not exceeding P5,000;
b. Journal or ledger if the gross quarterly sales,
earning, receipts or output exceed P5,000 but
are below P25,000;
c. Books must be audited and examined by an
independent certified public accountant if the
amount exceeds P25, 000.
PROBATIVE VALUE OF MERCHANTS BOOKS:
1. Books of merchants shall be evidence against
the merchants themselves;
2. If the books of two merchants conflict, those
kept properly shall prevail;
3. If one keeps books, the other does not and
cannot explain their absence, the books of the
former shall be admitted against the latter;
4. If both keep their books properly, but the entries
conflict, the court shall accept other proofs
(Article 48, Code of Commerce).
General Principles on Commercial Contracts
COMMERCIAL CONTRACT
An agreement between two or more merchants or
non-merchants binding themselves to give or to do
something in commercial transactions (Del Viso, 88,
Bar Review Materials in Commercial Law, Jorge Miravite, 2007).
GOVERNED BY:
1. Provisions of Code of Commerce; or
2. Provisions of Civil Law, in case of Special
Laws (Article 50, Code of Commerce).
FORM OF COMMERCIAL CONTRACTS:
GENERAL RULE
May be executed in any form and language
(Article 51, Ibid)
EXCEPTIONS
1. Contracts required by the Code of
Commerce or Special Laws to be in
writing or require forms or formalities for
their efficacy;
Examples: Negoti abl e Instruments,
Charter Parties, Maritime Loans of
Bottomry and Respondentia
2. Contracts executed abroad which require
instruments, forms or formalities for their
validity, although Philippine Law does not
require them (Article 52, Ibid).
CONTRACTS BY CORRESPONDENCE
Contracts entered into by correspondence like
letters, telegrams, by messengers, etc. but not
including those made by phone or through agents.
PERFECTION
Perfected from the moment an answer is
made accepting the offer or the conditions by
wh i c h t h e l a t t e r ma y b e mo d i f i e d
(MANIFESTATION THEORY). (Article 54, Code of
Commerce)
BUT certain mercantile contracts governed by
the CIVIL CODE, like sales, deposit, loan,
partnerships, agency and guaranty, if entered
into by correspondence, are perfected from
the time the offeror has knowledge of the
offerees acceptance (COGNITION THEORY).
(Article 1219 [2], New Civil Code)
Joint Account
JOINT ACCOUNT (cuentas en participacion)
A business arrangement whereby two or more
persons interest themselves in the business of
another, making contributions thereto, and
participating in the results of the business in the
proportion they may determine (Article 239, Code of
Commerce).
FEATURES:
1. No formality as to formation, may be oral or in
writing (Article 240, Ibid);
2. No common name can be adopted (Article 241,
Ibid);
3. Only one member is ostensible; the others are
silent and only the ostensible partner can sue
or be sued (Article 242, Ibid);
4. No common fund.
COMMERCIAL
PARTNERSHIP
JOINT ACCOUNT
Common name
A common name can be
adopted
No common name
can be adopted
Common fund
With a common fund No common fund
Juridical personality
With a juridical personality No juridical
personality
Liability of partners
All general partners are liable Only the ostensible
partner is liable
Management
All partners participate in the
management, unless they
agree to have a managing
partner
Managed by
ostensible partner
alone
PARTICULAR
PARTNERSHIP
JOINT VENTURE
Firm name
Participating merchants
can transact business
under their own name
Informal partnership,
with no firm name
Personality and individual liability
With a legal personality,
but partners can be
individually liable
therefor if they transact
business in their own
name
No legal personality,
participants are
individually liable
Number of transactions
Generally relates to a
continuing of business
of various transactions
of a certain kind
Usually limited to a
single transaction,
although the business
of pursuing to a
successful termination
may continue for a
number of years
(Bar Review Materials in Commercial Law, Miravite, 2007).
Code of Commerce
Letter of Credit
LETTER OF CREDIT
LETTER OF CREDIT
Letter issued by one merchant to another for the
purpose of attending to a commercial transaction
(Article 567, Code of Commerce).
In banking practice, it is a request by one bank to
another bank to advance or to give money to a
third person on the basis of the letter and on the
credit of the person pursuing it (7 Am. Jur. 917, Bar
Review Materials in Commercial Law, Miravite, 2007).
An engagement by a bank or other person made
at the request of a customer that the issuer will
honor drafts or other demands for payment upon
compliance with the conditions specified in the
credit (Prudential Bank vs. ICA, GR No. 74886, December
8, 1992).
Let t ers of credi t are i n eff ect absol ut e
undertakings to pay the money advanced or the
amount for which credit is given on the faith of the
instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby
into contracts of guaranty (MWSS vs. Daway, GR No.
160732, June 21, 2004).
ESSENTIAL CONDITIONS:
1. Issued in favor of a definite person and not to
order;
Note: The Uniform Commercial Practice for
Documentary Credits allows letters of credit to
be payable to order
2. Limited to a fixed or specified amount, or to
one or more amounts, but with a maximum
stated limit (Article 568, Ibid).
If any of these essential conditions is not present,
the instrument is merely considered as a letter of
recommendation.
GOVERNING LAWS:
1. Code of Commerce;
2. Uni f orm Cust oms and Pract i ce f or
Documentary Credits (Bank of America NT. &
SA vs. CA, G.R. No. 105395, December 10, 1993).
NATURE OF A LETTER OF CREDIT
A financial device (mode of payment) developed
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 (Bank of America NT. & SA vs.
CA, G.R. No. 105395, December 10, 1993).
DURATION:
1. Upon the period fixed by the parties; or
2. If none is fixed:
a. 6 months from its date if used in the
Philippines;
b. 12 months if used abroad (Art. 572, Ibid).
Note: The Letter of Credit becomes void if it is not
used within the period applicable.
PARTIES:
1. Applicant/ buyer/ importer one who
purchases the goods, procures the LC, and
obliges himself to reimburse the issuing bank
upon receipt of the documents of title.
2. Issuing/ opening bank one which issues
the LC, and undertakes to pay the seller upon
receipt of the draft and proper documents of
title from the seller and to surrender them to
the buyer upon reimbursement; and
3. Seller/ exporter/ beneficiary one who sells
the goods to the buyer, and who delivers the
draft and documents to the issuing bank to
recover payment.
The number of parties may be increased.
Modern letters of credit are usually not made
between natural persons. They involve bank-
to-bank transactions.
4. Ad v i s i n g / n o t i f y i n g b a n k t h e
correspondent bank (agent) of the opening
bank through which it advises the beneficiary
of the LC.
5. Confirming bank bank which, upon the
request of the beneficiary, confirms the LC
issued.
6. Paying bank bank on which the drafts are
to be drawn, which may be the opening bank
or another bank not in the city of the
beneficiary.
7. Negotiating bank bank in the city of the
beneficiary which buys or discounts the drafts
contemplated by the LC, if such draft is to be
drawn on the opening bank or on another
designated bank not in the city of the
beneficiary.
A mere advising or notifying bank is not liable

for a breach of the letter of credit, while a
confirming bank is liable in case of breach
thereof. An advising bank is bound only to
check the apparent authenticity of the letter of
credit (Bank of America NT. & SA vs. CA, G.R. No.
105395, December 10, 1993).
STAGES: (CA-IS-ERR)
1. Contract of sale between the buyer and seller;
2. Application for LC by the buyer with the bank;
3. Issuance of LC by the bank;
4. Shipping of goods by the seller;
5. Execution of draft and tender of documents by
the seller;
6. Redemption of draft (payment) and obtaining
of documents by the issuing bank; and
7. Reimbursement to the bank and obtaining of
documents by the buyer.
INDEPENDENT CONTRACTS INVOLVED IN A
LETTER OF CREDIT:
1. Contract of sale between the buyer and the
seller;
2. Contract of the buyer with the issuing bank;
3. LC proper in which the bank promises to pay
the seller pursuant to the terms and conditions
stated therein (with a pour autrui stipulation in
favor of the seller).
How their respective relationships are
governed:
1. Issuing bank and applicant/ buyer/
importer governed by the terms of the
application and agreement for the issuance of
the letter of credit by the bank.
2. Issuing bank and beneficiary/ seller/
exporter governed by the terms of the letter
of credit issued by the bank.
3. Applicant and beneficiary governed by the
sales contract (Bar Review Materials in Commercial
Law, Miravite, 2007ed).
The opening of a letter of credit in favor of a
vendor is only a mode of payment; it is not among
the essential requirements of a contract of sale
enumerated in Articles 1305 and 1474 of the Civil
Code. Therefore, it does not prevent the
perfection of the contract between the parties
(Johannes Schuback & Sons Phil. Trading Corp. vs. CA, GR
No. 105387, November 11, 1993).
Other contracts may be involved especially where
additional parties are present.
INDEPENDENCE PRINCIPLE
A letter accommodation is entirely distinct and
separate, it is an independent agreement. It is not
supposed to be affected by the main contract
upon which it rests.
The independence nature of the letter of credit
may be:
a. Independence in toto where the credit is
independent from the justification aspect and
is a separate obligation from the underlying
agreement like for instance a typical standby;
or
b. Independence may be only as to the
justification aspect like a commercial letter
of credit or repayment standby, which is
identical with the same obligations under the
underlying agreement (Transfield Phil. Inc. vs.
Luzon Hydro Corp., GR No. 146717 November 22,
2004).
FRAUD EXCEPTION PRINCIPLE
The untruthfulness of a certificate accompanying a
demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction
against payment.
REMEDY
Injunction when the following are present:
a. Clear proof of fraud;
b. Fraudulent abuse of the independent purpose
of the letter of credit and not only fraud under
the main agreement; and
c. Irreparable injury might follow if injunction is
not granted or the recovery of damages would
be seriously damaged (Transfield Phil. Inc. vs. Luzon
Hydro Corp., November 22, 2004).
RULE OF STRICT COMPLIANCE
Documents tendered by the seller/ beneficiary
must strictly conform to the terms of the Letter of
Credit, i.e. they must include all the documents
required by the Letter of Credit (Feati Bank vs. CA,
GR No. 94209, April 30, 1991).
Thus, a correspondent bank which departs from
what has been stipulated under the letter of credit
acts on its own risk and may not thereafter be able
to recover from the buyer or the issuing bank the
money thus paid to the beneficiary (Feati Bank vs.
CA, Ibid.).
Code of Commerce
KINDS OF LETTER OF CREDIT
1. Irrevocable
vs.
Revocable
Revocable can be cancelled or amended at any time before payment; intended to
serve as a means of arranging payment but not as a guarantee of payment.
Irrevocable obligates the issuing bank to honor drafts drawn in compliance with the
credit and can be neither cancelled nor amended without the consent of all parties,
including the beneficiary/ exporter.
2. Confirmed
vs.
Unconfirmed
Confirmed both the drawer and drawee banks are obligated to honor drafts in
compliance with the credit.
Unconfirmed the obligation is only on the issuing bank.
3. Revolving
vs. Non-
revolving
Revolving one that is valid for several transactions over a given period of time such as
a week or a month; usually issued in revocable form.
Non-revolving valid for one transaction only.
4. Cumulative
vs. Non-
cumulative
Cumulative one wherein the undrawn amounts are carried over to the future periods.
Non-cumulative one wherein any amount unused by the beneficiary during the
specified period may not be drawn against in a later period.
5. Standby
LoC
A security arrangement for the performance of certain obligations. It can be drawn against
only if another business transaction is not performed. It may be issued in lieu of a
performance bond.
They cannot be converted into contracts of guaranty because banks are not allowed to
enter into contracts of guaranty or surety except in certain cases. They are primary
obligations, not accessory contracts (Insular Bank of Asia vs. IAC, G.R. No. 74834, November 17,
1988)
6. Back to
Back LoC
A credit with identical documentary requirements and covering the same merchandise as
another LoC, except for a difference in the price of the merchandise as shown by the
invoice and the draft. The second letter can be negotiated only after the first is negotiated.
! END OF COMMERCE "
COMMERCIAL LAW
(Act. No. 2031)
NEGOTIABLE INSTRUMENTS
NEGOTIABLE INSTRUMENTS LAW
General Concepts
NEGOTIABLE INSTRUMENT (NI)
A written contract for the payment of money which
complies with the requirements of Sec. 1 of the
Negotiable Instruments Law (NIL), which by its
form and on its face, is intended as a substitute for
money and passes from hand to hand as money,
so as to give the holder in due course (HDC) the
right to hold the instrument free from defenses
available to prior parties (Reviewer on Commercial Law,
Jose R. Sundiang and Timoteo B. Aquino, 2006ed).
Functions:
1. To suppl ement t he cur r ency of t he
government;
2. To substitute for money; and
3. To increase the purchasing medium (Bar Review
Materials in Commercial Law, Miravite, 2007ed).
LEGAL TENDER
That kind of money which the law compels a
creditor to accept in payment of his debt when
tendered by the debtor in the right amount.
Note: A NI although intended to be a substitute for
money, is NOT legal tender, hence, delivery of
instrument does not operate as payment.
However, a check that has been CLEARED AND
CREDITED to the account of the creditor shall be
equivalent to delivery to the creditor of cash (Sec.
60, NCBA). Hence, a check shall produce the effect
of payment only when they have been encashed
or when through the fault of the creditor they have
been impaired (Article 1249, New Civil Code).
FEATURES OF A NI
1. Negotiability
That attribute or property whereby a bill or
note or check may pass from hand to hand
similar to money, so as to give the holder in
due course the right to hold the instrument
and to collect the sum payable for himself free
from defenses.
Note: The defenses from which a holder in
due course is free are personal defenses but
he is not free from real defenses.
The essence of negot i abi l i t y whi ch
characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate
freely as a substitute for money (Firestone Tire v.
CA, GR No. 113236, March 5, 2001).
2. Accumulation of Secondary Contracts
When negotiable instruments are transferred
through negotiation, secondary contracts are
accumulated because the indorsers become
secondarily liable not only to their immediate
transferees but also to any holder. Unless
they have valid defenses against the holder or
any party, these indorsers are liable to said
Negotiable Instruments
EXECUTIVE COMMITTEE
COMMERCIAL LAW
holder or whoever may be compelled to pay
the instruments.
Note: Negotiation not only operates to
transfer a negotiable instrument but also
makes a contract for the one negotiating it.
This is equally true in case of checks. For in
the case of checks, the acts of drawing and
negotiating a check have certain effects aside
from the transfer of title or incurring of liability
in regard to the instrument by transfer. The
holder who takes the negotiable paper makes
a contract on the face of the instrument.
There is an implied representation that the
funds on credit are available for the payment
of the instrument in the bank upon which it is
drawn (State Investment House, Inc. v. CA, GR No.
101163, January 11, 1993).
APPLICABLE LAW
GENERAL RULE
The provisions of the NIL are not applicable if
the instrument involved is not negotiable.
EXCEPTION
In the case of Borromeo v. Amancio Sun (GR
No. 75908, October 22, 1999), the SC applied Sec.
14 of the NIL by analogy in a case involving a
Deed of Assignment of shares which was
signed in blank to facilitate future assignment
of the same shares. The SC observed that the
situation is similar to Sec. 14 where the blanks
in an instrument may be filled up by the holder,
the signing in blank being with the assumed
authority to do so.
KINDS OF NI
1. Promissory Note (PN)
An unconditional promise, in writing, made by
one person to another, signed by the maker
engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in
money, to order or to bearer (Sec. 184, Negotiable
Instruments Law).
2. Bill of Exchange (BE)
An unconditional order, in writing, addressed
by one person to another, 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 order or to bearer (Sec. 126).
CHECK
A bill of exchange drawn on a bank payable
on demand (Sec. 185). It is also the most
common form of bill of exchange. The only
difference is that a check is usually certified
to, not accepted by, the drawee bank. But
certification is considered to be equivalent to
acceptance.
OTHER FORMS OF NI
1. Certificate of deposit issued by banks,
payable to the depositor or his order, or to
bearer;
2. Trade acceptance;
3. Bonds, which are in the nature of promissory
notes;
4. Drafts, which are bills of exchange drawn by
one bank upon another;
5. Debenture
Note: All of these must comply with Sec. 1,
Negotiable Instruments Law (NIL).
NON-NEGOTIABLE INSTRUMENTS
1. Treasury Warrant being payable out of a
particular fund of the national treasury
(Metrobank v. CA, GR No. 88866, February 18, 1991).
2. Postal money orders
a. Under postal regulations, the bureau of
posts can refuse to pay on numerous
g r o u n d s , t h u s t h e o r d e r i s n o t
unconditional;
b. A money order can be indorsed only once;
c. The post off i ce i s not run by t he
government for commercial profit, but for
public service.
3. Letter of Credit being payable to a specified
person.
4. Trust Receipt being payable to the
entrustor, conditioned upon the resale of the
goods.
5. Negotiable Document of Title, Bill of Lading
and Warehouse Receipt being payable in
goods rather than money.
Instances when a BILL OF EXCHANGE may be
treated as a PROMISSORY NOTE (FLANS)
1. The drawer and the drawee are the same
person;
2. Drawee is a fictitious person;
3. Drawee does not have the capacity to
contract (Sec. 130);
4. Where the bill is drawn on a person who is
legally absent; and
5. Where the bill is ambiguous (Sec. 17[e]).
PARTIES TO A NEGOTIABLE INSTRUMENT
1. Promissory Note
a. Maker party who executes the written
promise to pay;
b. Payee party in whose favor the
promissory note is made payable.
2. Bill of Exchange
a. Drawer party who executes the written
order to pay;
b. Drawee party who is commanded or
ordered by the drawer to pay a sum
certain in money;
c. Payee party in whose favor the bill is
drawn or is payable.
Other parties to a Negotiable Instrument
1. Indorser - a person placing his signature upon
an instrument otherwise than as maker,
drawer, or acceptor;
2. Indorsee, in the case of instrument payable to
order;
3. Persons negotiating by mere delivery;
4. Persons to whom the instrument is negotiated
by mere delivery, in case the instrument is
payable to bearer.
NEGOTIABLE
INSTRUMENTS
NON-NEGOTIABLE
INSTRUMENTS
Applicable law
Only NI is governed by
the NIL.
Application of the NIL
is only by analogy.
Transferability
Transferable by
negotiation or by
assignment.
Transferable only by
assignment
Transferee
The transferee can be a
HDC if all the
requirements are
complied with
The transferee
remains to be an
assignee and can
never be a HDC
Defenses
A holder in due course
takes the NI free from
personal defenses
All defenses available
to prior parties may be
raised against the last
transferee
Nature of title
Requires clean title, one
that is free from any
infirmities in the
instrument and defects of
title of prior transferors.
Transferee acquires a
derivative title only.
Solvency of the debtor
Solvency of debtor is in
the sense guaranteed by
the indorsers because
they engage that the
instrument will be
accepted, paid or both
and that they will pay if
the instrument is
dishonored.
Solvency of debtor is
not guaranteed under
Art. 1628 of the NCC
unless expressly
stipulated (Notes and
Cases on Banks, Negotiable
Instruments and other
Commercial Documents,
Timoteo B. Aquino, 2006ed).
NEGOTIABLE
INSTRUMENT
NEGOTIABLE
WAREHOUSE RECEIPT
Applicable law
Governed by NIL Governed by Warehouse
Receipts Law
If originally payable to bearer
It will always remain
so payable
regardless of manner
of indorsement.
It will be converted into a
receipt deliverable to
order, if indorsed specially.
Rights of holder
A holder in due
course may obtain
title better than that
of the one who
negotiated the
instrument to him.
The indorsee, even if
holder in due course,
obtains only such title as
the person who caused
the deposit had over the
goods.
NEGOTIABLE
INSTRUMENT
NEGOTIABLE
DOCUMENT OF TITLE
Applicability of Sec. 1, NIL
Has all the requisites of
Sec. 1 of NIL
Does not have these
requisites
Nature
Is itself the property
with value
The document is a mere
evidence of title the
things of value being the
goods mentioned in the
document
Subject
Money Goods
Rights acquired
A holder, if a holder in
due course, may
acquire rights over the
instrument better than
his predecessors.
A holder can never acquire
rights to the document
better than his
predecessors.
Liability in case of dishonor
A holder of NI may run
after the secondary
parties for payment if
dishonored by the party
primarily liable.
Intermediate parties are
not secondarily liable if the
document is dishonored.
PROMISSORY
NOTE
BILL OF EXCHANGE
Nature
Unconditional promise Unconditional order
Number of parties
Involves 2 parties Involves 3 parties
Liability of creator
Maker is primarily
liable
Drawer is only
secondarily liable
Presentment
Only one
presentment: for
payment
Two presentments:
for acceptance and for
payment
Right to limit liability
Maker of note may
NOT insert an express
stipulation limiting or
negativing his own
liability to the holder
Drawer may insert in the
instrument an express
stipulation limiting or
negativing his own
liability to the holder
(Sec. 61)
BILLOF EXCHANGE CHECK
To whom instrument drawn
May or may not be
drawn on the bank
Is always drawn on a
bank or banker
Drawn on deposit
Need NOT be drawn on
a deposit, hence it is not
necessary that the
drawer of a bill of
exchange should have
funds in the hands of the
drawee
Is drawn on deposit,
otherwise, if it is not
drawn on deposit there
would be fraud
When payable
May be payable on
demand or at a fixed or
determinable future time
Always payable on
demand
Presentment
Must be presented for
acceptance
Need not to be
presented for
acceptance, however,
if the holder requests
and the banker
desires, he may accept
When presentment made
May be presented for
payment within
reasonable time after its
last negotiation.
Must be presented for
payment within a
reasonable time after
its issue.
Effect of acceptance/ certification
If accepted - drawer/
indorser remains liable
If certified - drawer/
indorsers are
discharged
Effect of drawers death
Death of a drawer of a
BOE, with the
knowledge of the bank,
does not revoke the
authority of the drawee
to pay.
Death of the drawer of
a check, with the
knowledge of the bank,
revokes the authority
of the banker to pay.
Negotiability
FORM OF NI (WU-POA)
1. Must be in Writing and signed by the maker or
drawer;
2. Must contain an Unconditional promise or
order to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
5. When the instrument is Addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty
(Sec. 1).
Factors that affect the determination of
negotiability of instruments: (WART)
1. Whole instrument;
2. What appears on the face of the instrument;
3. Requisites enumerated in Sec.1 of the NIL;
and
4. Should contain words or terms of negotiability
such as order or bearer (Gopenco, Commercial
Law Bar Reviewer, cited in Aquino, p. 23).
Note: In determining the negotiability of an
instrument, the instrument in its entirety and by
what appears on its face must be considered. It
must comply with the requirements of Sec. 1 of
the NIL (Caltex Phils. v. CA, GR No. 97753, August 10,
1992).
The acceptance of a bill of exchange is not
important in the determination of its negotiability.
The nature of acceptance is important only on the
determination of the kind of liabilities of the parties
involved (PBCom v. Aruego, GR Nos. L-25836-37, January
31, 1981).
REQUISITES OF NEGOTIABILITY
1. IT MUST BE IN WRITING AND SIGNED BY
THE MAKER OR DRAWER
Signature: may be in ones handwriting,
pr i nt ed, engr av ed, l i t hogr aphed or
photographed, so long as the signature is
adopted by the signer with the intent to
authenticate the writing (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents,
Timoteo B. Aquino, 2006ed).
Reason: to show that he is a contracting party.
One who signs under a trade or assumed
name shall be liable to the same extent as if he
had signed in his own name.
2. UNCONDITIONAL PROMISE OR ORDER TO
PAY A SUM CERTAIN IN MONEY
Unconditional promise or order
An unconditional promise or order to pay is
required because the purpose of a negotiable
instrument is to take the place of money. Thus,
the promise or order must be ABSOLUTE.
Where the promise or order is made to depend
on a contingent event, it is conditional, and the
instrument involved is non-negotiable. The
happening of the event does not cure the
defect.
BUT a condition in the indorsement does not
affect the negotiability of the instrument.
The unconditional nature of the promise or
order is NOT affected by: (FT)
a. An indication of a particular fund out of
which reimbursement is to be made, OR
a particular account to be debited with the
amount;
BUT an order or promise to pay out of a
particular fund is conditional, as it depends
upon the sufficiency of the fund thus
indicated (Sec. 3).
TEST: Does the instrument carry the
general credit of the drawer or the maker,
or only the credit of a particular fund?
(Handbook of Commercial Law, Sulpicio Guevara, 10
th

edition)
FUND FOR
REIMBURSEMENT
PARTICULAR FUND
FOR PAYMENT
Acts Involved
Drawee pays the
payee from his own
funds; afterwards,
the drawee pays
himself from the
particular fund
indicated.
There is only one
act- the drawee pays
directly from the
particular fund
indicated. Payment is
subject to the
condition that the
fund is sufficient.
Nature of Fund Indicated
Particular fund
indicated is NOT
the direct source of
payment but only
the source of
reimbursement.
Particular fund
indicated is the direct
source of payment.
Effect
Conditional Unconditional
b. A statement of the transaction which
gives rise to the instrument (Sec. 3).
Reason: Instruments are not issued with
any transaction upon which they are based.
Where the promise or order is subject to
the terms and conditions of the transaction
stated, the instrument is rendered non-
negotiable. The NI must be burdened with
the terms and conditions of that agreement
to destroy its negotiability (Commercial Law
Review, Cesar Villanueva, 2004ed).
Note: 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 (Sec. 189).
Mere authority and/or request to pay render
the instrument non-negotiable because it does
not contain an order to pay.
Payable in sum certain in money
A sum is certain if the amount to be
unconditionally paid by the maker or drawee
can be determined on the face of the
instrument and is not affected by the fact that
the exact amount is arrived at only after a
mathematical computation (Notes and Cases on
Banks, Negotiable Instruments and other Commercial
Documents, Aquino, 2006 ed).
The certainty is NOT affected although to
be paid: (ISA-Ex-Co)
a. With interest;
b. By stated installments;
For the amount to be certain-
(1) The amount of each installment is
indicated; AND
(2) The due date is fixed or at least
determinable
c. By stated installments with a statement that
upon default in payment of any installment
or interest, the whole shall become due
(acceleration clause);
d. With exchange, whether at a fixed rate or
at a current rate; or
e. With cost of collection or attorneys fees, in
case payment shall not be made at
maturity.
Note: An instrument is still negotiable although
the amount to be paid is expressed in currency
that is not legal tender so long as it is
expressed in money (PNB v. Zulueta, GR No.
L-7271, August 30, 1957).
Under the Uniform Currency Law, R.A. 529, as
repealed by R.A. 8183, the agreement to pay
in foreign currency is valid.
An instrument which contains an order or
promise to do any other act in addition to the
payment of money is NOT negotiable.
However, under Sec. 5 (d), the instrument is
not rendered non-negotiable if it is the holder
who is given an election to require something
to be done in lieu of the payment of money.
ACCELE-
RATION
CLAUSE
INSECURI-
TY CLAUSE
EXTENSION
CLAUSE
Definition
A clause that
renders whole
debt due and
demandable
upon failure of
obligor to
comply with
certain
conditions.
Provisions in
the contract
which allows
the holder to
accelerate
payment if he
deems
himself
insecure.
Clauses in the
face of the
instrument that
extend the
maturity dates:
a. at the option
of the holder;
or
b. at the option
of the maker
or acceptor; or
c. automatically
upon or after a
specified act
or event.
Effect
Instrument is
still
NEGOTIABLE
Instrument is
rendered
NON-
NEGOTIABL
E because
the holders
whim and
caprice
prevail
without the
fault and
control of the
maker
Instrument is still
NEGOTIABLE
(Ibid)
EXTENSION
CLAUSE
EXTENSION UNDER SEC.
120(f)
Stated on
the face of
the
instrument
Agreement binding the holder:
a. To extend the time of
payment; or
b. Postpone the holders right to
enforce the instrument
Parties are
bound
because
they took the
instrument
knowing that
there is an
extension
clause
Binds the person secondarily
liable and therefore cannot be
discharged from liabilities if:
a. He consents; or
b. Right of recourse is
expressly reserved. (Notes
and Cases on Banks, Negotiable
Instruments and other Commercial
Documents, Aquino, 2006ed)
3. PAYABLE ON DEMAND OR AT FIXED OR
DETERMINABLE FUTURE TIME
PAYABLE ON
DEMAND
PAYABLE AT A FIXED OR
DETERMINABLE
FUTURE TIME
a. Where
expressed
to be payable
on demand, at
sight or on
presentation;
b. Where no
period of
payment is
stated;
c. Where
issued,
accepted, or
indorsed after
maturity (only
as between
immediate
parties) (Sec. 7).
a. At a fixed period after
date or sight;
After sight means after
the drawee has seen the
instrument upon the
presentment for
acceptance
b. On or before a fixed or
determinable future
time specified therein;
or
c. On or at a fixed period
after the occurrence of
a specified event, which
is certain to happen,
though the time of
happening is uncertain
(Sec. 4).
Note: If the day and the month, but not the
year of payment is given, it is not negotiable
due to its uncertainty (Pandect of Commercial Law and
Jurisprudence, Justice Jose Vitug, 2006ed).
If the instrument states that the amount shall
be paid in two equal installments, the second
being payable on a fixed date, the instrument
can be considered negotiable since the first
installment would then be payable on demand
(Ibid).
4. PAYABLE TO ORDER OR TO BEARER
Payable to Order
The instrument is payable to order where it is
drawn payable to the order of a specified
person, or to him or his order (Sec. 8).
The instrument may be made payable to the
order of: (P
3
DD-HOT)
a. A payee who is not the maker,
b. A payee who is not the drawer,
c. A payee who is not the drawee;
Note: The payee must be named or
otherwise indicated therein with reasonable
certainty. If there is no payee, in an
instrument that is payable to order, no one
could indorse the instrument.
Subject to the rules in Secs. 13, 14 and 15
on incomplete instruments, leaving the
payee blank may make the instrument non-
negotiable because an instrument payable
to order may be negotiated ONLY by
indorsement AND delivery.
d. The drawer or maker;
Note: If the maker is made the payee, the
instrument must be indorsed in order to
complete it (Sec. 184).
Where the instrument is payable to the
order of the drawer and it is accepted by
the drawee, the instrument is equivalent to
a promissory note made by the acceptor in
favor of the drawer (Commercial Laws of the
Philippines, Vol. 1, Aguedo Agbayani, 1992ed).
e. The drawee;
f. Two or more payees jointly;
g. One or some of several payees; or
h. The holder of an office for a time being.
Payable to Bearer
The instrument is payable to bearer:
(OPEN-F)
a. When it is expressed to be so payable; or
b. When it is payable to a person named
therein or to bearer;
c. When it is payable to the order of a
fictitious or non-existing person, and such
fact was known to the person making it so
payable;
Fictitious Payee Rule
Fictitious person is not limited to persons
having no real existence. An existing
person may be considered a fictitious
payee, depending upon the intention of the
one making or drawing the instrument.
Thus, it is not necessary that the person
referred to in the instrument is really non-
existent or fictitious to make the instrument
payable to bearer. The person to whose
order the instrument is made payable may
in fact be existing but he is still fictitious or
non-existent under Sec. 9(c) of the NIL if
the person making it so payable does not
intend to pay the specified persons (Reviewer
on Commercial Law, Sundiang and Aquino, 2006ed).
Reason: There is no one to indorse it, and
hence, if the maker intended to give it
negotiability, it could only be on the theory
that it became payable to bearer.
d. When the name of the payee does not
purport to be the name of any person such
as pay to cash or pay to the order of
money;
A check that is payable to the order of cash
is payable to bearer.
Reason: The name of the payee does not
purport to be the name of any person (Ang
Tek Lian v. CA, GR L-2516, September 25, 1950).
e. When the only or last indorsement is an
indorsement in blank (Sec. 9).
Note: An instrument originally payable to
bearer can be negotiated by mere delivery
even if it is indorsed especially. If it is
originally a BEARER instrument, it will
always be a BEARER instrument (Sec. 40,
NIL).
As opposed to an original order instrument
becoming payable to bearer, if the same is
indorsed specially, it can NO LONGER be
negotiated further by mere delivery, it has to be
indorsed.
Where the instrument is payable only to a
specified person or his agent, it is not payable
to order, thus, non-negotiable.
5. IDENTIFICATION OF DRAWEE
It is applicable only to a bill of exchange.
However, omission of drawee may be filled
later on (Sec. 14).
A bill may be addressed to 2 or more drawees
jointly, whether they are partners or not, but
not to 2 or more drawees in the alternative or
in succession (Sec. 128).
OMISSIONS &
PROVISIONS
THAT DO NOT
AFFECT
NEGOTIABILITY
ADDITIONAL PROVISONS
NOT AFFECTING
NEGOTIABILITY
a. It is not dated;
b. It does not
specify the
value given or
that any value
has been given;
Reason:
Consideration is
presumed.
c. It does not
specify the
place where it
is drawn or
where it is
payable;
d. It bears a seal;
e. It designates a
particular kind
of current
money in which
payment is to
be made (Sec. 6).
GENERAL RULE
If some other act is
required other than or in
addition to
payment of money, the
instrument is NOT
negotiable (Sec. 5).
EXCEPTIONS:
a. Authorizes the sale of
collateral securities on
default;
b. Authorizes confession of
judgment on default;
c. Waives the benefit of law
intended to protect the
debtor such as
presentment for
payment, notice of
dishonor and protest; or
d. Allows the holder the
option to require
something in lieu of
money.
Note: Confession of judgment clauses are
VOID as being against public policy to give a
person his day in court; however such nullity
does not affect the negotiability of the
instrument (National Bank v. Manila Oil Refining Co.,
GR L-18103, June 8, 1922).
Interpretation of NI (Sec. 17)
1. Words prevail over figures.
2. Interest stipulated runs from the date of the
instrument or, if undated, from its issue.
3. If undated, the instrument is deemed dated at
its issue.
4. Written words prevail over printed provisions.
5. When there is doubt whether the instrument is
a bill or note, the holder, at his election, may
treat it as either as a bill or as a note.
6. When it is not clear in what capacity a person
signs, he is deemed an indorser;
7. When two or more persons sign We promise
to pay, their liability is JOINT (each liable for
his part) but if they sign I promise to pay, the
liability is SOLIDARY (each can be compelled
to comply with the entire obligation).
It is ONLY when the instrument in question is

ambiguous, doubtful, or obscure, or when
there are omissions therein that the rules in
this section apply.
Transfer and Negotiation
INCIDENTS IN THE LIFE OF NI (IN-PAD-
PDND)
1. Issue
2. Negotiation
3. Presentment for acceptance, in certain kinds
of Bills of Exchange
4. Acceptance
5. Dishonor by non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Discharge (Commercial Laws of the Philippines, Vol. 1,
Agbayani, 1992ed)
MODES OF TRANSFER
1. NEGOTIATION
The transfer of the instrument from one person
to another so as to constitute the transferee a
holder thereof (Sec.30)
a. by indorsement completed by delivery; or
b. by mere delivery.
Effect: makes the transferee the holder of the
instrument.
2. ASSIGNMENT
A method of transferring a non-negotiable
instrument whereby the assignee is merely
placed in the position of the assignor and
acquires the instrument subject to all defenses
that might have been set up against the
original payee.
Assignment may be effected whether the
instrument is negotiable or non-negotiable
(Sesbreo v. CA, GR No. 89252, May 24, 1993).
A person taking a negotiable instrument by
assignment in a separate piece of paper takes
it subject to the rules applying to assignment.
And where the holder of the bill payable to
order transferred it without indorsement, it
operates as an equitable assignment (Commercial
Laws of the Philippines, Vol. 1, Aguedo Agbayani, 1992ed).
ASSIGNMENT NEGOTIATION
Applicable law
Governed by the Civil
Code
Governed by the NIL
(Sesbreo v. CA, GR No.
89252, May 24, 1993)
Type of transaction
Pertains to contracts in
general
Pertains to NI
Nature of the transferee
The transferee is a
mere assignee.
The transferee is a
holder who may be a
holder in due
course.
Rights acquired
Assignee steps into the
shoes of the assignor
and merely acquires
whatever rights the
assignor may have
Holder in due course
may acquire a better
right than the right of
the transferor
Availability of defenses
Assignee takes the
instrument subject to
the defenses obtaining
among the original
parties
Holder in due course
takes it free from
personal defenses
available among the
parties
3. BY OPERATION OF LAW
The full title to a bill may pass without
assignment, indorsement, or delivery, i.e.
by operation of law
a. by the death of holder, where the title
vests in his personal representatives;
b. by the bankruptcy of the holder, where
the title vests in his assignee or trustee;
c. upon the death of a joint payee or
indorsee, in which case the title vests in
the surviving payee or indorsee in general
(Commercial Laws of the Philippines, Vol. 1,
Agbayani, 1992ed).
HOW NEGOTIATION TAKES PLACE
1. ISSUANCE
It is the first delivery of the instrument,
complete in form, to a person who takes it
as a holder (Sec. 191).
Steps:
a. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Sec. 1; and
b. The delivery of the complete instrument
by the maker or drawer to the payee or
holder with the intention of giving effect to
it (The Law on Negotiable Instruments with
Documents of Title, Hector de Leon, 2000 ed).
Delivery transfer of possession with
intent to transfer title (Sec. 16, NIL).
2. SUBSEQUENT NEGOTIATION (Sec. 30, NIL)
a. If payable to bearer, a negotiable
instrument may be negotiated by mere
delivery.
b. If payable to order, a NI may be
negotiated by indorsement completed by
delivery.
In both cases, delivery must be intended to
give effect to the transfer of instrument
(Development Bank v. Sima Wei, GR No. 85419, March
9, 1993).
3. INCOMPLETE NEGOTIATION OF ORDER
INSTRUMENT (Sec. 49, NIL)
Contemplates a case where there is delivery
and payment of value but NO indorsement.
Rights of Transferee for Value:
a. Acquires only the rights of the transferor;
and
b. Right to require the transferor to indorse
the instrument.
However, transferees in this situation do not
enjoy the presumption of ownership in favor of
holders.
Reason: Mere possession of a negotiable
instrument does not in itself conclusively
establish either the right of the possessor to
receive payment, or of the right of one who
has made payment to be discharged from
liability (BPI v. CA and Salazar, GR No. 136202,
January 25, 2007).
For the purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time when
the indorsement is made.
4. INDORSEMENT; HOW MADE
The indorsement must be written on the
instrument itself or upon a paper attached
thereto (allonge). The signature of the
indorser without additional words is sufficient
(Sec. 31).
Where the indorsement is written in an
allonge, the same must be tacked or pasted
on the instrument so as to become part of it;
otherwise, it cannot be considered an allonge.
Indorsement may be made in any form, as
long as it is meant to be an indorsement.
An indorsement is not only a mode of transfer,
it is also a contract.
Indorsement as a contract
Unless the indorsement is qualified (Sec. 65),
every indorser is a new obligor and the terms
are found on the face of the bill or note, with
the additional obligation that if the instrument
is dishonored by non-payment or non-
acceptance, and notice is given to the
indorser, the latter will pay for it (Commercial Law
Review, Cesar Villanueva, 2004ed).
But a qualified indorser is liable in case of
breach of warranties (Sec. 65).
GENERAL RULE
Indorsement must be of the entire instrument.
An indorsement which purports to transfer to
the indorsee a part only of the amount
payable does not operate as a negotiation of
the instrument; it operates merely as an
assignment (Montinola vs. PNB, GR No. L-2861,
February 26, 1951).
EXCEPTION
Where instrument has been paid in part, it
may be indorsed as to the residue (Sec. 32).
Note: An indorsement which purports to
transfer the instrument to two or more
indorsees severally does not operate as a
negotiation of the instrument (Sec. 32).
KINDS OF INDORSEMENT
1. Special Specifies the person to whom or to
whose order, the instrument is to be payable
(Sec. 34).
2. Blank Specifies no person to whom or to
whose order the instrument is to be payable.
Rules on Blank Indorsement:
a. I f ori gi nal l y payabl e t o order and
negotiated by special indorsement, it can
be further negotiated by indorsement
completed by delivery;
b. I f ori gi nal l y payabl e t o order and
negotiated by blank indorsement, it can be
negotiated further by mere delivery;
Effects of Blank Indorsement are (1) to
make the instrument payable to bearer
and (2) may be converted to special
indorsement by writing over the signature
of indorser in blank any contract consistent
with character of indorsement (Sec. 35).
c. If originally payable to bearer, it can be
further negotiated by mere delivery, even if
the original bearer negotiated it by special
indorsement.
3. Absolute One by which the indorser binds
himself to pay:
a. Upon no other condition than failure of
prior parties to do so; and
b. Upon due notice to him of such failure.
4. Conditional Right of the indorsee is made
to depend on the happening of a contingent
event. Party required to pay may disregard
the conditions (Sec. 39).
Note: Conditional indorsement does NOT
render an instrument non-negotiable BUT if
the condition is on the face of the instrument,
the condition renders it non-negotiable as the
promise or order therein would not be
unconditional.
5. Restrictive An indorsement is restrictive,
when it either:
a. Prohibits further negotiation of the
instrument; or
b. Constitutes the indorsee as the agent of
the i ndorser (e.g. i ndorsement for
deposit); or
c. Vests the title in the indorsee in trust for
or to the use of some other persons.
Note: But mere absence of words
implying power to negotiate does not
make an indorsement restrictive (Sec. 36).
The omission of words of negotiability in
the indorsement does NOT affect the
negotiability of the instrument BUT such
omission in the body thereof will render
the instrument non-negotiable.
Effect of Restrictive Indorsement: (PAT)
Confers upon the indorsee the right to:
a. Receive payment of the instrument;
b. Bring any action thereon that the indorser
could bring;
c. Transfer his rights as such indorsee, where
the form of the indorsement authorizes him
to do so.
6. Qualified Constitutes the indorser a mere
assignor of the title to the instrument (Sec. 38).
It is made by adding to the indorser's signature
words like "sans recourse, without recourse",
"indorser not holder", "at the indorser's own
risk", other terms of similar import.
Hence, it has been held that oral testimony is
not admissible to establish that an unqualified
indorsement is in fact qualified (Velasco vs. Tan
Liuan & Co., GR No. 17230, March 17,1922).
Without Recourse means without resort
to a person secondarily liable after the default
of the person primarily liable
Note: Qualified indorsement is usually
resorted to if the indorser wants to transfer his
rights over the instrument but does not want to
assume responsibilities under the secondary
contract.
Effects of Qualified Indorsement:
a. A qualified indorser has limited liability, i.e.,
he is liable for breach of warranty if the
i nst r ument i s di shonor ed by non-
acceptance or non-payment due to:
1. Forgery warranty as to genuineness;
2. Lack of good title on the part of the
indorser warranty as to good title;
3. Lack of capacity to indorse on the part
of the prior parties warranty as to
capacity to contract; or
4. Fac t t hat at t he t i me of t he
endorsement, the instrument was
valueless or not valid, and he knew of
the fact warranty as to ignorance of
certain facts.
b. A qualified indorsement does not impair the
negotiable character of the instrument (Sec.
38, last sentence);
c. A qualified indorser is liable to all the
parties who derive their title through his
indorsement (Agbayani, 1992ed, See p. 334).
7. Joint Indorsement payable to the order of 2
or more persons (Sec. 41).
GENERAL RULE
Where the instrument is payable to two or
more payees ALL must indorse in order that
the instrument may be validly negotiated.
Reason: To make it an indorsement of the
entire instrument because if only one
indorses, he passes only his part of the
instrument.
EXCEPTIONS
a. Where the payees or indorsees indorsing
has the authority to indorse for the others,
and
b. Where the payees or indorsees are
partners (Sec. 41).
8. Irregular A person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery (Sec. 64).
Liability of Irregular Indorser:
(a) If the instrument is payable to the order
of a third person, he is liable to the
payee and to all subsequent parties.
(b) If the instrument is payable to the order
of the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
(c) If he signs for the accommodation of
the payee, he is liable to all parties
subsequent to the payee.
PRESUMPTION AS TO TIME OF
INDORSEMENT
GENERAL RULE
Negotiation is deemed prima facie to have
been effected before the instrument is
overdue.
EXCEPTION
If the indorsement bears a date after the
maturity of the instrument (Sec. 45).
Note: If the indorsement bears a date, the
presumption would be that the date written is
the true date (Sec. 11, NIL).
PRESUMPTION AS TO PLACE OF
INDORSEMENT
Except where the contrary appears, every
indorsement is presumed to have been made at
the place where the instrument is dated (Sec. 46).
OTHER RULES ON INDORSEMENT
1. Where a person is under obligation to indorse
in a representative capacity, he may indorse
in such terms as to negate personal liability
(Sec. 44).
a. He must add words describing himself as
agent;
b. He must disclose his principal;
c. He must be duly authorized.
2. Where an instrument is drawn or indorsed to
a person as cashier or other fiscal officer of
a bank or corporation, it is deemed prima
facie to be payable to the bank or corporation
of which he is an officer, and may be
negotiated by either indorsement of the bank
or corporation or indorsement of the officer
(Sec.42).
RENEGOTIATION OF PRIOR PARTIES (Sec. 50)
Where an instrument is negotiated back to a prior
party, such party may reissue and further
negotiate the same. But he is not entitled to
enforce payment thereof against any intervening
party to whom he was personally liable.
Reason: To avoid circuitousness of suits.
Limitations
A prior party cannot renegotiate the instrument:
1. Where it is payable to the order of a third
person, and has been paid by the drawer;
2. Wher e i t was made or accept ed f or
accommodation and has been paid by the
party accommodated.
STRIKING OUT INDORSEMENT
The holder may at any time strike out any
indorsement which is not necessary to his title.
Effect: The indorser whose indorsement is struck
out, and all indorsers subsequent to him are
thereby relieved from liability on the instrument
(Sec. 48).
Note: If the instrument is negotiated by special
indorsement, the holder has no right to strike out
such indorsement nor can he convert the special
indorsement into a blank indorsement.
CONTINUATION OF NEGOTIABLE
CHARACTER
GENERAL RULE
An instrument which is negotiable shall
continue to be such until it has been
1. Restrictively indorsed;
This refers only to the first kind (Sec. 36[a])
because this is the only type of restrictive
indorsement that completely destroys the
negotiability of the instrument.
2. Discharged by payment or otherwise (Sec. 47)
This must be understood to be payment made
at or after maturity because if the payment be
made before maturity thereof, the person so
paying can still renegotiate or reissue the
instrument. Hence, payment before maturity
does not destroy negotiability.
CONSIDERATION FOR THE ISSUANCE AND
SUBSEQUENT TRANSFER
Every NI is deemed prima facie to have been
issued for a valuable consideration. Every person
whose signature appears thereon is presumed to
have become a party thereto for value (Sec. 24).
Consideration is not relevant to the negotiability
of an instrument but is significant on the question
of whether or not one is a holder in due course.
VALUE
Any consideration sufficient to support a simple
contract (Sec. 25).
It includes:
1. An antecedent or pre-existing debt;
2. Value previously given (Sec. 25);
3. Lien arising from contract or by operation of
law but the holder is deemed a holder for
value to the extent of his lien (Sec. 27).
EFFECTS OF WANT OF CONSIDERATION
(Sec. 28)
ABSENCE OF
CONSIDERATION
FAILURE OF
CONSIDERATION
Definition
It is the total lack of
any valid
consideration.
It is the neglect or failure of
one of the parties to give,
to do or to perform the
consideration agreed
upon.
Type of transactions involved
Embraces
transactions where
no consideration was
intended to pass
Implies that the giving of
valuable consideration was
contemplated but that it
failed to pass
Both are valid defenses against a person not a
holder in due course. These defenses are
therefore ONLY personal or equitable.
Partial failure of consideration is merely a defense
pro tanto, whether the failure is an ascertained or
liquidated amount or otherwise (Sec. 28).
Note: The drawee, by accepting unconditionally
the bill, becomes liable to the holder, and
therefore cannot allege want of consideration
between him and the drawer.
Reason: The holder is a stranger as regards
the transaction between the drawer and the
drawee, and if the holder has given value to
the drawer and has no knowledge of any
equity between the drawer and the drawee, he
is in the same situation as an indorsee in good
faith (Commercial Laws of the Philippines, Vol.1, Aguedo
Agbayani, 1992ed).
Consideration founded on (1) love and affection or
(2) upon gratitude is good consideration but does
NOT constitute such valuable consideration as is
sufficient of itself to support the obligation of a bill
or a note.
Holders
HOLDER
A payee or indorsee of a bill or note who is in
possession of it or the bearer thereof entitled to
receive the sum for which it calls (Sec. 191, par. 7).
CLASSES
1. SIMPLE HOLDERS (Sec.51)
The instrument is subject to the same
defenses as if it were non-negotiable; he may
enforce the instrument and receive payment
therefore.
2. HOLDERS FOR VALUE (Sec. 26)
A holder is a holder for value if the
instrument was indorsed to him by his
immediate transferor to pay for the obligation
that was extended to the latter.
3. HOLDERS IN DUE COURSE (Secs. 52 and 57)
IMPORTANCE OF THE CLASSIFICATION
Each class of holders has defenses which are
available to one class and which may not be
available to other classes (Laws on Negotiable
Instrument, Hector De Leon, 2004ed).
RIGHTS OF HOLDERS IN GENERAL (Sec. 51)
1. May sue thereon in his own name;
Even if he be a holder only for collection or as
pledgee of the instrument.
2. Payment to him in due course discharges
the instrument
Payment in due course is payment made:
i. at or after the maturity of the instrument;
ii. to the holder thereof;
iii. in good faith; and
iv. without notice that his title is defective.
The only disadvantage of a holder who is NOT a
holder in due course is that the negotiable
instrument is subject to defenses as if it were non-
negotiable (Chan Wan v. Tan Kim, GR No. L-15327,
September 30, 1960).
Right to sue of Transferee of an unendorsed
instrument:
A transferee of unendorsed instrument is certainly
not a holder as defined under Sec. 191 and can
not be considered a holder in due course.
Nevertheless, if the transferor could sue in his
own name, then the transferee may also do so
under the principle in assignment that the
assignee steps into the shoes of the assignor
(Laws on Negotiable Instrument, Hector De Leon, 2004ed).
HOLDER IN DUE COURSE (HDC)
A holder who has taken the instrument under the
following conditions: (COVI)
1. That the instrument is complete and regular
upon its face;
An instrument is incomplete when it is wanting
in any material particular proper to be inserted
in a negotiable instrument (Sec. 14). BUT if the
omission is not an important particular, such
omission will not deprive the holder the right of
a holder in due course.
2. That he has become a holder of it before
being overdue and without notice that it
had been previously dishonored, if such
were the case;
A holder who takes an overdue instrument is
put on inquiry although he is not actually aware
of any existing defense of a prior party. A
person taking an overdue instrument should
certainly question why the instrument is still in
circulation even if it overdue (Notes and Cases on
Banks, Negotiable Instruments and Other Commercial
Documents, Timoteo Aquino, 2006ed).
On the date of maturity, the instrument is not
overdue and a holder who acquires the
instrument on that date is a holder in due
course because the principal debtor has the
whole day to pay.
Installment Instruments
A purchaser after maturity of the first
installment with notice that it was unpaid takes
the paper as overdue paper. Consequently, a
purchaser of an installment note after an
installment is overdue may be a holder in due
course as to the balance if he has NO notice of
the failure to pay the first installment.
Reason: The holder may assume that the
regular course of business had been followed
and that each installment was paid when due.
A transferee has no reason to conclude, from
the mere fact that the note circulates after the
due date of one or more installments, that such
installments were not paid (Notes and Cases on
Banks, Negotiable Instruments and Other Commercial
Documents, Aquino, 2006ed).
Interest
Where by the terms of the instrument, the
principal was to become due upon the default
of the payment of interest, one who takes the
instrument upon which the interest is overdue
is NOT a holder in due course.
Demand Instruments (Sec. 53, NIL)
Where an instrument payable on demand is
negotiated on an unreasonable length of time
after its issue, the holder is NOT deemed a
holder in due course.
3. That he has taken it in good faith and for
value;
Although good faith on the part of the holder is
presumed, such presumption is destroyed if
the payee or the indorsee acquired possession
of the instrument under circumstances that
should have put him to inquiry as to the title of
the holder who negotiated the instrument. The
burden now is on the part of the holder to show
t hat not wi t hst andi ng t he suspi ci ous
circumstances, it acquired the check in actual
good faith (De Ocampo vs. Gatchalian, et al., GR No.
L-15126, November 30, 1961).
Good faith refers to the indorsee or
transferee, not to the indorser or transferor of
the instrument.
4. That at the time of its negotiation to him, he
has had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it (Sec. 52).
Notice to holder covers only situations
where the holder had actual or chargeable
knowledge of the infirmity or defect or must
have acted in bad faith (Sec.56).
Defects in the title results from the
acquisition or the negotiation of the instrument.
In the acquisition thereof, the title of a
person becomes defective when he obtains
the instrument or any signature thereto by
(1) fraud; (2) force, duress or fear; (3) other
unl awf ul means; (4) f or an i l l egal
consideration.
In the negotiation thereof, the title
becomes defective when he negotiates it in
(5) breach of faith; or under (6) such
circumstances that amount to fraud (Sec. 55).
Infirmities must include things that are
wr ong wi t h t he i nst r ument i t sel f as
distinguished from those things that are lacking
in the contracts on the instruments. Such
infirmities are to be found in situations arising
under Sec. 13, 14, 15, 16, 21 and 23 of the
NIL.
Effect of acquiring notice of infirmity before
payment of full amount of consideration:
Transferee will be deemed a holder in due
course only to the extent of the amount
therefor paid by him (Sec. 54).
WHO IS DEEMED A HOLDER IN DUE COURSE
Every holder of a negotiable instrument is deemed
prima facie a holder in due course. However, this
presumption arises only in favor of a person who
is a holder as defined in Sec. 191 of the NIL.
BUT when it is shown that the title of any person
who has negotiated the instrument was defective,
the burden is on the holder to prove that he or
some person under whom he claims acquired the
title as holder in due course.
The PAYEE may be a holder in due course
because Section 191 defines a holder as the
payee or indorsee of a bill or note who is in
possession of it or the bearer thereof. So if the
payee satisfies the requirements of Section 52,
that payee can be a HDC (Cely Yang v. Court of
Appeals, GR No. 138074, August 15, 2003).
The holder may not be considered a holder in due
course because of the instrument involved, as in
the case where a person takes a crossed check
without making further inquiries. The act of
crossing a check serves as a warning to the
holder that the check has been issued for a
definite purpose (Bataan Cigar and Cigarette Factory v. CA,
GR No. 93048, March 3, 1994).
Note: The last paragraph of article 146 of the
Consumer Act effectively abolished the distinction
between a holder in due course and one who is
not with respect to transfer to banks and financing
companies of instruments that cover consumer
credit sales (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Aquino, 2006ed).
RIGHTS OF A HDC (HERS)
1. May sue on the instrument in his own name;
Note: Even when he holds the instrument
merely in a representative capacity; such as a
holder for collection only or a pledgee of a
note.
2. May receive payment and if payment is in due
course, the instrument is discharged;
3. Holds the instrument free from any defect of
title of prior parties and free from personal
def enses avai l abl e t o par t i es among
themselves;
4. May enforce payment of the instrument for the
full amount thereof against all parties liable
thereon (Secs. 51 and 57).
EXCEPTIONS
a. when the holder is a holder for value only
to the extent of his lien - HDC only to that
extent (Sec. 27);
b. when the holder acquired notice of any
infirmity in the instrument or defect in the
title of the person negotiating the same
before he has paid the full amount agreed
to be paid therefor - HDC only to the
extent of the amount paid (Sec.54);
c. in case of alteration as to amount - HDC
may enforce payment only according to
its original tenor (Sec. 124).
HOLDER NOT IN DUE COURSE
One who became a holder of an instrument
without any, some or all of the requisites under
Sec. 52 of the NIL.
With respect to demand instruments, if it is
negotiated at an unreasonable length of time after
its issue, the holder is deemed not a holder in due
course (Sec.53).
In determining what is unreasonable length of time
regard must be given to the nature of the
instrument, the usage of trade or business with
respect to such instruments, and the facts of the
particular case (Sec. 193).
RIGHTS OF A HOLDER NOT IN DUE COURSE:
(HARS)
1. He may sue on the instrument in his own
name;
2. He may receive payment and if the payment is
in due course, the instrument is discharged;
3. He holds the instrument subject to the same
defenses as if it were non-negotiable.
Note: Thus, prior parties can avail against him
any defense available among these prior
parties and prevent the said holder from
collecting in whole or in part the amount stated
in the instrument.
4. If he derives his title through a holder in due
course and if he is not a party to any fraud or
illegality affecting the instrument, he has all the
rights of such former holder in respect of all
parties prior to the latter. (Shelter Rule)
Note: If there are NO defenses, the distinction
between a HDC and one who is not a HDC is
IMMATERIAL (Notes and Cases on Banks, Negotiable
Instruments and other Commercial Documents, Aquino, 2006ed).
GENERAL RULE
If a holder is not a holder in due course, he is
subject to the same defenses as if it were non-
negotiable. In other words, a holder not in due
course is subject to both real and personal
defenses available to parties primarily or
secondarily liable.
EXCEPTION
If he derives his title through a holder in due
course and if he is not a party to any fraud or
illegality affecting the instrument, he has all the
rights of such former holder in respect of all
parties prior to the latter. (Shelter Rule)
EXCEPTION TO THE EXCEPTION
The rule under Sec. 58 does not apply if the
holder was a previous holder NOT in due course
who had subsequently repurchase the instrument
either personally or through an agent.
Reason: a holder who is not a holder in due
course cannot improve his situation by reacquiring
the instrument (Fossum v. Fernandez GR No. L-20080
March 27, 1923).
FAILURE TO MAKE INQUIRY
GENERAL RULE
Failure to make inquiry after notice of the facts
merely sufficient to cause a person of ordinary
prudence to make inquiry as to an infirmity in
the negotiable instrument and defect in the
holders title, is not evidence of bad faith as to
bar him from recovery.
Reason: The law does not impose a duty on
the part of every holder to make inquiry before
acquiring the instrument.
EXCEPTIONS
1. Where a holders title is defective or
suspi ci ous t hat woul d compel a
reasonable man to investigate, it cannot
be stated that the payee acquired the
instrument without the knowledge of said
defect in the holders title and for this
reason the presumption that it is a holder
in due course or that it acquired the
instrument in good faith does not exist (De
Ocampo v. Gatchalian, GR L-15126, November 30,
1961).
2. Holder to whom cashiers check is not
indorsed in due course and negotiated for
value is not a holder in due course (Mesina v.
IAC, GR No. 70145, November 13, 1986).
ACCOMMODATION
A legal arrangement under which a person called
the accommodation party, lends his name and
credit to another called the accommodated party,
without any consideration.
ACCOMMODATION PARTY (AP)
Requisites:
1. He must be a party to the instrument, signing
as maker, drawer, acceptor, or indorser;
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his
name or credit (Sec. 29).
Note: without receiving value therefor, means
without receiving value by virtue of the
instrument (Clark v. Sellner, GR 16477, November 22,
1921).
EFFECT: The person to whom the instrument thus
executed is subsequently negotiated has a right of
recourse against the accommodation party in spite
of the formers knowledge that no consideration
passed between the accommodati on and
accommodated parties (Sec. 29).
Relation between accommodation party and
accommodated party
When the accommodation party makes payment
to the holder of the note, it has the right to sue the
accommodated party for reimbursement since the
relation between them is in effect that of principal
and surety, the accommodation party being the
surety.
It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed
an original promissory debtor from the beginning.
The liability is immediate and direct (Romeo Garcia v.
Dionisio Llamas, GR No. 154127, December 8, 2003).
However, the accommodated party cannot recover
from the accommodation party. As between them,
absence of consideration is a defense.
ACCOMMODATION
PARTY
REGULAR
PARTY
Purpose for signing
Signs instrument for the
purpose of lending his
name or credit to some
other person (Sec.29)
Does not sign for that
purpose in which the
accommodation party
did
Value received
Signs instrument without
receiving value therefor
Signs instrument for
value
Availability of parole evidence
May always show by
parole evidence that he is
only such a party
Can not disclaim or limit
his personal liability as
appearing on the
instrument by parole
evidence (Maulini v.
Serrano, GR No. L-8844,
December 16, 1914 ; Velasco v.
Vinluan 43 Phil 195).
Availability of absence or failure of
consideration as a defense
Cannot avail of the
defense of absence or
failure of consideration
against a holder NOT in
due course
Can avail of said
defense against a
person NOT a holder in
due course
Right to sue
After paying the holder,
may sue for
reimbursement the
accommodated party
May not sue any
subsequent party for
reimbursement (Phil.
National Bank v. Maza, GR
No. L-24224, November 3,
1925).
Specific Rights of Accommodation Party:
1. Right to revoke accommodation;
2. Ri g h t t o r e i mb u r s e me n t f r o m a n
accommodated party after making the
payment (Agro Conglomerates Inc. v. CA, GR No.
117660, December 18, 2000);
3. Right to contribution from other solidary
accommodation parties, if any.
An accommodation party may demand
contribution from his co-accommodation party
without first directing his action against the
principal debtor PROVIDED:
a. He made the payment by virtue of
judicial demand; or
b. The principal debtor is insolvent (Sadaya v.
Sevilla, GR No. L-17845, April 27, 1967).
LIABILITY OF AN ACCOMMODATION PARTY
Liable on the instrument to a holder for value
notwithstanding such holder, at the time of the
taking of the instrument, knew him to be only an
accommodation party. Hence, as regards, an
accommodation party, the 4
th
condition, i.e. lack of
notice of infirmity in the instrument or defect in the
title of the persons negotiating it, has NO
application (Stelco Marketing Corp. v. Court of Appeals, GR
No. 96160, June 17, 1992).
EXCEPTION
If the accommodation party is a corporation.
Reason: Thi s i s because t he i ssue or
indorsement of negotiable paper by a corporation
without consideration and for the accommodation
of another is ultra vires. Hence, one who has
taken the instrument with knowledge of the
accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party (Crisologo- Jose v. CA, GR No.
80599, September 15, 1989).
Parties Who Are Liable
PRIMARY AND
SECONDARY
LIABILITY OF
PARTIES
WARRANTIES OF PARTIES
Liability to pay
Makes the parties
liable to pay the
sum certain in
money stated in
the instrument.
Impose no direct obligation to
pay in the absence of breach
thereof. In case of breach,
the person who breached the
same may either be liable or
barred from asserting a
particular defense.
Requisites to enforce liability
Conditioned on
presentment and
notice of dishonor.
Does not require
presentment and notice of
dishonor.
When action must be brought
Action can not be
brought until
maturity of
instrument.
May be brought at any time;
the breach may even occur at
the time of transfer (Campos and
Lopez-Campos, Negotiable
Instruments Law, 1994ed).
1. PRIMARILY LIABLE
MAKER
(Sec. 60)
ACCEPTOR
(Sec. 62)
A. Engages to pay
according to the tenor
of the instrument; and
A. Engages to pay
according to
the tenor of his
acceptance;
B. Admits the existence of
the payee and his
capacity to indorse.
Note: The liability of
the maker is primary
and unconditional;
therefore he cannot
shift his liability to any
person without the
payees consent.
B. Admits the
existence of
the drawer, the
genuineness of
his signature
and his
capacity and
authority to
draw the
instrument; and
C. Admits the
existence of
the payee and
his capacity to
indorse.
Note: The warranty established by Sec. 62 is
in favor of holders of the instrument after
acceptance and when the drawee bank cashes
or pays the check, the cycle of negotiation is
terminated; it is illogical thereafter to speak of
subsequent holders who can invoke the
warranty provided in Sec. 62 against the drawee
(PNB v. National City Bank of New York, et al., GR No.
43596, October 31, 1956).
2. SECONDARILY LIABLE
DRAWER
(Sec. 61)
GENERAL
INDORSER
(Sec. 66)
IRREGULA
R
INDORSER
(Sec. 64)
A. Admits
the
existence of
the payee
and his
capacity to
indorse;
A. Warrants to all
subsequent HDC
-
a. That the
instrument is
genuine and in
all respect
what it
purports to be;
b. He has good
title to it;
c. All prior
parties had
capacity to
contract;
d. The instru-
ment is, at the
time of
endorsement,
valid and
subsisting.
A person,
not
otherwise a
party to an
instrument,
places his
signature
thereon in
blank before
delivery.
A. If
instrument
payable to
the order of
a 3
rd

person, he
is liable to
the payee
and
subsequent
parties.
B. Engages
that the
instrument
will be
accepted or
paid by the
party
primarily
liable; and
B. Engages that
the instrument
will be accepted
or paid, or both,
as the case may
be, according to
its tenor; and
B. If
instrument
payable to
order of
maker or
drawer or to
bearer, he is
liable to all
parties
subsequent
to the
maker or
drawer.
C. Engages
that if the
instrument is
dishonored
and proper
proceedings
are brought,
he will pay to
the party
entitled to be
paid.
C. If the
instrument is
dishonored and
necessary
proceedings on
dishonor be duly
taken, he will pay
to the party
entitled to be
paid.
C. If he signs
for
accommoda
tion of the
payee, he is
liable to all
parties
subsequent
to the payee
Note:
a. Drawer
There is a contractual relation between the
drawer and the drawee.
A drawer may not unilaterally discharge
himself from liability on checks issued by
him as security and not for value and
negotiated to a holder in due course by the
mere expediency of withdrawing his funds
from the drawee bank (State Investment House
Inc. v CA, GR No. 101163, January 11, 1993).
When the holder deposits his check with
t he col l ect i ng bank, t he nat ure of
relationship created is one of agency, that
is, the bank is to collect from the drawee of
the check the corresponding proceeds.
Thus, the privity of contract is between the
holder-depositor and the the collecting
bank. There is no prIvity of contract
between the drawer and the collecting
bank.
The drawer is secondarily liable to (1) the
holder, or (2) to the indorser who is
compelled to pay.
Sec. 61 allows the drawer to negative or
limit his liability by express stipulation.
b. General Indorser
A general indorser is one who indorses the
instrument without any qualification. He is
secondarily liable to the holder or any
subsequent i ndor ser who may be
compelled to pay the instrument on account
of Sec. 66.
By indorsing the instrument, the indorser
enters into a contract with certain fixed and
definite terms, which may not be varied or
contradicted by parole evidence.
c. Irregular Indorser (Sec. 64)
Although the law does not state that all
irregular indorsers are accommodation
parties, they are usually accommodation
parties.
To be considered as an irregular
indorser:
1. A person must not be a party to the
instrument;
2. He must have signed the instrument in
blank; and
3. He must have signed before delivery.
Where a person puts his signature
after delivery, this section does not
apply. It is Section 17 (f) and Section
63 which apply.
The party is called an irregular or an
anomalous indorser because he indorses
in an unusual, singular or peculiar manner.
His name appears where we would
naturally expect another name.
Liability of Irregular indorser
An irregular indorser is liable as a general
indorser because he indorses without
qualification.
3. LIMITED LIABILITY (Sec. 65; Metropol Financing v.
Sambok, GR L-39641, February 28,1983)
QUALIFIED INDORSER
PERSON
NEGOTIATING
BY DELIVERY
Warranties
A. Instrument is genuine and
in all respects what it
purports to be;
B. He has good title to it;
C. All prior parties had
capacity to contract;
D. He has no knowledge of
any fact which would
impair the validity of the
instrument or render it
valueless.
Same
warranties
To whom warranties extend
Liable to all parties who
derive their title through his
indorsement
Warranties
extend to
immediate
transferee only.
GENERAL
INDORSER
PERSON
NEGOTIATING BY
MERE DELIVERY OR
BY QUALIFIED
INDORSEMENT
Nature of liability
There is secondary
liability and
warranties
No secondary liability;
liable only for breach of
warranty
Warranty as to ignorance of certain facts
Warrants that the
instrument is, at the
time of his
indorsement, valid
and subsisting
regardless of
whether he is
ignorant of that fact
or not
Warrants that he has no
knowledge of any fact
which would impair the
validity of the instrument
or render it valueless
To whom warranties extend
To subsequent
holders in due
course; subsequent
parties deriving
their title from
holders in due
course and his
immediate
transferee
Person Negotiating by
Mere Delivery - To
immediate transferee
only.
Qualified Indorser - To
all parties who derive
their title through his
indorsement.
When person signing the instrument NOT
deemed an indorser:
a. The person who signed the instrument has
clearly indicated by appropriate words his
intention to be bound in some other
capacity (Sec. 63).
b. A person si gns for the purpose of
identifying a person only and not for the
purpose of incurring any liability (American
Bank v. Macondray & Co., GR No. 1808, August 23,
1905).
c. A per s on onl y guar ant ees pr i or
endorsements (PNB v. CA, GR L-26001,
October 29, 1968).
Conditions precedent to make endorser
liable:
a. Presentment for payment or acceptance;
and
b. If the instrument is dishonored, the proper
proceedings must be taken.
Order of Liability
There is no order of liability among the
indorsers as against the holder. He is free to
choose to recover from any indorser in case of
dishonor of the instrument (Notes and Cases on
Banks, Negotiable Instruments and other Commercial
As respect one another, indorsers are liable
prima facie in the order in which they indorse
unless the contrary is proven (Sec. 68).
Liability to The Instrument
GENERAL RULE
A person whose signature does not appear on the
instrument is not liable (Sec. 18, NIL).
EXCEPTIONS (PITACA-DF)
1. Persons whose signatures were forged but
who are precluded from setting up the
defense of forgery (Sec. 23);
2. Incapacitated persons who sign through their
legal guardians;
3. One who signs in a trade or assumed name
(Sec. 18);
4. One who si gns through an agent or
authorized representative (Sec. 19);
5. In case of constructive acceptance (Sec. 137);
6. Indorsers who sign on a separate piece of
paper (allonge);
7. Persons who negotiate by mere delivery.
They are liable for breach of warranty
although they did not sign. (Sec. 65);
8. Forgers of signature (Sec. 23).
Defenses
The right of the holder to enforce payment of a negotiable instrument may be defeated by the defenses that
may be raised by the person primarily or secondarily liable.
REAL DEFENSES PERSONAL DEFENSES
Nature
Those that attach to the instrument itself and
are available against all holders, whether in
due course or not, but only by the parties
entitled to raise them. (a.k.a absolute
defenses)
Those which are available only against a person not a holder
in due course or a subsequent holder who stands in privity
with him. (a.k.a. equitable defenses)
Status of contract
Void Voidable
Availability against HDC
Available against HDC Not available against HDC
REAL DEFENSES PERSONAL DEFENSES
Defenses
KEY:
PAID-WIFI-MUD-FEM
1. Prescription
2. Material Alteration (Sec.124);
3. Illegality if declared void for any purpose;
4. Duress amounting to forgery;
5. Want of authority of agent;
6. Non-Delivery of Incomplete Instrument (Sec.
15);
7. Forgery (Sec. 23);
8. Insanity where the insane person has a
guardian appointed by the court;
9. Minority (available only to the minor);
10. Ultra Vires Act of Corporation;
11. Discharge in Insolvency;
12. Fraud in Factum or Esse Contractus or
Fraud in Execution;
13. Execution of instrument between public
enemies;
14. Marriage in the case of a wife;
Note: An instrument subject to real defense
cannot be enforced against the person to whom
the defense is available but it can be enforced
against those whom such defense is not
available such as under Sec. 23.
KEY:
CUBIC-RAIN-WIFI-MICU
1. Non- delivery of complete instrument (Sec. 16);
2. Ultra vires acts of corporations where the corporation has the
power to issue negotiable paper but the issuance was not
authorized for the particular purpose for which it was issued;
3. Negotiation in breach of faith (Sec. 55);
4. Insertion of wrong date in an instrument (Sec. 13);
5. Conditional Delivery of Complete instrument;
6. Filling up blank beyond reasonable time (Sec. 14);
7. Absence or failure of consideration, whether partial or total
(Sec. 28);
8. Illegal consideration (Sec. 55);
9. Filling up blank not within authority (Sec. 14);
10. Want of authority of agent where he has apparent
authority;
11. Fraud in Inducement;
12. Acquisition by force, duress or fear (Sec. 55);
13. Intoxication;
14. Mistake;
15. Insanity where there is no notice of insanity on the part of
the one contracting with the insane person;
16. Negotiation under circumstances that amount to fraud (Sec.
55);
17. Acquisition of the instrument by unlawful means (Sec. 55).
EFFECTS OF CERTAIN DEFENSES
1. MINORITY
Negotiation by a minor passes title to the
instrument (Sec. 22). But the minor is not liable
and the defense is personal to him. Thus,
other parties who are capacitated cannot
invoke such defense.
Note: However, the minor shall be liable
under the following exceptions: (1) the minor
actively misrepresents his age and it appears
that he is physically of such age (estoppel);
(2) the minor kept the fruits or benefits; and
(3) the minor spent the money in good faith
(Art. 1427, NCC).
2. ULTRA VIRES ACTS
A real defense but the negotiation passes title
to the instrument (Sec. 22).
Note: A corporation CANNOT act as an
accommodation party. The issuance or
indorsement of negotiable instrument by a
corporation without consideration and for the
accommodation of another is ultra vires
(Crisologo-Jose v. CA, GR No. 80599, September 15,
1989).
3. FRAUD
In case of FRAUD IN FACTUM, the person
who signs the instrument lacks knowledge of
the character or essential terms of the
instrument. But the defense is not available if
the party involved had reasonable opportunity
to obtain such knowledge.
An essential element is that the maker or
indorser must have exercised ordinary
diligence and in no manner contributed
negligently to the imposition.
The factors to be considered in determining
the presence of reasonable opportunity
include:
a. the age and sex of the obligor;
b. his intelligence, education, and business
experience;
c. his ability to read and understand the
language used;
d. the representations made to him and his
reason to rely on them or to have
confidence in the person making them;
e. the presence or absence of any third
person who might read or explain the
instrument to him or any other information;
and
f. the apparent necessity, or lack of it, for
acting without delay.
FRAUD IN
INDUCEMENT
FRAUD IN ESSE
CONTRACTUS/
FRAUD IN FACTUM/
FRAUD IN
EXECUTION
How Committed
The person who
signs the instrument
intends to sign the
same as a NI but
was induced by
fraud
The person is induced
to sign an instrument
not knowing its
character as a bill or
note
Nature
Personal defense Real defense
4. INCOMPLETE but DELIVERED NI (Sec. 14)
a. Prima Facie Authority to Complete the
Instrument
Requisites:
i. Want of a material particular in the
instrument;
Note: Material particular includes the
matters stated in Sec. 125 of the NIL.
ii. Possession thereof by a person;
iii. That such person had authority to fill
up the bank:
(1) Strictly in accordance with the
authority given; and
(2) Within a reasonable time
b. Prima Facie Authority to Fill It Up For
Any Amount
Requisites:
i. Signature on a blank paper;
ii. Person signing in blank delivers it to
another;
iii. Delivery was for the purpose of
converti ng i t i nto a negoti abl e
instrument.
c. If the holder of the instrument, after it was
filled up, is a holder in due course, the
holder may enforce the instrument as if it
has been filled up strictly in accordance
with the authority given and within a
reasonable time (Notes and Cases on Banks,
Negotiable Instruments and other Commercial
5. INCOMPLETE and UNDELIVERED NI
(Sec. 15)
Two steps in the execution of a negotiable
instrument:
a. The act of wri t i ng t he i nst rument
completely and in accordance with Sec. 1;
and
b. The delivery of the instrument with the
intention of giving effect thereto.
Note: If completed and negotiated without
authority, not a valid contract against a person
who has signed before delivery of the contract
even in the hands of holders in due course
but subsequent indorsers are liable. This is a
REAL defense which belongs to the drawer
(or parties, if any, prior to the delivery of the
instrument to the payee) against any holder.
Reason: The law does not make any
distinction between a holder in due course
and one who is not a holder in due course.
Where an INCOMPLETE and UNDELIVERED
instrument is in the hands of a holder in due
course, there is a PRIMA FACIE presumption
of delivery which the maker may rebut by
proof of non-delivery.
6. COMPLETE but UNDELIVERED NI (Sec. 16)
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect
thereto.
RULES
AS REGARDS
IMMEDIATE PARTIES
AND REMOTE PARTIES
WHO ARE NOT HDC
AS REGARDS
HOLDERS IN
DUE COURSE
Delivery must be coupled
with the intention of
transferring title to the
instrument and made
either by or under the
authority of the party
making, drawing,
accepting or indorsing, as
the case may be.
Delivery is
conclusive if he
is in possession
of a complete
instrument so as
to make all prior
parties to him
liable
It may be shown that:
a. there was no delivery;
b. delivery was not
authorized;
c. delivery was
conditional; or
d. delivery was for a
special purpose only.
It cannot be
shown that there
was no delivery,
or that delivery
was not
authorized, or that
it was conditional,
or delivery was for
a special purpose
only.
Comparison of Sections 14, 15 and 16 of the Negotiable Instruments Law
Sec. 14 Sec. 15 Sec. 16
Delivery Delivered Undelivered
Undelivered
Note: Delivery may be conditional or
for a special purpose only and not for
the purpose of transferring the
property in the instrument
Completeness
Wanting in
any
material
particular
Blank paper with
signature
Mechanically
incomplete
Mechanically complete
Authority of
person in
possession
Prima facie
authority to
complete it
by filling up
the blanks
therein
Signature
operates as a
prima facie
authority to fill it
up as such for any
amount
No authority to
complete and/or
negotiate
instrument
May negotiate if delivered to him by
or under the authority of the party
making, indorsing, drawing or
accepting, as the case may be.
When
enforceable
If filled up strictly in accordance
with authority given and within
a reasonable time
Not enforceable
When delivery is made by or under
authority of the party making,
indorsing, drawing or accepting, as
the case may be.
Kind of
defense
Personal Real Personal
Rights of
holder
1. If HDC, he can enforce the
instrument as completed
against parties prior or
subsequent to the
completion
2. If not a HDC, he can
enforce the instrument as
completed only against
parties subsequent to the
completion but not against
those prior thereto.
None in the hands
of any holder.
However, the
invalidity of the
instrument is only
with reference to
parties whose
signatures appear
on the instrument
after delivery, the
instrument is
valid.
Can enforce the instrument.
Note: Where the instrument is in the
hands of a HDC, a valid delivery
thereof by all parties prior to him so
as to make them liable to him is
conclusively presumed. Where the
instrument is no longer in the
possession of a party whose
signature appears thereon, a valid
and intentional delivery to him is
presumed until the contrary is proved.
7. ABSENCE OR FAILURE OF
CONSIDERATION (Sec. 28)
Personal defense to the prejudice of a party
and available against any person not holder in
due course.
Partial failure of consideration is a defense
pro t ant o, whet her t he f ai l ure i s an
ascertai ned and l i qui dated amount or
otherwise (Sec. 29).
8. PRESCRIPTION
Refers to extinctive prescription and may be
raised even against a holder in due course.
Under the Civil Code, the prescriptive period
of an action based on a written contract is 10
years from accrual of cause of action.
In case of checks, the action of the depositor
against his drawee bank commences to run
from the time he is given notice of payment
(Philippine Commercial International Bank v. CA, GR No.
121413, January 29, 2001).
The failure of the payee to encash a check for
more than 10 years undoubtedly resulted in
the impairment of the check through his
unreasonable and unexplained delay. (Myron
C. Papa v. A. U. Valencia et. al., GR No. 105188,
January 23, 1998).
NOTE: This is contrary to NAMARCO vs
F.U.N.D. (GR No. L-22578, January 31, 1973). In
this case, the SC held that the delivery of
promissory notes payable to order, or bills of
exchange or drafts or other mercantile
document shall produce the effect of payment
only when realized, or when by the fault of the
creditor, the privileges inherent in their
negotiable character have been impaired. The
clause of Article 1249 is applicable ONLY to
instruments executed by third persons and
delivered by the debtor to the creditor, and
does NOT apply to instruments executed by
the debtor himself and delivered to the
creditor.
9. MATERIAL ALTERATION
It means an unauthorized change in an
instrument that purports to modify in any
respect the obligation of a party or an
unauthorized addition of words or numbers or
other change to an incomplete instrument
relating to the obligation of a party (International
Corporate Bank v. CA and PNB, GR No. 129910,
September 5, 2006).
It is a partial real defense because a holder
in due course can enforce it according to its
original tenor.
An alteration is said to be material if it alters
the effect of the instrument. In other words, a
material alteration is one which changes the
items which are required to be stated under
Sec. 1 of the Negotiable Instruments Law
(PNB v. CA GR L-26001, October 29, 1968).
Changes in the following constitute
material alterations: (Sec. 125)
a. Date;
b. Sum payable, either for principal or
interest;
c. Time or place of payment;
d. Number or relations of the parties;
e. Medium or currency in which payment is
to be made;
f. That which adds a place of payment
where no place of payment is specified;
and
g. Any other change or addition which alters
the effect of the instrument in any respect.
The insertion of the words Agent, Phil.
National Bank which converts the bank from
a mere drawee to a drawer and therefore
changes its liability, constitutes material
alteration of the instrument without the
consent of the parties liable thereon, and so
discharges the instrument. (Enrique Montinola vs.
PNB, GR L-2861, February 26, 1951).
The alteration of the sum payable and the
date appearing on the check constitute
material alteration. (Metropolitan Bank and Trust Co.
v. Renato Cabilzo, GR No. 154469, December 6, 2006)
A serial number is an item which is not an
essential requisite for negotiability under Sec.
1, NIL, and which does not affect the rights of
the parties, hence its alteration is not material
(PNB v. CA, 256 SCRA 491 cited in; International
Corporate Bank v. CA & PNB, GR No. 129910,
September 5, 2006).
In his work, Pandect of Commercial Law and
Jurisprudence," Justice Vitug opines that "an
innocent alteration (generally, changes on
items other than those required to be stated
under Sec. 1, N. I . L. ) and spol i at i on
(alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it
only according to its original tenor.
Effects:
a. Alteration by a party Avoids the
instrument except as against the party
who (1) made, (2) authorized, or (3)
assented to the al terati on and (4)
subsequent indorsers. However, if an
altered instrument is negotiated to a holder
in due course, he may enforce payment
thereof according to its ORIGINAL tenor
regardless of whether the alteration was
innocent or fraudulent.
Note: Since no distinction is made, it does
not matter whether it is favorable or
unfavorable to the party making the
alteration. The intent of the law is to
preserve the integrity of the negotiable
instruments.
b. Alteration by a stranger (spoliation)- the
effect is the same as where the alteration
is made by a party in which case a holder
in due course can recover on the original
tenor of the instrument (Sec. 124).
10. FORGERY
Counterfeiting or fraudulent alteration of any
writing, which may consist of:
a. Signing of anothers name with intent to
defraud; or
b. Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.
Effects:
(1) When a signature is forged or made
without the authority of the person, the
signature (not the instrument itself and the
genuine signatures) is wholly inoperative.
(2) NO right to retain the instrument, or to give
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired.
EXCEPTION
Unless the party against whom it is sought
to enforce such right is precluded from
setting up the forgery or want of authority
(Sec. 23).
Note: A person whose signature is forged as
maker, drawer, payee or indorsee of a note or
check was never a party or did not ever
consent to the contract which gave rise to the
instrument. Since his signature does not
appear in the instrument, he cannot be held
liable thereon by anyone (Gempesaw v. CA, GR
No. 92244, February 9, 1993).
CUT OFF RULE
Parties PRIOR to the forged signature are cut-
off from the parties AFTER the forgery in the
sense that prior parties cannot be held liable
and can raise the defense of forgery. The
holder can only enforce the instrument against
parties who became such after the forgery.
EXCEPTION
When the prior parties are precluded from
setting up the defense of forgery either
because of their warranties, representation or
negligence (Gempesaw v. CA, Ibid).
Wher e a deposi t or i s usi ng i t s own
personalized checks, its failure to provide
adequate security measures to prevent
f orgeri es of checks const i t ut es gross
negligence and bars it from setting up the
defense of forgery (MWSS v. CA, GR No. L-62943,
July 14, 1986).
BUT the mere fact that a check had been
removed and stolen in a checkbook without the
knowledge and consent of the owner cannot
be considered negligence. (PNB vs. QUIMPO,
GR No. L-53194. March 14, 1988).
Persons precluded from setting up defense
of forgery
a. Persons who warrant or admi t the
genuineness of the signature in question.
b. Warrantors of genuineness include (1)
indorsers, (2) persons negotiating by mere
delivery; and (3) acceptors.
c. Those who by their acts, silence, or
negligence, are estopped from setting up
the defense of forgery.
These include acts or omission that
amounts to ratification, express or implied.
BUT a person precluded from raising the
defense of forgery may still recover
damages under the Civil Code provisions
on quasi-delicts.
Note: If the instrument is payable to bearer,
the forgery of the indorsement is immaterial
since it is negotiable by mere delivery.
RULES ON FORGERY
1. PROMISSORY NOTES
ORDER
INSTRUMENT
BEARER
INSTRUMENT
Makers signature forged
a. Maker is not liable
because he never
became a party to
the instrument.
a. Maker is not
liable.
b. Indorsers
subsequent to
forgery are liable
because of their
warranties.
b. Indorsers may be
made liable to
those persons
who obtain title
through their
indorsements.
c. Party who made
the forgery is
liable.
c. Party who made
the forgery is
liable.
Payees signature forged
a. Maker and payee
not liable.
a. Maker is liable.
b. Indorsers
subsequent to
forgery are liable.
b. Indorsement is
not necessary to
title and the maker
engages to pay
holder.
c. Party who made
the forgery is
liable.
c. Party who made
the forgery is
liable.
Indorsers signature forged
a. Maker, payee and
indorser whose
signature was
forged is not
liable..
a. Maker is liable.
(indorsement is
not necessary to
title and the maker
engages to pay
the holder).
b. Indorsers
subsequent to
forgery are liable
because of their
warranties.
b. Indorser whose
signature was
forged not liable.
c. Party who made
the forgery is
liable.
c. Party who made
the forgery is
liable.
2. BILLS OF EXCHANGE
ORDER
INSTRUMENT
BEARER
INSTRUMENT
Drawers signature forged
a.Drawer is not
liable because he
was never a party
to the instrument.
a. Drawer is not
liable.
ORDER
INSTRUMENT
BEARER
INSTRUMENT
Drawers signature forged
b. Drawee is liable if
it paid (no
recourse to
drawer) because
he admitted the
genuiness of the
drawers
signature.
Drawee cannot
recover from the
collecting bank
because there is
no privity between
the collecting
bank and the
drawer. The latter
does not give any
warranty
regarding the
signature of the
drawer (Associated
Bank v. CA, 208
SCRA 465).
it paid. Drawee
cannot recover
from the collecting
bank because it is
bound to know the
drawers signature
since the latter is
its depositor.
The drawee may
recover from the
drawer when the
latters negligence
is the proximate
cause of the loss
or contributed
thereto (Gempesaw v.
CA, 218 SCRA 682).
c. Indorsers
subsequent to
forgery liable
(such as
collecting bank or
last endorser).
d. Party who made
the forgery is
liable
c. Party who made
the forgery is
liable.
Payees signature forged
a. Drawer, drawee
and payee not
liable. Cut-off
Rule applies
a. Drawer is liable
(his indorsement
is not necessary to
pass title).
Drawee is liable
(No privity between
drawer and payee
because
indorsement of
payee is not
necessary) (Ang Tek
Lian case, GR L-2516,
September 25, 1950)
Payee is not liable.
ORDER
INSTRUMENT
BEARER
INSTRUMENT
b. Indorsers
subsequent to
forgery are liable
(such as
collecting bank).
b. Collecting bank is
liable because of
warranty.
But it may recover
form the person
who forged the
indorsement on
the check and
deposited or
encashed the
same (Jai-Alai Corp.
v. Bank of PI, GR No.
L-29432, August 6,
1975).
c. Party who made
the forgery is
liable.
c. Party who made
the forgery is
liable.
Indorsers signature forged
a. Drawer, payee
and indorser
whose signature
was forged not
liable. (Cut off rule
does NOT apply)
a. Drawer is liable
(indorsement not
necessary to title).
it paid.
b. Drawee is liable.
c. Indorsers
subsequent to
forgery are liable
(such as
collecting bank).
c. Indorser whose
signature was
forged is liable
because
indorsement is not
necessary to title.
d. Party who made
the forgery is
liable.
d. Party who made
the forgery is
liable.
24-HOUR CLEARING RULE
When the drawee bank fails to return a
forged check or altered check to the
collecting bank within the 24-hour clearing
period, the collecting bank is absolved from
liability (Republic Bank vs. CA, GR No. 42725,
April 22, 1991).
Enforcement of Liability
1. STEPS TO CHARGE THE PARTIES LIABLE
a. PRIMARY LIABILITY
As to the maker, the unconditional
promise attaches the moment the maker
makes the instrument.
While as to the acceptor, the acceptors
assent to the unconditional order attaches
the moment he accepts the instrument.
No further act is necessary in order for the
liability to accrue. What is necessary only is
for the holder to enforce such liability by
presenting it for payment.
b. SECONDARY LIABILITY
1. Indorser; and
2. Drawer
Their liability cannot be immediately
enforced. There are necessary steps which
should be taken in order to charge these
persons. Unless the holder is excused from
taking any of the steps, the persons
secondarily liable are discharged
STEPS IN PROMISSORY NOTE
a. Presentment for payment to the maker
unless excused.
When presentment for payment is excused:
1) After exercise of reasonable diligence, it
cannot be made;
2) Drawee is a fictitious person;
3) Express or implied waiver (Sec. 82).
b. If dishonored by non-payment, notice of
dishonor should be given to the persons
secondarily liable unless excused.
When Notice of Dishonor is excused:
1) When notice is waived;
2) When dispensed with under Sec. 112;
3) As to drawer under Sec. 114;
4) As to indorser, under Sec. 115;
5) Where due notice of dishonor by non-
acceptance has been given;
6) As to the holder in due course without
notice.
STEPS IN BILL OF EXCHANGE
a. Present ment f or accept ance or
negotiation within a reasonable time
after it is acquired ONLY in the
following instances:
1. Where the bill is payable after sight;
2. When it is necessary in order to fix
the maturity of the instrument;
3. Where the bill expressly stipulates
t hat i t shal l be present ed f or
acceptance;
4. Where the bill is drawn payable
elsewhere than at the residence or
place of business of the drawee (Sec.
143).
Note: In all the above cases, the holder
must either present the bill for acceptance
or negotiate it within a reasonable time;
otherwise, the drawer and all indorsers
are discharged (Sec. 144).
b. If dishonored by non-acceptance:
1. Notice of dishonor given to drawer
and indorsers unless excused; or
2. Protest in case of a foreign bill unless
excused.
c. If bill is accepted:
1. Presentment for payment to the
acceptor unless excused under Sec.
82.
2. If dishonored upon presentment for
payment:
a) Notice of dishonor to persons
secondarily liable; or
b) Protest for dishonor by non-
payment in case of foreign bill
Steps in Order to Charge Persons
Secondarily Liable in Other Cases:
1) Protest for non-payment by drawee in
order to charge an acceptor for honor (Sec.
165 and 167) or a referee in case of need
(Sec. 167);
2) Protest for non-payment by the acceptor
for honor is also required (Sec. 17).
2. PRESENTMENT
The production of a BE to the drawee for his
acceptance, or to the drawee or acceptor for
payment or the production of a PN to the
party liable for the payment of the same (Sec.
70).
PRESENTMENT FOR PAYMENT
Consists of:
a. Personal demand for payment at the proper
place; and
b. Readiness to exhibit the instrument, if
required, and
c. To receive payment and to surrender the
instrument if the debtor is willing to pay.
Note: Mere informal talk not accompanied by
presentment is not sufficient. Demand on
phone is also not sufficient unless maker
waives exhibition (implied or express) (Gilpin vs.
Savage, 201 NY 167, 94 N.E. 656).
Requisites:
a. Made by the holder or any person
authorized to receive payment on his
behalf;
b. At a reasonable hour on a business day;
c. At a proper place;
d. To the person primarily liable, or if he is
absent or inaccessible, to any person found
at the place where the presentment is
made (Sec. 72).
When should be made:
Instrument When payable
a. PN payable on
demand
Within reasonable time
after its issue;
b. BE payable on
demand
Within reasonable time
after its last negotiation;
c. Payable on a
specified date
On the date it falls due
(Sec. 71).
Reasonable time is so much of the time as is
necessary under the circumstances for a
reasonably prudent and diligent man to do,
conveniently, what the contract or duty requires
should be done, having a regard for the rights
and possibility of loss, if any, to the other party.
In determining what reasonable time is, regard
is to be had to the nature of the instrument, the
usage of trade or business with respect to
such instruments, and the facts of the
particular case (Sec. 193).
GENERAL RULE
Presentment for payment is NOT necessary in
order to charge the person primarily liable but
it is necessary in order to charge the drawer
and indorser, except as otherwise provided.
WHEN NOT REQUIRED:
a. In order to charge the drawer
Where he has no right to expect or require
that the drawee or acceptor will pay the
instrument (Sec. 79) such as in case of a
check where payment has been stopped;
b. In order to charge an indorser
When the i nstrument was made or
accepted for his accommodation and he
has no reason to expect that the instrument
will be paid if presented (Sec. 80).
Note: Only the drawer and the indorser
referred to i n these secti ons are not
discharged but all other parties secondarily
liable are relieved of their liability.
When delay in making presentment or of
giving notice is excused:
a. When caused by circumstances beyond the
control of the holder; and
b. Not imputable to his default, misconduct, or
negligence (Sec. 81).
How Computed
When the instrument is payable at a fixed
period after date, after sight, or after that
happening of a specified event the time of
payment is determined by excluding the day
from which the time is to begin to run, and by
including the date of payment (Sec. 86).
Time of Maturity
Every negotiable instrument is payable at the
time fixed therein without grace.
When the day of maturity falls upon Sunday
or a holiday
Instruments falling due or becoming payable
on Saturday are to be presented for payment
on the next succeeding business day
EXCEPTION
The instruments which is payable on demand
may, at the option of the holder, be presented
for payment before twelve o'clock noon on a
Saturday when that entire day is not a holiday
(Sec. 85).
Proper Place of Presentment (Sec. 73)
1. Where a place of payment is specified in
the instrument, it to be presented there.
2. Where no place of payment is specified but
the address of the person to make
payment is given in the instrument, it is
there presented.
3. Where no place of payment is specified and
no address is given, the instrument is
presented at the usual place of business
or residence of the person to make
payment
4. In any other case, presented is to be made
to the person to make payment wherever
he can be found, OR presented at his last
known place of business or residence
If the instrument is, by its terms, payable at
a special place, and the person primarily
liable is able and willing to pay it there at
maturity, such ability and willingness are
equivalent to a tender of payment upon his
part (Sec. 70).
EXHIBITION (Sec. 74)
Purposes:
a. To enable the debtor to determine the
genuineness of the instrument and the right
of the holder to receive payment; and
b. To enable him to reclaim possession upon
payment.
When excused:
a. When debtor does not demand to see the
instrument but refuses payment on some
other grounds; and
b. When the instrument is lost or destroyed.
Even if the rule requires that the instrument
must be exhi bi ted to determi ne i ts
genuineness, this is rendered unnecessary
not only by the omission to contest it, but
also by the admission of the authenticity of
the note implicit from the averment that
substantial payments were made thereon
and by the express waiver of demand,
presentment, protests and notice of protest
and non-payment in the note (Jose Ma.
Ansaldo v. Court of Appeals, GR No. 47696, August
29. 1989).
Special cases:
a. Instrument payable at a bank Must be
made during banking hours, unless there
are no funds to meet it at any time during
the day, presentment at any hour before the
bank is closed on that day is sufficient (Sec.
75).
b. Person liable is dead May be made to
his personal representative, if there be one,
and if he can be found (Sec. 76).
c. Persons liable are partners may be
made to any of the partners, even if their
partnership has been dissolved (Sec. 77).
d. Persons liable are joint debtors must
be made to all of them (Sec. 78).
3. PRESENTMENT FOR ACCEPTANCE
Requisites:
a. Must be made by or on behalf of the
holder;
b. At a reasonable hour on a business day;
c. Before the bill is overdue; and
d. To the drawee or some person authorized
to accept or refuse to accept on his
behalf.
GENERAL RULE
Pr esent ment f or accept ance i s NOT
necessary in order to render any party to the
bill liable.
When required:
a. Where the bill is payable after sight, or
when it is necessary in order to fix the
maturity of the instrument;
b. Where the bill expressly stipulates that it
shall be presented for acceptance;
c. Where t he bi l l i s drawn payabl e
elsewhere than at the residence or place
of business of the drawee (Sec. 143).
Must either present it for acceptance or

negotiate it within a reasonable time;
upon failure to do so, the drawer and all
indorsers are discharged.
Rules: (Sec. 145)
a. Where a bill is addressed to two or more
dr awees who ar e not par t ner s,
presentment must be made to them all
unless one has the authority to accept or
refuse acceptance for all, in which case
presentment may be made to him only.
b. Where the drawee is dead, presentment
ma y b e ma d e t o h i s p e r s o n a l
representative.
c. Where the drawee has been adjudged
bankrupt or insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to
his trustee or assignee.
A bill may be presented for acceptance

on any day on which negotiable
instruments may be presented for
payment under the provisions of Secs.
72 and 75 of the NIL.
When excused:
a. Where the drawee is dead, or has
absconded, or is a fictitious person or a
person not having capacity to contract by
bill;
b. After exercise of reasonable diligence,
presentment cannot be made;
c. Although presentment has been irregular,
acceptance has been refused on some
other ground (Sec. 148).

4. ACCEPTANCE
The signification by the drawee of his assent to
the order of the drawer.
It is the act by which the drawee manifests his
consent to comply with the request contained
in the bill of exchange directed to him.
Form:
1. Must be in writing;
2. Signed by the drawee;
3. Must not express that the drawee will
perform his promise by any other means
than the payment of money (Sec. 132).
The holder of the bill presenting the same
for acceptance may require that the
acceptance be written on the bill, and if
such request is refused, may treat the bill
as dishonored (Sec. 133).
KINDS:
A. GENERAL - assents without qualification to
the order of the drawer.
B. QUALIFIED - which in express terms varies
the effect of the bill as drawn.
1. Conditional - makes payment by the
acceptor dependent on the fulfillment of
a condition therein stated.
2. Partial - an acceptance to pay part only
of the amount for which the bill is drawn.
3. Local - an acceptance to pay only at a
particular place.
4. Qualified as to time
5. The acceptance of some one or more of
the drawees but not of all (Sec. 141).
EFFECT OF QUALIFIED ACCEPTANCE
T h e d r a we r a n d i n d o r s e r s a r e
DISCHARGED unless (1) they have
expressly or impliedly authorized the holder
to take qual i fi ed acceptance or (2)
subsequently assented thereto.
THUS, a subsequent party which caused
the dishonor of the check through its
qualified indorsement cannot hold prior
indorsers liable on the instrument (Melva
Theresa Gonzales vs. Rizal Commercial Banking
Corporation, GR No. 156294, November 29, 2006).
The holder has the right to require the
dr awee t o accept t he bi l l wi t hout
qualification, if the latter refused; he can
treat the bill as dishonored by non-
acceptance (Sec. 142).
C. IMPLIED/CONSTRUCTIVE ACCEPTANCE
(Sec. 137)
If after 24 hours, the drawee fails to return
the instrument. He is also deemed to have
accepted the instrument when he destroys
the same.
Acceptance in the sense used in NIL is
not required for checks for the same are
payable on demand.
Payment is not acceptance because the
latter is a promise to perform an act
whi l e t he f or mer i s t he act ual
performance thereof (PNB vs. CA, GR No.
L-26001, October 29, 1968).
D. EXTRINSIC (Sec. 134) - acceptance may be
made on a paper other than the bill.
E. VIRTUAL (Sec. 135) - contemplates the
situation where an acceptance is made on
a bill that has not yet been drawn.
5. DISHONOR
Where a bill is duly presented for acceptance
and is not accepted within the prescribed
time:
a. the person presenting it must treat the bill
as dishonored by non-acceptance or he
loses the right of recourse against the
drawer and indorsers; and
b. proper notice of dishonor should be given
to the drawer and indorsers
NOTICE OF DISHONOR
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by non-acceptance by the
drawee of a bill or by non-payment by the
acceptor of a bill or by non-payment by the
maker of a note (Sec. 89).
Requisites:
a. Given by holder or his agent, or by any
party who may be compelled by the
holder to pay (Sec. 90);
b. Given to secondary party or his agent
(Sec. 97);
c. Given within the periods provided by law
(Sec. 102); and
d. Given at the proper place (Secs. 103 and
104)
How given:
Notice of dishonor may be:
(1) oral, or
(2) in writing.
Whether written or oral, the notice must
contain the following: (1) sufficient description
of the instrument to identify it; (2) a statement
that it has been presented for payment or for
acceptance, and that it has been dishonored;
and (3) a statement that the party giving notice
intends to look for the party addressed for
payment.
By whom given:
a. The holder;
b. Another, on behalf of the holder; or
c. Any party to the instrument who may be
compelled to pay it to the holder, and
w h o w o u l d h a v e a r i g h t o f
reimbursement from the party to whom
notice is given (Sec. 90).
To whom given:
a. Non-acceptance (bi l l ) to persons
secondarily liable, namely, the drawer and
indorsers as the case may be.
b. Non-payment (both bill and note)
indorsers.
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
are discharged. Notice may be given to the
party himself or to his agent.
When Given:
As soon as the instrument is dishonored (Sec.
102).
When dispensed with:
a. When party to be notified knows about the
dishonor, actually or constructively (Secs.
114-117);
b. If waived (Sec. 109); and
c. When after due diligence, it cannot be
given (Sec. 112).
DISHONOR BY NON-PAYMENT
a. Payment is refused or cannot be obtained
after due presentment for payment;
b. Pr esent ment i s excused and t he
instrument is overdue and unpaid (Sec. 83).
Effect:
There is an immediate right of recourse by the
holder against persons secondarily liable.
However, notice of dishonor is generally
required (Sec. 84).
DISHONOR BY NON-ACCEPTANCE
a. When it is duly presented for acceptance
and such an acceptance is refused or
cannot be obtained; or
b. When presentment for acceptance is
excused, and the bill is not accepted. (Sec.
149)
Effect:
Immediate right of recourse against the
drawer and indorsers accrues to the holder
and no presentment for payment is
necessary (Sec. 151).
Effect of lack of notice of dishonor on NI
which are payable in installments:
a. No acceleration clause failure to give
notice of dishonor on a previous installment
does not discharge drawers and indorsers
as to succeeding installments.
b. With acceleration clause it depends
upon whether the clause is optional or
automatic.
i. automatic - failure to give notice of
dishonor as to a previous installment
will discharge the persons secondarily
l i a b l e a s t o t h e s u c c e e d i n g
installments.
ii. optional - if not exercised, the rule
would be the same as where there is
no acceleration clause. If it is
exercised, the rule would be the same
as where the installment contains an
aut omat i c accel er at i on cl ause.
(Commercial Laws of the Philippines, Vol. 1,
Agbayani, 1992ed).
To whose benefit does a notice of dishonor
inure:
a. When given by or on behalf of a holder:
1. All parties prior to the holder, who have
a right of recourse against the party to
whom the notice is given; and
2. All holders subsequent to the holder
giving notice (Sec. 92).
b. When given by or on behalf of a party
entitled to give notice:
1. The holder; and
2. All parties subsequent to the party to
whom notice is given (Sec. 93).
Dishonor in the hands of an Agent:
Agent can do either of the following:
a. Directly give notice to persons secondarily
liable thereon; or
b. Give notice to his principal. In such case,
he must give notice within the time allowed
by law as if he were a holder (Sec. 94).
Where a party receives notice of

dishonor, he has, after the receipt of
such notice, the same time for giving
notice to antecedent parties that the
holder has after the dishonor (Sec. 107).
WAIVER OF NOTICE OF DISHONOR
When made:
a. before the time of giving notice, or
b. after the omission to give due notice
Waiver may be expressed or implied (Sec. 109).
As to who are affected by an express waiver
depends on where the waiver is written:
a. If it appears in the body or on the face of
the instrument, it binds all parties; but
b. If it is written above the signature of an
indorser, it binds him only (Sec. 110).
When Notice of Dishonor is not required to
be given to
DRAWER
(Sec. 114)
INDORSER
(Sec. 115)
Drawer and drawee
are the same
Drawee is a fictitious
person or does not have
the capacity to contract,
and indorser was aware
of that fact at the time
he indorsed the
instrument
Drawee is a
fictitious person or
not having the
capacity to contract
Indorser is the person to
whom the instrument is
presented for payment
DRAWER
(Sec. 114)
INDORSER
(Sec. 115)
Drawer is the
person to whom the
instrument is
presented for
payment
Instrument was made or
accepted for his
accommodation (Sec.
115).
The drawer has no
right to expect or
require that the
drawee or acceptor
will honor the
instrument
Where the drawer
has countermanded
payment (Sec. 114).
Note: If an instrument is not accepted by the
drawee, there is no sense presenting it again
for payment, and notice of dishonor must at
once be given. If there was acceptance,
presentment for payment is still required and if
payment is refused, there is a need for notice
of dishonor (Sec. 116).
An omission to give notice of dishonor by non-
acceptance does NOT prejudice the rights of a
holder in due course subsequent to the
omission (Sec. 117).
Nature of
Instrument
How made
By whom
PRESENTMENT
NOTICE OF DISHONOR
Payment Acceptance
Promissory Notes
Bills of Exchange
Checks
Sec.143
Bill is payable after sight or

when it is necessary in order to
fix the maturity of the
instrument
Bill expressly stipulates
Bill is drawn payable elsewhere

than at the residence or place
of business of the drawee
Promissory Notes
Bills of Exchange
Checks
Sec. 74
By exhibiting the
instrument
By producing the bill (because the
bill will be stamped ACCEPTED)
Either VERBALLY or in
WRITING;
must describe the instrument
and state the fact of
presentment and the fact of
dishonor.
Holder / Agent Holder / Agent
Secs. 90 & 91
Holder / Agent
By or on behalf of any party

who might be compelled to
pay it to the holder and who
have a right of
reimbursement from the
party to whom the notice is
given.
To whom
When
made
Where
made
PRESENTMENT
NOTICE OF DISHONOR
Payment Acceptance
Secs. 76, 77, 78
Person Primarily Liable
Maker / Drawee
If debtor is dead, to
his personal
representative
If liable as partners,
presentment may
be made to any one
of them
If joint debtors,
presentment must
be made to all of
them
Any person found

at the place of
presentment
(Substituted
Presentment)
Sec. 145
Drawee / Agent WITH
AUTHORITY TO ACCEPT OR
REJECT (because acceptance
gives rise to a liability on the part
of the drawee.)
If there are two or more

drawees who are not partners,
presentment must be made to
all of them unless one has
authority to accept or refuse for
all.
If drawee is dead, presentment

must be made to his personal
representative.
If adjudged bankrupt or
insolvent or has made an
assignment, presentment must
be made to him, his trustee or
assignee .
Secs. 89 & 97
Drawer / Indorser or any
person secondarily liable or
his Agent.
Secs. 98 101
If dead, to his personal

representative.
If partners, notice to any

one partner is sufficient.
If jointly liable, notice must

be given to each of them
unless one has authority to
receive notice for the
others.
If adjudged bankrupt or
insolvent or an assignment
was made, notice must be
given to him, his trustee or
assignee.
Secs. 72 & 85
If instrument is
payable on a future
determinable time,
must be presented
on DUE DATE,
except when it falls
due on a Saturday,
Sunday or a holiday,
in which case,
presentment must be
made on the NEXT
BUSINESS DAY
Sec. 85 / 194
If instrument is
payable on demand,
it must be made w/in
REASONABLE TIME
note AFTER
ISSUE
bill FROM LAST
NEGOTIATION
checks 6
MONTHS after issue
including Saturday
up to 12 noon
If payable on a future
determinable time, it must be
presented BEFORE IT IS
OVERDUE or AT MATURITY
If payable on demand, the bill

must be presented w/in a
REASONABLE TIME FROM
LAST NEGOTIATION including
Saturdays up to 12 nn.
If living in the SAME AREA,

notice must be given W/IN
24 HRS. FROM
DISHONOR
If living in DIFFERENT
AREA, the DROPPING OF
LETTER IN A MAILBOX is
sufficient compliance.
Sec. 73
place designated by
the parties
if none, at the
address of the
maker / acceptor as
stated in the
instrument
if none, at his
residence or office
if none, any place

where he is found
NO REQUIREMENT because it is
immaterial. What is important is
that the bill was accepted.
address of party
indicated / added in his
instrument
if none, at his residence

or office
if none, where he is
sojourning
How
excused
PRESENTMENT
NOTICE OF DISHONOR
Payment Acceptance
Secs. 79 82
when the drawer

has no right to
expect or require
that the drawee or
acceptor will pay
the instrument
where the
instrument was
made or accepted
for his
accommodation
and he has no
reason to expect
that the instrument
will be paid if
presented
when the delay is

caused by
circumstances
beyond the control
of the holder and
not imputable to his
default, misconduct
or negligence.
Even after the

exercise of due
diligence,
presentment cannot
be made
Drawee is a
fictitious person
Waiver, express or
implied
Sec. 148
drawee is dead, absconded, a

fictitious person or a person
not having the capacity to
contract by bill
after the exercise of due

diligence, presentment cannot
be made
although presentment was

irregular, acceptance has been
refused on some other ground
Secs. 112 - 114 (DRAWER)
after the exercise of due

diligence, it cannot be given
to or does not reach the
parties sought to be
charged
delay is caused by
circumstances beyond the
control of the holder and not
imputable to his default,
misconduct or negligence
drawer and drawee is the

same person
drawee is a fictitious person

or a person not having the
capacity to contract
drawer is the person to

whom the instrument is
drawer has no right to

expect or require that the
drawee or acceptor will
honor the instrument
drawer has countermanded

payment
Sec. 115 (INDORSER)
when the drawee is a

fictitious person or a person
not having the capacity to
contract and the indorser
was aware of that fact at
the time he indorsed the
instrument
indorser is the person to

whom the instrument was
when the instrument was

made or accepted for his
accommodation
6. FOREIGN BILL OF EXCHANGE
One which is or on its face purports to be:
a. drawn in the Philippines but payable
outside the Philippines; OR
b. payable in the Philippines but drawn
outside the Philippines.
INLAND BE FOREIGN BE
A bill which or on its
face purports to be
both drawn and
payable within the
Philippines.
One which is or on
its face purports to
be drawn or payable
outside the
Philippines.
PROTEST
The formal instrument executed usually by a
notary public certifying that the legal steps
necessary to fix the liability of the drawee and
the indorsers have been taken.
Purposes:
1) for uniformity in international transactions;
and
2) to furnish an authentic and satisfactory
evidence of dishonor.
Note: Protest is necessary only in case of
foreign bills of exchange, which have
been dishonored by non-acceptance or
non-payment.
Effect of non-protest: the drawer and
indorsers are discharged (Sec. 118).
Protest is absolutely required:
a. Upon dishonor by non-acceptance of a
foreign bill appearing on its face to be
such (Sec.152);
b. Upon dishonor by non-payment of a
foreign bill appearing on its face to be
such, if not having been previously
dishonored by non-acceptance;
c. Before a bill can be accepted for honor, it
must be protested for dishonor by non-
acceptance or protested for better security
(Sec.161);
d. Before a bill can be presented for payment
to the acceptor for honor or the referee in
case of need, it must be protested by the
holder for non-payment to any party liable
thereon (Sec.167);
e. Upon dishonor of the bill by the acceptor
for honor for non-payment by the acceptor
for honor (Sec.170); and,
f. Before a bill can be paid for honor, it must
be protested by the holder for non-
payment by any party liable thereon (Sec.
171).
NOTE: Guarantors/ surety, unlike indorsers,
are liable on the instrument even without a
protest made upon the dishonor of an export
bill. The contract of indorsement is primarily
that of transfer, while the contract of guaranty
is that of personal security. Unless the bill is
promptly presented for payment at maturity
and due notice of dishonor given to the
indorser within a reasonable time, he will be
discharged from liability thereon. On the other
hand, except where required by the provisions
of the contract of suretyship, a demand or
notice of default is not required to fix the
suretys liability (Allied Banking Corporation v. Court of
Appeals, GR No. 125851, July 11, 2006).
NOTICE OF
DISHONOR
PROTEST
When required
Required in
inland bill
Required in foreign bill
Form
May be oral or
written
Always written
By whom made
May be made by
a party or agent
Made by a notary public or
a respectable resident in
the presence of witness
Where made
Made in
residence of
parties
Made in the place of
dishonor
REQUISITES:
1) Must be made by (a) notary public; or (b)
any respectable resident of the place
where the bill is dishonored, in the
presence of 2 or more credible witnesses
(Sec. 154);
2) Must be annexed to the bill, or must
contain a copy thereof;
3) Must be under the hand and seal of the
notary making it;
4) Must specify - (a) The time and place of
pr es ent ment ; ( b) The f ac t t hat
presentment was made and the manner
thereof; (c) The cause or reason for
protesting the bill; (d) The demand and the
answer given, if any or the fact that the
drawee or acceptor could not be found (Sec,
153).
When Made:
On the day of dishonor unless delay is
excused.
Where Made:
At the place where it is dishonored except
where the bill is payable at a place other than
the residence of the drawee.
Protest for better security One made by
the holder of a bill after it has been accepted
but before it matures, against the drawer and
indorsers, where the acceptor has been
adjudged a bankrupt or an insolvent, OR has
made an assignment for the benefit of the
creditors (Sec. 158).
Purpose:
To give the acceptor the opportunity to perform
an act that will ensure payment
ACCEPTANCE FOR HONOR
An undertaking by a stranger to a bill after
protest for the benefit of any party liable
thereon or for the honor of the person for
whose account the bill is drawn which
acceptance inures also to the benefit of all
parties subsequent to the person for whose
honor it is accepted, and conditioned to pay
the bill when it becomes due if the original
drawee does not pay it (Secs. 161-170).
Requisites:
a. The bill must have been protested for
dishonor by non-acceptance or for better
security;
b. The acceptor for honor must be a stranger
to the bill;
c. The hol der must consent t o t he
acceptance for honor;
d. Bill must not be overdue;
e. Must follow the formalities prescribed in
Sec. 162, to wit: (1) Must be in writing; (2)
Must indicate that it is an acceptance for
honor; (3) Signed by the acceptor for
honor; (4) Must contain an express or
implied promise to pay money; (5) The
accepted bill for honor must be delivered
to the holder.
PAYMENT FOR HONOR
Payment made by a person, whether a party to
the bill or not, after it has been protested for
non-payment, for the benefit of any party liable
thereon or for the benefit of the person for
whose account it was drawn (Secs. 171-177).
Requisites:
a. The bill has been dishonored by non-
payment;
b. It has been protested for non-payment;
c. Payment supra protest (another term for
payment for honor because prior protest for
non-payment is required) is made by any
person, even by a party thereto;
d. The payment is attested by a notarial act of
honor which must be appended to the
protest or form an extension of it;
e. The notarial act must be based on the
declaration made by the payor for honor or
his agent of his intention to pay the bill for
honor and for whose honor he pays.
Note: If the above formalities are not
complied with, payment will operate as a
mere voluntary payment and the payor
will acquire no right to full reimbursement
against the party for whose honor he pays.
In payment for honor, the payee cannot
refuse payment. If he refuses, he cannot
recover from the parties who would have
been discharged had he accepted the
same. In acceptance for honor, the
holders consent is necessary.
Right of Payor for Honor
To receive both the bill and the protest to
enable him to enforce his rights against the
parties who are liable to him.
ORDINARY
ACCEPTANCE
ACCEPTANCE FOR
HONOR
Necessity of protest
Previous protest
is not required
Previous protest is
required
Consent of holder
Consent of holder
is implied
Consent of holder is
required
Liability
Acceptor is
primarily liable
Acceptor is secondarily
liable
By whom accepted
Drawee is
acceptor
Acceptor must be stranger
to the bill
Number of acceptors
No acceptors in
the alternative
or in succession
There may be several
acceptors for honor for
different parties in the bill
For whose benefit
Benefits the
holder and all
prior parties
Benefits parties
subsequent to party for
whose honor the bill is
accepted
Effect of payment
Instrument is
discharged upon
payment by the
acceptor
Bill is not discharged upon
payment by acceptor for
honor
ACCEPTANCE FOR
HONOR
PAYMENT FOR
HONOR
Bill
Bill must be overdue Bill may be overdue
Previous protest
Previously protested
for non-acceptance or
for better security
Previously protested
for non-payment
Consent of holder
Consent of the holder
is necessary
Consent of the holder
is not necessary
Liability
Acceptor is secondarily
liable
Acceptor is primarily
liable
By whom made
Made by a stranger or
party not liable on the
bill
Made by any person
whether a party or
stranger to the bill
Notarial Act
Notarial act of honor
not necessary
Notarial act of honor
necessary
Effects
Effects (Secs. 164, 165) Effects (Secs. 175, 177)
PAYMENT BY
PERSON
PRIMARILY LIABLE
PAYMENT FOR
HONOR
Necessity of protest
No need to protest
for non-payment or
non-acceptance
Need to protest for
non-payment
PAYMENT BY
PERSON
PRIMARILY LIABLE
PAYMENT FOR
HONOR
Party liable
A party the maker
or the drawee-
acceptor
May be a stranger or
may be a party
In whose favor payment is made
In favor of specific
parties
In favor of a specified
person and the law
requires that there is a
statement of the person
for whose honor
payment is made
Notarial act
Not Necessary Necessary
Payment in due course
Discharges the
instrument
Cannot be payment in
due course and
payment discharges
only the parties after
the party in whose
favor payment for
honor is made
BILLS IN SET
One composed of several parts, each part
being numbered and containing a reference to
the other parts, the whole of the parts
constituting but one bill.
Purpose
It is usually availed of in cases where a bill had
to be sent to a distant place through some
conveyance. If each part is sent by different
means of conveyances, the chance that at
least one part of the set would reach its
destination would be greater.
Ri ght s of hol ders where part s are
negotiated separately:
a. If both are HDC, the holder whose title first
accrues is considered the true owner of
the bill.
b. But the person who accepts or pays in due
course shall not be prejudiced (Sec. 179).
Obligations of holder who indorses 2 or
more parts of the bill in set:
a. The person shall be liable on every such
part;
b. Every indorser subsequent to him is liable
on the part he has himself indorsed, as if
such parts were separate bills (Sec. 180).
Discharge
DISCHARGE OF NI
A release of all parties, whether primary or
secondar y, f r om t he obl i gat i ons ar i si ng
thereunder. It renders the instrument without
force and effect and, consequently, it can no
longer be negotiated (The Law on Negotiable Instruments
with Documents of Title, Hector de Leon, 2000 ed).
Instances:
1. By payment in due course by or on behalf of
the principal debtor;
2. Payment by accommodated party;
3. Intentional cancellation by the holder;
4. By any act which will discharge a simple
contract for the payment of money;
5. When the principal debtor becomes the holder
of the instrument at or after maturity in his
own right (Sec. 119).
1. PAYMENT IN DUE COURSE
Requisites:
a. Payment must be made at or after
maturity;
b. Payment must be made to the holder;
c. Payment must be made in good faith and
without notice that the holders title is
defective (Sec. 88).
By whom made:
a. By maker or acceptor; or (selected
accommodation party)
b. Surety, if a primary party; or
c. By an agent on behalf of the principal
2. PAYMENT BY ACCOMODATED PARTY
Reason: He is the one ultimately liable on the
instrument
3. CANCELLATION
It includes the act of tearing, erasing,
obliterating, or burning. It is not limited to
writing of the word cancelled, or paid, or
drawing of criss-cross lines across the
instrument (Sec. 123). It may be made by any
other means by which the intention to cancel
the instrument may be evident.
Intentional Cancellation
Requisites:
a. Intentionally done;
b. By the holder thereof; and
c. By writing the word cancelled or paid
on the face of the instrument; or if the
instrument is torn up, burned, mutilated or
destroyed.
Effect of unintentional cancellation, or
under a mistake or without the authority of
holder: The cancellation is inoperative but
party who alleges that cancellation was made
unintentionally, or under a mistake or without
authority has the burden of proof (Sec.123).
4. BY ANY OTHER ACT WHICH DISCHARGES
THE INSTRUMENT:
The Law on Obligations and Contracts will
apply. Article 1231 provides how obligations
are extinguished (by payment or performance,
loss of thing due, condonation or remission of
debts, confusion or merger of the rights of the
creditor and debtor, compensation, novation,
annullment, rescission, fulfillment of resolutory
condi ti on and prescri pti on). However,
although such ways discharge the instrument
as between immediate parties, they will not do
so in the hands of a holder in due course.
Note: The instrument must be surrendered to
the payor. If the instrument is not surrendered,
it may fall in the hands of a holder in due
course who may have the right to enforce the
instrument despite the previous payment.
Discharge of Persons Secondarily Liable:
(DIVARA)
a. By any act which discharges the instrument;
b. By the intentional cancellation of his signature
by the holder;
c. By the discharge of a prior party;
The release of the principal debtor must be

by the act of the holder and not by
operation of law.
d. By a valid tender or payment made by a prior
party;
Tender of Payment means the act by

which one produces and offers to a person
holding a claim against or demand against
him the amount of money which he
considers and admits to be due, in
satisfaction of such claim or demand
without any stipulation or condition.
e. By the release of the principal debtor, unless
the holders right of recourse against the party
secondarily liable is expressly reserved;
f. By any agreement binding upon the holder to
extend the time of payment or to postpone the
holders right to enforce the instrument (Sec.
120).
Instances when the agreement to extend the
time of payment does NOT discharge a party
secondarily liable:
a. where the extension of time is consented to
by such party;
b. where the holder expressly reserves his right
of recourse against such party.
Effects of Payment by Parties Secondarily
Liable:
1) Instrument is not discharged.
2) It only cancels his own liability and that of the
parties subsequent to him.
3) He may strike out his own and all subsequent
indorsements and again negotiate the
instrument except (a) where it is payable to
the order of a third person and has been paid
by the drawer; and (b) where it was made or
accepted for accommodation and has been
paid by the party accommodated (Sec. 121).
RENUNCIATION (Sec. 122)
The act of surrendering a right or claim without
recompense, but it can be applied with equal
propriety to the relinquishing of a demand upon an
agreement supported by a consideration (1
Agbayani 1992 ed).
It must be with written declaration to that effect
and if oral, must be accompanied by surrender of
the instrument to the person primarily liable
thereon.
Requisites:
a. Absolute and unconditional;
b. Made in favor of the person primarily liable;
and
c. Made at or after maturity
Effects:
a. A renunciation in favor of a secondary party
may be made by the holder before, at or after
maturity of the instrument. The effect is to
discharge only such secondary party and all
parties subsequent to him but the instrument
itself remain in force.
b. A renunciation in favor of the principal debtor
may be effected at or after maturity. The
effect is to discharge the instrument and all
parties thereto provided the renunciation is
made unconditionally and absolutely.
In either case, renunciation does not affect the
rights of a holder in due course without notice.
Checks
A bill of exchange drawn on a bank payable on
demand (Sec. 185).
Checks are not mere contracts but:
1. a representation of funds on deposit;
2. representation of credit stated in
3. monetary value;
4. substitute for cash; and
5. as payment for an obligation.
BUT 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. The bank is not liable to
the holder, unless and until it accepts or certifies
the check (Sec. 189).
Presentment for payment
A check must be presented for payment within
reasonable time after its issue or the drawer will
be discharged from liability thereon to the extent
of the loss caused by the delay (Sec. 186).
Factors to determine reasonable time:
1. Nature of the instrument
2. Usage of business or trade
3. The facts of the particular case (Sec. 193)
CERTIFICATION OF CHECKS
An agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future
time when presented for payment
Effects:
1. Equivalent to acceptance (Sec. 187) and is the
operative act that makes banks liable;
2. Assignment of the funds of the drawer in the
hands of the drawee (Sec. 189);
3. If obtained by the holder, discharges the
persons secondarily liable thereon (Sec. 188).
Where the holder of a check procures it to be
accepted or certified, the drawer and all
indorsers are discharged from liability thereon
(Sec. 186).
Refusal of drawee bank to pay and certify If a
bank refuses to pay a check (notwithstanding the
sufficiency of funds), the payee-holder cannot, as
provided under Sections 185 and 189 of the
Negotiable Instruments Law, sue the bank. The
payee should instead sue the drawer who might in
turn sue the bank.
Reason: No privity of contract exists between
the drawee-bank and the payee (Sincere
Villanueva v. Marlyn Nite, GR No. 148211, July 25,
2006).
CROSSED CHECK
A check which in addition to the usual contents of
an ordinary check contains also the name of a
certain banker or business entity through whom it
must be presented for payment.
Kinds:
1. Crossed Specially: The name of a particular
bank or company is written or appears
between the parallel lines in which case the
drawee-bank must pay the check only upon
presentment by such bank or company (Chan
Wan vs. Tan Kim GR No. L-15380, September 30, 1960)
on penalty of being made to pay again by the
rightful owner should the first payment prove
to have been erroneous.
2. Crossed Generally: only the words and Co.
are written between the parallel lines or when
none at all is written at all between said lines.
Effects:
1. It may not be encashed, but may only be
deposited with the bank (Associated Bank v. CA,
GR No. 89802, May 7, 1992).
2. It may be negotiated only once to a person
who has an account with the bank; and
3. It serves as a warning to the holder that the
check has been issued for a definite purpose
(Bataan Cigar v. CA, GR No. 93048, March 3, 1994).
The NIL is silent with respect to crossed checks,
although the Code of Commerce makes reference
to such instrument. Nonetheless, this Court has
taken judicial cognizance of the practice that a
check with 2 parallel lines in the upper left hand
corner means that it could only be deposited and
not converted into cash. The effects of crossing a
check thus, relates to the mode of payment,
meaning that the drawer had intended the check
for deposit only by the rightful person, i.e., the
payee named therein (Cely Yang v. Court of Appeals, GR
No. 138074, August 15, 2003).
IRON CLAD RULE
Prohibits the countermanding of payment of
certified checks (Republic of the Philippines v. PNB, GR
No. 16106, December 1, 1961).
Note: The holder must be a holder in due course
so that the stop-payment order may not be
successfully invoked against him (Mesina v. IAC, GR
No. 70145, November 13, 1986).
CHECK KITING
It is the wrongful practice of taking advantage of
the float, the time that elapses between the
deposit of the check in one bank and its collection
at another.
Note: In anticipation of the dishonor of the check
that was deposited, the conspirators will replace
the original check with another worthless check
(Notes and Cases on Banks, Negotiable Instruments and other
Commercial Documents, Aquino, 2006ed).
TYPES OF CHECKS
1. CASHIERS CHECK
One drawn by the cashier of a bank, in the
name of the bank against the bank itself
payable to a third person. It is a primary
obligation of the issuing bank and accepted in
advance upon issuance (Tan v. CA, GR No.
108555, December 20, 1994).
2. MANAGERS CHECK
A check drawn by the manager of a bank in
the name of the bank itself payable to a third
person. It is similar to the cashiers check as
to the effect and use.
Note: In issuing a managers check, the bank
assumed the liabilities of an acceptor under
Section 62 of the Negotiable Instruments Law
(Equitable PCI Bank v. Rowena Ong, GR No. 156207,
3. MEMORANDUM CHECK
A check given by a borrower to a lender for
the amount of a short loan, with the
understanding that it is not to be presented at
the bank, but will be redeemed by the maker
himself when the loan falls due and which
understanding is evidenced by writing the
word memorandum, memo or mem on
the check.
4. CERTIFIED CHECK
An agreement whereby the bank against
whom a check is drawn undertakes to pay it
at any future time when presented for
payment (Sec. 187).
5. TRAVELERS CHECK
It is one upon which the holders signature
must appear twice; one to be affixed by him at
the time it is issued and the second, for
counter-signature, to be affixed by him in the
presence of the payee before it is paid,
otherwise, it is incomplete (Commercial Law
Review, Villanueva, 2004ed).
CASES WHEN BANK MAY REFUSE PAYMENT
1. The bank is insolvent;
2. The drawers deposit is insufficient or he has
no account with the bank or said account had
been closed or garnished;
3. The drawer is insolvent and proper notice is
received by the bank;
4. The drawer dies and proper notice is received
by the bank;
5. The drawer has countermanded payment;
6. The holder refuses to identify himself;
7. The bank has reason to believe that the check
is forgery.
A bank is under no obligation to make partial
payment on a check up to the amount of the
drawers funds as where the check is drawn for
an amount larger than what the drawer has on
deposit. In case of partial payment, the check
holder could not be called upon to surrender
the check and the bank would be without a
voucher affording a certain means of showing
payment (Moran v. CA, GR No. 105836, March 1994).
! END OF NEGOTIABLE INSTRUMENTS LAW "
COMMERCIAL LAW
(Presidential Decree No. 612)
INSURANCE LAW
INSURANCE LAW
Contract of Insurance
CONTRACT OF INSURANCE
An agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event (Sec.2, par.2, Insurance Code of the
Philippines).
GOVERNING LAWS
1. Insurance Code; or, in its absence
2. Civil Code; or, in the absence of both,
3. General principles prevailing on the subject
in the United States, particularly in the State
of California where our Insurance Code was
based.
ELEMENTS OF THE CONTRACT (RAPIS)
1. INSURABLE INTEREST The insured has
an insurable interest in the life or thing
insured, i.e. a pecuniary interest;
2. RISK OF LOSS The happeni ng of
designated events, either unknown or
contingent, past or future, will subject such
interest to some kind of loss, whether in the
form of injury, damage or liability;
3. ASSUMPTION OF RISK the insurer
undertakes to assume the risk of such loss for
a consideration;
4. PAYMENT OF PREMIUM the consideration
for the insurers promise to assume the risk
and pay the losses from such risk;
5. SCHEME TO DISTRIBUTE THE LOSSES
the assumption of risk is part of a general
scheme to distribute the loss among a large
number of persons exposed to similar risks.
NATURE OF INSURANCE CONTRACT (CAC-V-
CUP
2
)
1. CONSENSUAL it is perfected by the
meeting of the minds of the parties;
2. VOLUNTARY the parties may incorporate
such terms or conditions as they may deem
convenient;
3. ALEATORY the liability of the insurer is
dependent on the happening of an event
which is uncertain, or though certain, is to
occur at some future undetermined time.
(Article 2010, New Civil Code [NCC]). It is not,
however, a gambling or wagering contract
where the risk is created by the contract itself.
4. UNILATERAL imposes legal duties only on
the insurer who promises to indemnify
another in case of loss; executed as to the
insured after payment of premium, and
executory on the part of the insurer until
payment for a loss.
EXECUTIVE COMMITTEE
COMMERCIAL LAW
5. CONDITIONAL it is subject to conditions,
the principal one of which is the happening of
the event insured against.
6. CONTRACT OF INDEMNITY Except life
and accident insurance where the result is
death, a contract of insurance is a contract of
indemnity whereby the insurer promises to
make good only the loss of the insured.
7. PERSONAL each party having in view the
character, credit and conduct of the other.
8. PROPERTY since an insurance is a
contract, as such, it is property in legal
contemplation.
SURETY CONTRACT AS INSURANCE
A contract of suretyship shall be deemed to be an
insurance contract, within the meaning of the
Code, only if made by a surety who or which, as
such, is doing an insurance business.
Doing an Insurance Business:
1. making or proposing to make, as insurer, any
insurance contract;
2. making or proposing to make, as surety, any
contract of suretyship as a vocation and not
as merely incidental to any legitimate
business or activity of the surety;
3. doing any kind of business, including
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of the Code;
4. doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of this Code (Sec.2, par.4).
Note: The fact that NO profit is derived from
t he maki ng of i nsur ance cont r act s,
agreements or transactions or that no
separate or direct consideration is received
therefor, shall NOT be deemed conclusive to
show that the making thereof does not
constitute the doing or transacting of an
insurance business.
FIVE CARDINAL PRINCIPLES IN INSURANCE
(I-SIGA)
1. INSURABLE INTEREST relation between
the insured and the event insured against
such that occurrence of the event will cause
substantial loss or harm of some kind to the
insured.
2. PRINCIPLE OF UTMOST GOOD FAITH
(uberrimae fides) Each party takes into
consideration the character, conduct and/or
credit of the other and in making the contract,
each is enjoined by law to deal with the other
in utmost good faith. A violation of this duty
gives the aggrieved party the right to rescind
the contract.
3. CONTRACT OF INDEMNITY The insured
who has insurable interest over a property is
only entitled to recover the amount of actual
loss sustained and the burden is upon him to
establish the amount of such loss.
Note: A life insurance is NOT a contract of
indemnity. It is considered an investment. A
life policy constitutes, through the insureds
savings, his investment and the earnings
thereon, a measure of economic security for
the insured during his lifetime and for his
beneficiary after his death (Insurance, Maria Clara
L. Campos, 1983ed).
Insurance contracts are not wageri ng
contracts or gambling contracts.
Reason: It is not a contract of chance and it is
not used for profit.
WAGERING
CONTRACT
CONTRACT OF
INSURANCE
The parties
contemplate gain
through mere chance
The parties seek to
distribute the possible
loss by reason of
mischance
Gambler courts
misfortune
Insured seeks to
avoid misfortune
Tends to increase the
inequality of fortune
Tends to equalize
fortune
Essence of gambling
is that whatever one
wins from a wager is
lost by the other
wagering party
The gains of the one
insured are not at the
expense of another
insured
As soon as the party
makes a wager, he
creates a risk of loss
to himself where no
such risk existed
previously
The purchase of
insurance does not
create a new and
non-existing risk of
loss to the purchaser
4. CONTRACT OF ADHESION (Fine Print
Rule) The policy is presented to the insured
already in its printed form, so that he either
takes it or leaves it. Most of the terms of the
cont r act do not r esul t f r om mut ual
negotiations between the parties as they are
prescribed by the insurer in final printed form
to which the insured may adhere if he
chooses but which he cannot change (Rizal
Surety and Insurance Co. vs. CA, GR No. 112360, 336
SCRA 12, July 18, 2000). It is for this reason that
any ambiguity therein is resolved in favor of
the insured and against the insurer.
5. PRINCIPLE OF SUBROGATION If the
plaintiffs property has been insured, and he
has received indemnity from the insurance
company for the injury or loss arising out of
wrong or breach of contract complained of,
Insurance Law
the insurance company shall be subrogated to
the ri ghts of the i nsured agai nst the
wrongdoer or the person who has violated the
contract.
If the amount paid by the insurance company
does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover
the deficiency from the person causing the
loss or injury (Article 2207 NCC).
Note: The principle of subrogation is a normal
incident of indemnity insurance as a legal
effect of payment; it inures to the insurer
without any formal assignment or any express
stipulation to that effect in the policy. Said
right is not dependent upon nor does it grow
out of any private contract. Payment to the
insured makes the insurer a subrogee in
equity (Malayan Insurance Co., Inc. vs. CA, GR No.
L-36413, September 26, 1988).
Incapacity of the insured will not affect the
capacity of the subrogee because capacity is
personal to the holder (Lorenzo Shipping vs. Chubb
and Sons, Inc, 431 SCRA 266, June 8, 2004).
Purposes of Subrogation:
1. To make the person who caused the loss
legally responsible for it;
2. To prevent the insured from receiving
double recovery from the wrongdoer and
the insurer; and
3. To prevent the tortfeasors from being free
from liability and is thus founded on
considerations of public policy.
Rules on Subrogation:
1. Applicable only to property insurance.
Reason: The value of human life is
regarded as unlimited and therefore, no
recovery from a third party can be
deemed adequate to compensate the
insureds beneficiary.
2. The insurer can only recover from the
third person what the insured could have
recovered.
NO SUBROGATION:
1. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage;
2. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insureds claim for loss;
3. Where the insurer pays the insured for a
loss or risk not covered by the policy (Pan
Malayan Insurance Company vs. CA, GR No. 77397
184 SCRA 54, April 3, 1990);
4. In life insurance;
5. For recovery of loss in excess of
insurance coverage;
Note: Should the insured, after receiving
payment from the insurer, release by his own
act the wrongdoer or third party responsible
for the loss or damage from liability, the
insurer loses his rights against the wrongdoer
since the insurer can only be subrogated to
only such rights as the insured may have
(Manila Mahogany Mfg. Corp. vs. CA, GR No. L-52756,
154 SCRA 668, October 12, 1987).
WHAT MAY BE INSURED AGAINST/ RISK:
1. Any contingent or unknown event, whether
past or future, which may damnify a person
having an insurable interest or creates a
liability against him may be insured against
(Sec. 3).
2. A past event may be insured provided the
loss is unknown to both parties and they
expressly stipulated that prior loss is insured
by the policy.
3. Contingent liability E.g. Reinsurance
Note: Insurance for or against the drawing of
any lottery, or for or against any chance or
ticket in a lottery drawing a price is not
allowed (Sec. 4). It may result in profit which is
not true in insurance which only seek to
indemnify the insured against losses.
REQUI SI TES FOR RECOVERY UPON
INSURANCE (CLIP)
1. The insured must have insurable interest in
the subject matter;
2. That interest is covered by the policy;
3. There must be a loss; and
4. The loss must be proximately caused by the
peril insured against.
CONSTRUCTION OF INSURANCE CONTRACT
1. The terms in an insurance policy which are
ambiguous, equivocal, or uncertain are to be
construed strictly and most strongly against
the insurer, and liberally in favor of the insured
so as to effect the dominant purpose of
indemnity or payment to the insured.
Reason: The insured usually has no voice in
the selection or arrangement of the words
employed and that the language of the
contract is selected with great care and
deliberation by experts and legal advisers
employed by, and acting exclusively in the
interest of, the insurance company (Calanoc v.
Court of Appeals, et al., GR No. L-8218, 98 SCRA 98,
December 15, 1955). If the terms are clear, there is
no room for interpretation.
2. Intentional as used in an accident policy
excepting intentional injuries inflicted by the
insured or any other person, etc. implies the
exercise of reasoning, consciousness, and
volition. Where a provision of the policy
excludes intentional injury, it is the intention of
the person inflicting the injury that is
controlling (Biagtan v. The Insular Life Assurance
Company, Ltd., GR No. 25579, 44 SCRA 59, March
29, 1972).
3. The terms accident and accidental, as used
in insurance contracts have not acquired any
technical meaning, and are construed in their
ordinary and common acceptation. Thus, the
terms mean those that which happen by
chance or fortuitously, without intention or
design, and which is unexpected, unusual,
and unforeseen.
An accident is an event that takes place
without ones foresight or expectation an
event that proceeds from an unknown cause
or is an unusual effect of a known cause and
therefore, not expected (Finman General Assurance
Corp. v. Court of Appeals, GR No. 94588, 213 SCRA
493, July 2, 1992).
4. An Authorized Driver clause limits the use
of the insured vehicle to two persons only,
namely: (1) the insured himself; or (2) any
person on his (insureds) permission.
The main purpose of the authorized driver
clause is that a person other than the insured
owner, who drives the car on the insureds
order, such as, his regular driver, or with his
permission, such as a friend or member of the
family or the employees of a car service or
repair shop must be duly licensed drivers and
have no disqualification to drive a motor
vehicle (Villacorta v. Insurance Commission, GR No.
L-54171, 28 SCRA 467, October 28, 1980).
PERFECTION OF AN INSURANCE CONTRACT
1. An insurance contract is a consensual
contract and is therefore perfected the
moment there is a meeting of minds with
respect to the object and the cause or
consideration.
2. Insurance contracts through correspondence
follow the cognition theory an acceptance
made by letter shall not bind the person
making the offer except from the time it came
to his knowledge (Enriquez vs. Sun Life Assurance
Co. of Canada, GR No. L-15774, 41 Phil. 269,
November 29, 1920).
Parties to The Contract
1. INSURER the party who assumes or
accepts the risk of loss and undertakes for a
consideration to indemnify the insured or to
pay him a certain sum on the happening of a
specified contingency or event. Every person,
partnership, association, or corporation duly
authorized to transact insurance business
may be an insurer (Sec. 6).
Insurance Corporation corporation formed
or organized to save any person or other
corporations harmless from loss, damage, or
liability arising from any unknown or future or
contingent event or to indemnify or to
compensate any person or persons or other
corporation for any such loss, damage, or
liability or to guarantee the performance of or
compliance with contractual obligations or the
payment of debt of others. (Sec. 185)
a. It must have sufficient capital and assets
required under the Insurance Code and the
perti nent regul ati ons i ssued by the
Commission (Sec. 186);
b. It must have a certificate of authority to
oper at e i ssued by t he I nsur ance
Commission which should be renewed
every year. (Sec. 187).
Foreign Insurance Corporations may
engage i n i nsurance busi ness i n the
Phi l i ppi nes pr ovi ded t he f ol l owi ng
requirements are met:
a) The appointment of a resident of the
Philippines as a general agent on whom
any notice or proof of loss may be served
and on whom summons and other
processes may be served;
b) It must possess paid-up unimpaired
assets or capital and reserve not less
t han t hat r equi r ed of domest i c
corporations;
c) It must deposit for the benefit and security
of policyholders, securities satisfactory to
the Commission.
d) Its investments should not exceed 20% of
the net worth of foreign corporation or
20% of the capital of the registered
enterprise.
2. INSURED the person in whose favor the
contract is operative and who is indemnified
against, or is to receive a certain sum upon
the happening of a specified contingency or
event. Anyone except a public enemy may be
insured. (Sec. 7)
Insurance Law
Public enemy citizen or subject of a nation
at war with the Philippines and does not
include robbers thieves and other criminals.
Reason: The purpose of war is to cripple
the power and exhaust the resources of the
enemy, and it is inconsistent that one
country should destroy its enemys property
and repay in insurance the value of what
has been so destroyed, or that it should in
such manner increase the resources of the
enemy, or render it aid (Filipinas Cia de Seguros
v. Christern Huenfeld & Co., Inc., GR No. L-2294, 89
Phil., May 25, 1951).
Insurance by a minor (Sec. 3, par. 3) has been
rendered moot and academic by Republic Act
6809 which reduced the majority age from 21
to 18 years of age. Hence, a person who is 18
years or more may enter into any kind of
insurance contract because he is already of
legal age.
Insurance by a married woman
A married woman may take out an insurance
on her life or that of her children without the
consent of her husband (Sec. 3 [2]), or that of
her husband, having an insurable interest in
the latter (Sec. 10).
However, while either spouse may exercise
any l egi ti mate professi on, occupati on,
business or activity without the consent of the
other, the latter may object on valid, serious
and moral grounds (Art. 73, Family Code).
3. CESTUI QUE VIE and BENEFICIARY
Cestui que vie is the person on whose life the
insurance is written. The beneficiary is the
person designated to receive the proceeds of
the policy when the risk attaches.
Illustration: A husband may take out a policy
on his wifes life, proceeds payable to their
son. The husband is the insured, the wife is
the cestui que vie, and the son is the
beneficiary.
Kinds of Beneficiary:
a) Insured himself;
b) Third person who paid a consideration; or
c) Third person through mere bounty of
insured.
In the second and third cases, the

beneficiary is not a party to the contract.
Art. 1311 (2
nd
par.), NCC allows the
contracting parties to include a stipulation
in favor of a third person not a party to the
contract.
Persons who cannot be named Beneficiary
Any person who is forbidden from receiving
any donation under Art. 739 cannot be named
beneficiary of a life insurance policy by the
person who cannot make any donation to him
(Art. 2012, NCC), to wit:
a) Those who are guilty of adultery or
concubinage with the insured at the time
of designation;
b) Those who were found guilty with the
insured of the same criminal offense,
commi tted i n consi derati on of the
designation;
c) A public officer or his wife, descendants
and ascendants designated by reason of
his office (Article 739, NCC).
Note: This prohibition will apply ONLY to
life insurance policies (Art. 2012, NCC).
Right to change Beneficiary:
GENERAL RULE
The insured shall have the right to change the
beneficiary he designated in the policy.
The beneficiary acquires NO vested right

but only an expectancy of receiving the
proceeds under the insurance.
The right may be exercised in the manner

provided in the policy.
The right ceases upon the insureds

death. It may not be exercised by his
representatives.
EXCEPTION
If the right to change the beneficiary is
EXPRESSLY WAIVED in the policy, then the
insured has no power to make such change
without the consent of the beneficiary.
The beneficiary acquires a vested right in

the policy. Such beneficiary, to whom a
policy of insurance upon life or health has
passed by transfer, will or succession,
may recover upon it whatever the insured
might have recovered (Sec. 181, Insurance
Code).
If the i nsured refuses to pay the

premiums, the designated irrevocable
beneficiary may continue the policy by
paying premiums that are due (Art. 1236,
NCC).
EXCEPTION TO THE EXCEPTION
Under Articles 43(4), 50 and 64 of the Family
Code, the innocent spouse may revoke the
designation of the other spouse who acted in
bad faith as beneficiary in any insurance
policy, EVEN if such designation be stipulated
as irrevocable.
When the beneficiary dies before the
insured:
1. Should the beneficiary predecease the
i nsur ed and such benef i ci ar y i s
irrevocable, and hence has a vested
i nt er est i n t he pol i cy, t he l egal
representatives of such beneficiary are
entitled to the proceeds of the insurance
as assets of his or her estate, unless the
proceeds were made payable to the
beneficiary only if living.
2. On the other hand, where the beneficiary
is revocable and therefore does not have
vested interest in the policy at the time of
h i s d e a t h , h i s e s t a t e o r l e g a l
representatives derive no interest from or
through him, but the proceeds passes to
the estate of the insured.
3. In case of an insurance policy taken out
by an original owner on the life or health
of a minor, all rights, title and interest in
the policy shall automatically vest in the
minor upon the death of the original
owner, unless otherwise provided for in
the policy (Sec. 3, par. 5).
Insurable Interest
INSURABLE INTEREST
The relation between the insured and the event
insured against such that the occurrence of the
event will cause substantial loss or harm of some
kind to the insured.
1. LIFE INSURANCE Insurable interest in life
exists when there is reasonable ground
founded on the relation of the parties, either
pecuniary or contractual or by blood or affinity,
to expect some benefit or advantage from the
continuance of the life of the insured.
2. PROPERTY INSURANCE Every interest in
property, whether real or personal, or any
relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might
directly damnify the insured.
PURPOSES
1. Based upon considerations which render
wager policies invalid. Without such insurable
interest, the contract would in effect be a
mere wager or gambling contract which is
void.
2. Measure of the upper limit of his provable loss
under the contract.
INSURABLE INTEREST IN LIFE INSURANCE
1. Where the insured is also the cestui que
vie (Insurance upon ones life)
A person has an insurable interest in his

own life and health (Sec. 10[a]).
The insured can make it payable to

anyone he chooses, regardless of
whether or not such beneficiary has an
insurable interest in his (insureds) life.
Upon the insureds death, the beneficiary

shall be entitled to the full face value of
the policy.
It is assumed that the insured would not

designate as his beneficiary a person
whom he would not trust his life.
2. Where the insured is not the cestui que vie
but is the beneficiary (insurable interest in
the life of another)
Wher e a per son names hi msel f

beneficiary in a policy he takes on the life
of another, he must have insurable
interest in the life of the latter.
Sec. 10 specifies the person in whose life

the insured has an insurable interest, to
wit:
a) On himself, of his spouse, and of
his children the insured beneficiary
need not prove insurable interest
because he is presumed to have an
insurable interest on the life his spouse
or his children.
The husband and wife as well as
parent and child do have some
pecuniary interest in each others life
since they are legally obliged to
support each other.
b) Of any person on whom he depends
wholly or in part for education or
support , or i n whom he has
pecuniary interest where the
relationship is not as close as those
ment i oned above, t he i nsured-
beneficiary will be like any other
stranger i.e. he will have to prove
that he has some pecuniary interest in
the life of the cestui que vie, otherwise
the policy will be void.
c) Of any per son under l egal
obligation to him for the payment of
money, or respecting property or
services of which death or illness
m i g h t d e l a y o r p r e v e n t
performance.
Insurance Law
d) Of any person upon whose life or
estate vested in him depends.
3. Creditor of insured as beneficiary
A cr edi t or may name hi msel f as

beneficiary in a policy he takes on the life
of his debtor. The death of the debtor
may either prevent payment if his estate
is not sufficient to pay his debts or delay
such payment if an administrator has to
be appointed to settle his estate.
Except Sec. 10 (par. a) of the ICP, an

insurance contract thereunder partakes
the nature of a contact of indemnity.
Hence, the creditors recovery upon the
death of the debtor should be limited to
the amount of his interest, i.e. the amount
owing to him.
BUT if the debtor is the insured and the

creditor is named beneficiary, the creditor
will be entitled to the WHOLE proceeds of
the policy upon the debtors death,
though his credit may be much less.
4. Business associate or employer of insured
A person may take a policy on the life of

his business partner because the latters
death may result in an interruption of
business operations which can in turn
cause financial loss.
A business firm can take out a policy on

the life of its officers or employees whose
services proved valuable to the business.
The proceeds are not taxable income but
constitute indemnity to the employer for
the loss which the business suffers
because of the death of a valued officer
or employee.
Consent of the Cestui que vie:
1. First View Consent is essential to the
validity of policy. It is believed that all such
contracts (without the consent of the insured)
are contrary to public policy and void.
2. Second View Under our law (Sec. 10), the
consent of the person insured is not essential
to the validity of the policy. So long as it could
be proved that the assured has a legal
insurable interest at the inception of the
policy, the insurance is valid even without
such consent.
TIME OF EXISTENCE
GENERAL RULE
Insurable interest in life or health must exist
when the insurance takes effect, but need not
exist thereafter or when the loss occurs (Sec.
19).
EXCEPTIONS
1. When the insurance is taken by the
creditor on the life of the debtor, the
creditor is required to have an insurable
interest not only at the time of the contract
but also at the time of the debtors death
because in this case, it is considered as a
contract of indemnity.
2. When the insurance is taken by the
employer on the life of the employee (El
Oriente Fabrica de Tabacos, Inc. v. Posadas, GR No.
34774, September 21, 1931).
INSURABLE INTEREST IN PROPERTY
An insurable interest in property may consist in:
1. An existing interest the existing interest in
the property may be legal title or equitable
title.
Examples of insurable interest arising from
legal title:
c. Trustee, as in the case of the seller of
property not yet delivered;
d. Mortgagor of the property mortgaged;
e. Lessor of the property leased
Examples of insurable interest arising from
equitable title
a. Purchaser of property before delivery or
before he has performed the conditions of
the sale;
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which
redemption is allowed.
2. An inchoate interest founded on an
existing interest
Example: A stockholder has an inchoate
interest in the property of the corporation of
which he is a stockholder, which is founded
on an existing interest arising from his
ownership of shares in the corporation.
3. An expectancy, coupled with an existing
i nt erest i n t hat out of whi ch t he
expectancy arises
Expectancy to be insurable must be

coupled with an existing interest (Sec. 14)
or founded on an actual right to the thing
or upon any valid contract for it (Sec. 16).
MEASURE OF INSURABLE INTEREST IN
PROPERTY: The measure of insurable interest in
property is the extent to which the insured might
be damnified by loss or injury thereof (Sec. 17).
Insurable interest in property does not necessarily
imply a property interest in, or a lien upon, or
possession of, the subject matter of the insurance,
and neither title nor a beneficial interest is
requisite to the existence thereof. It is sufficient
that the insured is so situated with reference to the
property that he would be liable to loss should it
be injured or destroyed by the peril against which
it is insured. Anyone has an insurable interest in
property who derives a benefit from its existence
or would suffer loss from its destruction (Gaisano
Cagayan, Inc. vs. Insurance Company of North America, GR
No. 147839, June 8, 2006).
TIME OF EXISTENCE
An interest in property insured must exist when
the insurance takes effect AND when the loss
occurs, but need not exist in the meantime (Sec. 19).
INSURABLE
INTEREST IN
PROPERTY
INSURABLE INTEREST
IN LIFE
Extent
Insurable interest is
limited to the actual
value of the interest
thereon
Insurable interest in life
is unlimited (save in life
insurance effected by a
creditor on the life of the
debtor)
Existence of insurable interest
Must exist when the
insurance takes effect
AND when the loss
occurs, but need not
exist in the meantime.
It is enough that interest
exist at the time the
policy takes effect and
need not exist at the time
of the loss.
Basis of expectation
There must be legal
basis
Expectation of the
benefit derived need not
have legal basis
Insurable Interest
The beneficiary must
have an insurable
interest in the thing
insured.
If the insured secured
the policy, the
beneficiary need not
have insurable interest
over the life of the
insured; if secured by the
beneficiary, the latter
must have insurable
interest in the life of the
insured.
SPECIAL CASES:
1. In case of a carrier or depository
A carrier or depository of any kind has an
insurable interest in a thing held by him as
such, to the extent of his liability but not to
exceed the value thereof (Sec. 15).
Reason: The loss of the thing by the carrier
or depository may cause liability against him
to the extent of its value.
2. In case of a mortgaged property
The mortgagor and mortgagee each have an
insurable interest in the property mortgaged
and this interest is separate and distinct from
the other. Therefore, insurance taken by one
in his name only and in his favor alone does
not inure to the benefit of the other.
a) MORTGAGOR As owner, has an
insurable interest therein to the extent of
its value, even though the mortgage debt
equals such value.
Reason: The loss or destruction of the
property insured will not extinguish the
mortgage debt.
b) MORTGAGEE His interest is only up to
the extent of the debt. Such interest
continues until the mortgage debt is
extinguished.
Reason: The property relied on as
mortgaged is only a security. In insuring
the property, he is not insuring the
property itself but his interest or lien
thereon.
Note: In case of an insurance taken by the
mortgagee alone and for his benefit, the
mortgagee, after recovery from the insurer, is not
allowed to retain his claim against the mortgagor
but it passes by subrogation to the insurer to the
extent of the insurance money paid (Palileo vs. Cosio,
GR No. L-7667, November 28, 1955).
The lessor cannot be validly a beneficiary of a fire
insurance policy taken by a lessee over his
merchandise, and the provision in the lease
contract providing for such automatic assignment
is void for being contrary to law and public policy
(Cha vs. Court of Appeals, GR No. 124520, August 18,
1997).
STANDARD OR
UNION MORTGAGE
CLAUSE
OPEN OR LOSS
PAYABLE MORTGAGE
CLAUSE
Subsequent acts of
the mortgagor
CANNOT affect the
rights of the assignee.
Acts of the mortgagor
affect the mortgagee.
Reason: Mortgagor does
not cease to be a party to
the contract (Secs. 8 and 9).
Effects of Loss Payable Clause:
1. The contract is deemed to be upon the
interest of the mortgagor; hence, he does not
cease to be a party to the contract;
2. Any act of the mortgagor prior to the loss,
which would otherwise avoid the insurance
affects the mortgagee even if the property is
in the hands of the mortgagee;
Insurance Law
3. Any act, which under the contract of
i nsurance i s to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect;
4. In case of loss, the mortgagee is entitled to
the proceeds to the extent of his credit;
5. Upon recovery by the mortgagee to the extent
of his credit, the debt is extinguished.
The rule on subrogation by the insurer to

the right of the mortgagee does not apply
in this case.
Reason: Premium payment has been paid
by t he mort gagor and not by t he
mortgagee.
MORTGAGE REDEMPTION INSURANCE
A life insurance taken pursuant to a group
mortgage redemption scheme by the lender of
money on the life of a mortgagor, who mortgages
the house constructed to the extent of the
mortgage indebtedness, such that if the mortgagor
dies, the proceeds of his life insurance will be
used to pay for his indebtedness and the
deceaseds heirs will thereby be relieved from
paying the unpaid balance of the loan (Great Pacific
Life Assurance Corp. vs. Court of Appeals, GR No. 113899,
316 SCRA 677, October 13, 1999).
TRANSFER OF INTEREST, POLICY, OR CLAIM
In Insurance, the following may be transferred
or assigned:
a) The thing insured (See Sec. 20);
b) The policy itself (See Sec. 58);
c) The claim itself (See Sec. 83).
1. CHANGE OF INTEREST
GENERAL RULE
A change of interest in any part of the thing
insured, unaccompanied by a corresponding
change of i nt erest i n t he i nsurance,
SUSPENDS the insurance to an equivalent
extent, until the interest in the thing and the
interest in the insurance are vested in the
same person (Sec. 20).
EXCEPTIONS
a. In cases of life, accident, and health
insurance (Sec. 20).
Reason: They are not regarded as
contracts of indemnity and therefore,
insurable interest need exist only at the
time the insurance is effected.
b. Change of interest in the thing insured after
occurrence of an injury which results in a
loss (Sec. 21).
Reason: After the loss has happened, the
liability of the insurer becomes fixed.
Therefore, the insured has the right to
assign his claim against the insurer as any
other money claim.
c. Change in interest in one or more of
several distinct things separately insured
by one policy (Sec. 22).
Reason: The contract is divisible.
d. Change of interest, by will or succession,
on the death of the insured (Sec. 23).
Reason: Art. 1311 of the Civil Code
(Relativity of Contracts)
Whoever takes the property of the

decedent will automatically become
the owner of the policy.
e. Transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to others
(Sec. 24).
Reason: No new party was introduced into
the co-ownership. It is the alienation to a
stranger that will suspend the policy.
f. When a policy is so framed that it will
inure to the benefit of whomsoever,
during the continuance of the risk, may
become the owner of the interest insured
(Sec. 57).
(Autonomy of Contracts)
g. When there i s a prohi bi ti on agai nst
alienation or change of interest without the
consent of the insurer, in which case, the
policy is not merely suspended but avoided.
(Autonomy of Contracts)
2. TRANSFER OF POLICY
In LIFE Insurance the policy may be
transferred without the consent of the insurer
(Sec. 181).
Reason: The policy does not represent a
personal agreement between the insured
and the insurer.
EXCEPTION: When notice to an insurer of
a transfer is expressly required in the policy
(Sec. 182).
In PROPERTY Insurance the policy may
NOT be transferred without the consent of the
insurer.
Reason: The insurer approved the policy
based on the personal qualification and the
insurable interest of the insured.
Effect of Transfer without Consent:
The insurance policy will be suspended and
will not be avoided until the interest in the
thing and the interest in the insurance are
vested in the same person.
In CASUALTY Insurance the policy may
NOT be transferred without the consent of the
insurer.
Reason: The moral hazards are as great
as those of property insurance.
3. TRANSFER OF CLAIM
Claim of insured after loss is transferable, and
any stipulation to the contrary is void.
Reasons:
1. agreement hinders free transmission of
property;
2. transfer does not involve a personal
contract, but a money claim or right of
action;
3. transfer involves no moral hazard.
VOID STIPULATIONS IN AN INSURANCE
CONTRACT:
1. Payment of loss, whether the person insured
has or not any insurable interest in the
subject-matter of insurance;
2. The policy shall be received as proof of such
interest;
3. Every policy executed by way of gaming or
wagering is void (Sec. 25).
As to whether a person has or has no

insurable interest in property, cannot be
vested by mere agreement or
stipulation of the parties. It is contrary
to law and public policy because it
becomes a wagering contract.
Devices Used for Ascertaining and
Controlling Risk and Loss
FOUR PRI MARY CONCERNS OF THE
INSURER
1. Correct estimation of risk which enables
insurer to determine if he will approve the
policy application and if so at what premium
rate;
2. Determination of the risk;
3. Control of risk to guard against increase of
risk;
4. Determine if loss occurs and if so the
amount thereof.
DEVICES USED FOR ASCERTAINING AND
CONTROLLING RISKS AND LOSS (C
2
REW)
1. CONCEALMENT neglect to communicate
that which a party knows and ought to
communicate (Sec. 26).
2. REPRESENTATION an oral or written
statement of a fact or condition affecting the
risk made by the insured to the insurance
company, tending to induce the insurer to
assume the risk.
3. WARRANTIES statements or promises by
the insured set forth in the policy itself or
incorporated in it by proper reference, the
untruth or non-fulfilment of which in any
respect, and without reference to whether the
insurer was in fact prejudiced by such untruth
or non-fulfilment render the policy voidable by
the insurer. The same may be expressed,
implied, affirmative or promissory.
4. EXCEPTION Exceptions make more
definite the coverage indicated by the general
description of the risk by excluding certain
specified risks that otherwise would be
i ncl uded under the general l anguage
describing the risks assumed.
5. CONDITION The insurer must also protect
himself against fraudulent claims of loss and
this he attempts to do by inserting in the
policy various conditions which make the form
of either conditions precedent or subsequent.
CONCEALMENT
Requisites:
1. A party knows a fact (a material fact) which he
neglects to communicate or disclose to the
other party;
2. Such party concealing is duty bound to
disclose such fact to the other;
3. Such party concealing makes no warranty as
to the fact concealed; and
4. The other party has no means of ascertaining
the fact concealed.
Test of Materiality: Determined not by the event,
but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of
Insurance Law
the advantages of the proposed contract, or in
making his inquiries (Sec. 31).
Distinguished from Materiality in Marine
Insurance:
Rules on concealment are stricter since the
insurer would have to depend almost entirely on
the matters communicated by the insured.
Thus, in addition to material facts, each party must
disclose ALL the information he possesses which
are material to the information of the belief or
expectation of a third person, in reference to a
material fact.
BUT a concealment in a marine insurance in any
of the following matters enumerated under Sec.
110, ICP does NOT vitiate the entire contract, but
merely exonerates the insurer from a loss
resulting from the risk concealed.
Effect of Concealment:
a) If there is concealment under Sec. 27, the
remedy of the insurer is rescission.
b) The part y cl ai mi ng t he exi st ence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.
c) Good faith is not a defense in concealment.
Conceal ment , whet her i nt ent i onal or
unintentional entitles the injured party to
rescind the contract of insurance (Sec. 27).
d) The matter concealed need not be the cause
of loss.
e) To be guilty of concealment, a party must
have knowledge of the fact concealed at the
time of the effectivity of the policy.
f) Failure to communicate information acquired
AFTER the effectivity of the policy will NOT be
a ground to rescind the contract.
Reason: Information is no longer material as
it will no longer influence the other party to
enter into such contract.
Matters that need not be disclosed -
Neither party to a contract of insurance is bound
to communicate information of matters following,
EXCEPT in answer to inquiries of the other:
(WOKEE)
1. Those which the other knows;
2. Those which, in the exercise of ordinary care,
the other ought to know and of which, the
former has no reason to suppose him
ignorant;
3. Thos e of whi c h t he ot her wai v es
communication;
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty,
and which are not otherwise material;
5. Those which relate to a risk excepted from the
policy and which are not otherwise material.
Note: Neither party is bound to communicate,
even upon inquiry, information of his own
judgment.
The parties are bound to know all the general
causes which are open to his inquiry, equally
with the other, and all general usages of
trade.
The right to information of material facts

may be WAIVED:
1. by the terms of the contract;
2. by failure to make an inquiry as to
such facts, where they are distinctly
implied in other facts from which
information is communicated.
Matters that must be disclosed even in the
absence of inquiry: (M-No means-No war)
1. Those material to the contract (Secs. 31, 34, 35);
2. Those which the other has no means of
ascertaining (Sec. 30, 32, 33);
3. Those as to which the party with the duty to
communicate makes no warranty (Secs. 67-76).
REPRESENTATIONS
Kinds of Representation:
1. Affirmative an affirmation of fact existing
when the contract begins;
2. Promissory statement by the insured
concerning what is to happen during the term
of the insurance.
Requi si t es of a f al se r epr esent at i on
(misrepresentation):
1. The insured stated a fact which is untrue.
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead.
3. Such fact in either case is material to the risk.
Test of materiality the same as concealment
(Sec. 31).
Effect of Misrepresentation:
1. The injured party entitled to rescind from the
TIME when the representation becomes false
(Sec. 45).
2. When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is a waiver of such right.
3. There is no waiver of the right of rescission if
the insurer had no knowledge of the ground
therefor at the time of acceptance of premium
payment (Stokes vs. Malayan Insurance Co., Inc. GR
No. L-34768, February 24, 1984).
Characteristics:
1. Not a part of the contract but merely a
collateral inducement to it;
2. Oral or written;
3. Made at the time of, or before issuing the
policy and not after;
4. Altered or withdrawn before the insurance is
effected but not afterwards;
5. Refers to the date the contract goes into
effect.
CONCEALMENT MISREPRESENTATION
Act involved
The insured
withholds
information of
material facts from
the insurer
The insured makes
erroneous statements of
facts with the intent of
inducing the insurer to enter
into the insurance contract
Materiality
Same rules apply to determine materiality
Effect
Same effect and gives the insurer the right to
rescind the contract, whether the concealment or
misrepresentation be intentional or not
WARRANTIES
Purpose: To eliminate potentially increasing
hazards which may either be due to the acts of the
insured or to the change of the condition of the
property.
Basis: The insurer took into consideration the
condition of the property at the time of effectivity of
the policy.
Kinds:
1. Express an agreement expressed in a
policy whereby the insured stipulates that
certain facts relating to the risk are or shall be
true, or certain acts relating to the same
subject have been or shall be done.
2. Implied - it is deemed included in the contract
although not expressly mentioned.
Example: In marine insurance, seaworthiness
of the vessel.
Effects of breach of warranty:
1. MATERIAL
GENERAL RULE
Violation of material warranty or of a
material provision of a policy will entitle the
other party to rescind the contract (Sec. 74).
EXCEPTIONS
a) Loss occurs before the time of
performance of the warranty;
b) The per f or mance becomes
unlawful at the place of the
contract; and
c) Performance becomes impossible
(Sec. 73).
2. IMMATERIAL (ex. Other insurance clause)
GENERAL RULE
It will not avoid the policy.
EXCEPTION:
When the policy expressly provides or
declares that a violation thereof will avoid it
(Sec. 75).
WARRANTY REPRESENTATION
Nature
Part of the contract Mere collateral inducement
Form
Written on the
policy, actually or
by reference
May be written in the policy
or may be oral.
Materiality
Presumed material Must be proved to be
material
Compliance
Must be strictly
complied with
Requires only substantial
truth and compliance
Effect of falsity/non-fulfilment
Falsity or non-
fulfilment operates
as a breach of
contract
Falsity renders the policy
void on the ground of fraud
CONDITIONS
Effects of Breach:
1. CONDITION PRECEDENT prevents the
accrual of cause of action.
2. CONDITION SUBSEQUENT avoids the
policy or entitles the insurer to rescind
The insurer may also protect himself

against fraudulent claims of loss by
Insurance Law
inserting in the policy various conditions
whi ch t ake t he f orm of condi t i ons
precedent. For instance, there are
conditions requiring immediate notice of
loss or injury and detailed proofs of loss
within a limited period.
CONDITION WARRANTY
Effects
Limitation to the attachment
of the risk
Does not have that
effect
Non-performance of which,
although in form executed
by the parties and delivered,
does not spring into life
Does not suspend
or defeat the
operation of the
contract
The occurrence of breach temporarily renders
the entire contract voidable.
EXCEPTIONS
Provisions that may specify excepted perils. It
makes more definite the coverage indicated by the
general description of the risk by excluding certain
specified risks that otherwise would be included
under the general language describing the risk
assumed.
An insurer seeking to defeat a claim because of

an exception or limitation in the policy has the
burden of proving that the loss comes within
the purview of the exception or limitation. If a
proof is made of a loss apparently within a
contract of insurance, the burden is upon the
insurer to prove that the loss arose from a
cause of loss which is excepted or for which it
is not liable, or from a cause which limits its
liability (DBP Pool of Accredited Insurance Companies v.
Mindanao Network, G.R. No. 147039, January 27, 2006).
RESCISSION OF CONTRACT OF INSURANCE
Grounds (FAB-BreC):
1. Concealment;
2. False representation;
3. Breach of material warranty;
4. Breach of a condition subsequent;
5. Alteration of the thing insured.
IN NON-LIFE POLICY:
The insurer must exercise the right to rescind the
contract BEFORE the insured has filed an action
to collect the amount of insurance.
A defense to an action to recover insurance that
t he pol i cy was obt ai ned t hr ough f al se
representation, fraud and deceit is NOT in the
nature of an action to rescind and therefore not
barred by the provision. There is no limit for
interposing this defense.
IN LIFE POLICY:
The defenses mentioned are available only during
the first two years of a life insurance policy,
provided that after a policy of insurance made
payable on the death of the insured shall have
been in force during the lifetime of the insured for
a period of 2 years from the date of its issue or its
last reinstatement, the insurer cannot prove that
the policy is void ab initio or is rescindable by the
r eas on of f r audul ent c onc eal ment or
misrepresentation of the insured or his agent (Sec.
48) (INCONTESTABILITY CLAUSE).
Purpose of Incontestability Clause
To assure that after the specified period, the policy
owner may rely upon the insurance company to
carry out the terms of the contract, regardless of
irregularities in connection with the application
which may later be discovered.
Requisites: (2-LiP)
1. It must be a Life insurance policy;
2. It must be Payable on the death of the
insured; and
3. It must be in force during the lifetime of the
insured for at least 2 years from its date of
issue or of its last reinstatement.
The period of two years may be shortened

but it cannot be extended by stipulation.
Defenses not barred by incontestability
clause: (FELT-Vicious-PMs)
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is
an excepted risk;
3. That the premiums have not been paid;
4. That the conditions of the policy relating to
military or naval service have been violated;
5. That the fraud is of a particular vicious type;
6. That the beneficiary failed to furnish proof of
death or to comply with any conditions
imposed by the policy after the loss has
happened;
7. That the action was not brought within the
time specified.
The Policy
POLICY OF INSURANCE
The written instrument in which a contract of
insurance is set forth (Sec. 49). It is not necessary
for the perfection of the contract.
Note: An insurance contract may be verbal or in
writing, or partly in writing and partly verbal.
However, the law provides that no policy of
insurance shall be issued or delivered unless in
the form previously approved by the Insurance
Commission (Sec. 226).
The approval of the Insurance Commissioner may
be dispensed with upon the certification of the
president, vice-president, or general manager
of the insurance company concerned that the risk
involved, the values of such risks and/ or the
premiums therefor has not yet been
determined or established, or such extension
or renewal is not contrary to and is not for
the purpose of violating any provisions of the
Insurance Code, or of any rulings, instructions,
or circulars of the Insurance Commissioner (Ins.
Memo Cir. No. 3-75, dated September 29, 1975, effective Oct.
21, 1976).
Contents of Policy (R
2
AP
2
ID):
1. Parties;
2. Amount of insurance, except in open or
running policies;
3. Rate of premium;
4. Property or the life insured;
5. Interest of the insured in the property if he is
NOT the absolute owner;
BUT i f he i s t he absol ut e owner,

information of the nature or amount of his
interest need not be communicated unless
in answer to an inquiry (Sec. 34).
6. Risk insured against;
7. Duration of the insurance.
RIDER
An attachment to an insurance policy that modifies
the conditions of the policy expanding or
restricting its benefits or excluding certain
conditions from the coverage.
Counter-signature of the insured on a rider,
endorsement, clause, or warranty
If the rider, endorsement, clause or warranty was
issued SIMULTANEOUSLY with the policy, the
counter-si gnature of the i nsured i s NOT
necessary. However, the descriptive title or name
of the rider must be written on the blank spaces
The rider, endorsement, clause, or warranty was
issued AFTER the issuance of the policy:
I f t he i nsured appl i ed f or t he ri der,

endorsement, clause, or warranty, his
counter-signature is NOT necessary.
If the same is not applied for by the insured,

riders and the like shall be countersigned by
the insured or owner.
Note: When the requirements for a rider are
complied with, it is considered as part of the
policy.
BINDING RECEIPT
A mere acknowledgment on behalf of the
company that its branch office had received from
the applicant the insurance premium and had
accepted the application subject to processing by
the head office.
COVER NOTE (AD INTERIM)
A concise and temporary written contract issued
by the insurer through its duly authorized agent
embodying the principal terms of an expected
policy of insurance.
Purpose: It is intended to give temporary
insurance protection coverage to the applicant
pending the acceptance or rejection of his
application.
Rules on Cover Notes:
a. The cover note is valid for 60 days, after
which the policy must be issued.
b. The period may be extended or renewed
beyond 60 days with the written approval of
the Commissioner if he determines that such
extension is not contrary to and is not for the
purpose of violating any provisions of the
Code.
c. No separate premiums are intended or
required to be paid on a cover note because
cover notes do not contain particulars of the
property insured that would serve as basis for
the computation of premiums. Thus, no
premium could be fixed and paid on the cover
note. Cover notes should not be treated as
separate policies but should be integrated to
the regular policies subsequently issued so
that the premiums on the regular policies
include the consideration for the cover notes
(Pacific Timber Export Corporation vs. Court of Appeals,
GR No. L-38613, 112 SCRA 199, February 25, 1982).
Insurance Law
KINDS OF POLICY:
1. OPEN POLICY one in which the value of
the thing insured is not agreed upon, but is
left to be ascertained in case of loss (Sec. 60).
2. VALUED POLICY one which expresses on
its face agreement that the thing insured shall
be valued at a specified sum (Sec. 61).
3. R U N N I N G P OL I C Y o n e w h i c h
contemplates successive insurances and
which provides that the object of the policy
may be from time to time defined, especially
as to the subjects of insurance, by additional
statements or endorsements (Sec. 62).
GENERAL RULE
The insurance proceeds shall be applied
exclusively to the proper interest of the person in
whose name or for whose benefit it is made. A
third person may not sue the insurer directly.
EXCEPTION
If the insurance contract was intended to benefit
third persons (Art. 1311, Civil Code), the latter may
directly claim from the insurer. Thus,
1. If the insurance contract contain some
sti pul ati on i n favor of a thi rd person
(stipulation pour autrui), the latter although
not a party to the contract may enforce the
stipulation in his favour before it is revoked by
the contracting parties (Coquia v. Fieldmens Ins. Co.,
et al, GR No. L-23276, November 29, 1968).
2. A third person has no right in law or equity to
the proceeds of an insurance unless there is a
contract or trust, express or implied,
between the insured and third person (Bonifacio
Bros., Inc. v. Mora, GR No. L-20853, May 29, 1967).
3. Where the contract insurance provides for
indemnity against liability to third persons,
then third persons, to whom the insured is
liable, can sue the insurer (Guingon v. del Monte, et
al., GR No. L-21806, 20 SCRA 1043, August 17,
1967).
INSURANCE PROCURED BY AN AGENT
The insurance inures to the benefit of the
principal.
Requisites:
1. agent must be authorized;
2. must act within the scope of his authority;
3. must disclose his principal;
4. indicate by appropriate words that he is acting
in a representative capacity.
TEST TO DETERMINE WHETHER A THIRD
PERSON MAY DIRECTLY SUE THE INSURER
OF THE WRONGDOER
Where the contract provides for indemnity
against liability to third persons, then the latter to
whom the insured is liable, can directly sue the
insurer.
On the other hand, where the insurance is for
indemnity against actual loss or payment, then
third persons cannot proceed against the insurer,
the contract being solely to reimburse the insured
for liability actually discharged by him through
payment to third persons, said third persons
recourse being, thus limited to the insured alone
(Guingon v. Del Monte, Ibid).
CANCELLATION OF NON-LIFE POLICY
Requisites (WANG):
1. prior notice of cancellation to the insured;
2. notice must be based on the occurrence after
the effective date of the policy of one or more
of the grounds mentioned;
3. notice must be in writing, mailed or delivered
to the insured at the address shown in the
policy;
4. notice must state the grounds relied upon
provided in Section 64 of the Insurance Code
and upon request of the insured to furnish
facts on which cancellation is made.
Grounds (VP- FrANC):
1. non-payment of premiums;
2. conviction of a crime out of acts increasing
the hazard insured against;
3. fraud or material misrepresentation;
4. wi l Lful or reckl ess acts or omi ssi ons
increasing the risk insured against;
5. physical changes in the property insured
making it uninsurable;
6. determination by the Insurance Commissioner
that the policy would violate the Insurance
Code.
Premium
GENERAL RULE
CASH AND CARRY RULE - No insurance policy
issued or renewal is valid and binding until actual
payment of the premium. Any agreement to the
contrary is void (Sec. 77).
EXCEPTIONS (LACIE)
1. In case of life and industrial life whenever the
grace period provision applies (Sec. 77).
2. Where there is an acknowledgment in the
contract or policy of insurance that the
premium had already been paid (Sec. 78).
3. If the parties have agreed to the payment of
the premium in installments and partial
payment has been made at the time of the
loss (Makati Tuscany Condominium v. Court of Appeals,
GR No. 95546, November 6, 1992).
4. Where a credit term was agreed upon (UCPB
General Insurance, Inc. v. Masagana Telemart, GR No.
13717, April 4, 2001).
5. Where the parties are barred by estoppel.
Note: Sec. 77 merely precludes the parties from
stipulating that the policy is valid even if the
premiums are not paid (Makati Tuscany Condominium
Corp. vs. CA, GR No. 95546, November 6, 1992).
Effect of Acknowledgment of Receipt of
Premium in Policy:
Conclusive evidence of its payment, in so far as
to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid (Sec. 78).
Reason: When the policy contains such written
acknowledgement, it is presumed that the insurer
has waived the condition of prepayment. It hereby
creates a legal fiction of payment.
Note: The conclusive presumption extends only to
the question on the binding effect of the policy. As
far as the payment of the premium itself is
concerned, the acknowledgment is only a prima
facie evidence of the fact of such payment. The
insurer may still dispute its acknowledgment but
only for the purpose of receiving the premium due
and unpaid (The Insurance Code of the Philippines Annotated,
De Leon, H., 2006ed).
Effect of acceptance of premium:
Acceptance of premium within the stipulated
period for payment thereof, including the agreed
grace period, merely assures continued effectivity
of the insurance policy in accordance with its
terms.
Where an insurer authorizes an insurance agent
or broker to deliver a policy to the insured, it is
deemed to have authorized said agent to receive
the premium in its behalf. The insurer is bound by
its agents acknowledgment of the receipt of
payment of premium.
Payment of the premium by post-dated check.
Delivery of a promissory note or a check will not
be sufficient to make the policy binding until the
said note or check has been converted into cash.
This is consistent with Article 1249 of the Civil
Code.
NOTE: Payment by means of a check or note,
accepted by the insurer, bearing a date PRIOR to
the loss, assuming availability of the funds thereof,
would be sufficient even if it remains unencashed
at the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor
(Pandect of Commercial Law and Jurisprudence, Vitug, 2006ed).
Entitlement of insured to return of premiums
paid:
1. WHOLE
a. If the thing insured was never exposed to
the risks insured against (Sec. 79);
b. If contract is voidable due to fraud or
misrepresentation of the insurer or his
agents (Sec. 81);
c. If contract is voidable because of the
existence of facts of which the insured
was ignorant without his fault (Sec. 81);
d. When by any default of the insured other
than actual fraud, the insurer never
incurred liability (Sec. 81); and
e. When rescission is granted due to the
insurers breach of contract (Sec. 74).
2. PRO RATA
a. When the insurance is for a definite
period and the insured surrenders his
policy before the termination thereof;
Exceptions:
1. policy not made for a definite period
of time;
2. short period rate is agreed upon;
3. life insurance policy
b. When there is over-insurance
1. In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to the
property insured. Hence, the insurer
Insurance Law
is not entitled to that portion of the
premium corresponding to the excess
of the insurance over the insurable
interest of the insured.
2. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which
the aggregate sum insured in all the
policies exceeds the insurable value
of the thing at risk (Sec. 82).
DEVI CES USED TO PREVENT T HE
FORFEITURE OF A LIFE INSURANCE AFTER
THE PAYMENT OF THE FIRST PREMIUM:
1. GRACE PERIOD after the payment of the
first premium, the insured is entitled to a
grace period of thirty days within which to pay
the succeeding premiums.
2. CASH SURRENDER VALUE the amount
the insurer agrees to pay to the holder of the
policy if he surrenders it and releases his
claim upon it.
3. EXTENDED INSURANCE where the
i nsurance ori gi nal l y contracted for i s
continued for such period as the amount
available therefor will pay when it will
terminate. In such a case, the insurance will
be for the same amount as the original policy
but for a period shorter than the period in the
original contract.
4. PAID UP INSURANCE no more payments
are required, and consists of insurance for life
in such an amount as the sum available
therefor, considered as a single and final
premium, will purchase. It results to a
reduction of the original amount of insurance,
but for the same period originally stipulated.
5. AUTOMATIC LOAN CLAUSE a stipulation
in the policy providing that upon default in
payment of premium, the same shall be paid
from the loan value of the policy until that
value is consumed. In such a case, the policy
is continued in force as fully and effectively as
though the premiums had been paid by the
insured from funds derived from other
sources.
6. REINSTATEMENT provision that the holder
of the policy shall be entitled to reinstatement
of the contract at any time within three years
from the date of default in the payment of
premium, unless the cash surrender value
has been paid, or the extension period
expired, upon production of evidence of
insurability satisfactory to the company and
the payment of all overdue premiums and any
indebtedness to the company upon said
policy (Reviewer on Insurance, Insolvency and Code of
Commerce, Perez H., 2000ed).
Double Insurance
Double insurance exists where the same person is
insured by several insurers separately, in respect
to the same subject and interest (Sec. 93).
Requisites (2- same IRIS):
1. same insured person;
2. same subject matter;
3. same interest insured;
4. same risk or peril insured against; and
5. 2 or more insurers insuring separately.
OVER-INSURANCE
Exists when the insured insures the same
property for an amount GREATER than the value
of that property.
Effect in case of loss:
1. The insurer is bound only to pay the extent of
the real value of the property lost;
2. The insured is entitled to recover the amount
of premium corresponding to the excess in
value of the property.
EFFECTS OF OVER INSURANCE BY DOUBLE
INSURANCE (Sec. 94)
1. The insured, unless the policy otherwise
provides, may claim payment from the
insurers in such order as he may select, up to
the amount for which the insurers are
severally liable under their respective
contracts;
2. Where the policy under which the insured
claims is a valued policy, the insured must
give credit as against the valuation for any
sum received by him under any other policy
without regard to the actual value of the
subject matter insured;
3. Where the policy under which the insured
claims is an unvalued policy, he must give
credit, as against the full insurable value, for
any sum received by him under any policy;
4. Where the insured receives any sum in
excess of the valuation in the case of valued
policies, or of the insurable value in the case
of unvalued policies, he must hold such sum
in trust for the insurers, according to their right
of contribution among themselves;
5. Each insurer is bound, as between himself
and the other insurers, to contribute ratably to
the loss in proportion to the amount for which
he is liable under his contract.
Under the Principle of Contribution or

Contribution Clause it is required that
each insurer contribute ratably to the loss
or damage considering that the several
insurances cover the same subject matter
and interest against the same peril.
ADDITIONAL OR OTHER INSURANCE CLAUSE
A condition in the policy requiring the insured to
inform the insurer of any other insurance coverage
of the property insured. It is lawful and specifically
allowed under Sec. 75 which provides that (a)
policy may declare that a violation of a specified
provision thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid
it.
Purposes:
1. To prevent an increase in the moral hazard;
and
2. To prevent over-insurance and fraud.
OVER-INSURANCE DOUBLE INSURANCE
Amount of insurance
When the amount of
the insurance is
beyond the value of
the insureds insurable
interest
There may be no over-
insurance as when the
sum total of the amounts
of the policies issued
does not exceed the
insurable interest of the
insured
Number of insurers
There may only be
one insurer involved
There are always several
insurers
REINSURANCE
A contract by which the insurer procures a third
person to insure him against loss or liability by
reason of an original insurance (Sec. 95) also known
as Reinsurance Cession.
In every reinsurance, the original contract of
insurance and the contract of reinsurance are
covered by separate policies.
LIMIT OF SINGLE RISK
No insurance company other than life, shall retain
any risk on any one subject of insurance in an
amount exceeding 20% of its net worth (Sec. 215).
DOUBLE
INSURANCE
REINSURANCE
Interest
Involves the same
interest
Involves different interest
Subject
Subject of insurance
is property
Subject of insurance is the
original insurers risk
Insurer
Insurer remains in
such capacity
Insurer becomes the
insured in relation to
reinsurer
Insured
Insured is the party
in interest in the 2
contracts
Original insured has no
interest in the reinsurance
contract (Sec. 98)
Insureds consent
Insured has to give
his consent
Insureds consent not
necessary
Other Terms:
1. Reinsurance treaty Merely an agreement
between two insurance companies whereby
one agrees to cede and the other to accept
reinsurance business pursuant to provisions
specified in the treaty.
2. Automatic reinsurance The reinsured is
bound to cede and the reinsurer is obligated
to accept a fixed share of the risk which has
to be reinsured under the contract.
3. Facultative reinsurance There is no
obligation to cede or accept participation in
the risk each party having a free choice. But
once the share is accepted, the obligation is
absolute and the liability thereunder can be
discharged only by payment (Equitable Ins. &
Casualty Co. vs. Rural Ins. & Surety Co., Inc., GR No.
L-17436, 4 SCRA 343, January 31, 1962).
4. Retrocession A transaction whereby the
reinsurer, in turn, passes to another insurer a
portion of the risk reinsured. It is really the
reinsurance of reinsurance (The Insurance Code of
the Philippines Annotated, Hector de Leon, 2002ed).
Insurance Law
Loss
LOSS IN INSURANCE
The injury, damage or liability sustained by the
insured in consequence of the happening of one
or more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive.
LOSS IS SATISFIED BY (RPR)
a) Payment of loss;
b) Reinstatement (repair or restoration) of the
property lost or damaged;
c) Replacement (substitution) with another or
similar property.
WHEN INSURER IS LIABLE FOR LOSS
1. Loss the proximate cause of which is the peril
insured against (Sec. 84);
2. Loss the immediate cause of which is the peril
insured against except where the proximate
cause is an excepted peril (Sec. 86);
3. Loss through the negligence of the insured
except where there was gross negligence
amounting to willful act (Sec. 87);
4. Loss caused by efforts to rescue the thing
insured from a peril insured against (Sec. 85);
5. Loss caused by a peril NOT insured against
to which the thing insured was exposed in the
course of rescuing the same from the peril
insured against (Sec. 85).
WHEN THE INSURER IS NOT LIABLE
1. Loss by the insureds willful act or gross
negligence;
2. Loss due to the connivance of the insured (Sec.
87); and
3. Loss where the excepted peril is the
proximate cause.
PROXIMATE CAUSE
That which in a natural and continuous
sequence, unbroken by any new independent
cause, produces an event and without which
the event would not have occurred.
NOTICE OF LOSS
Purposes:
1. To give the insurer information by which he
may determine the extent of his liability;
2. To afford the insurer a means of detecting any
fraud that may have been practiced upon him;
3. To operate as a check upon extravagant
claims.
In fire insurance In other types of insurance
Required Not required
Effect of failure to furnish
Failure to give
notice will defeat
the right of the
insured to
recover.
Failure to give notice will not
exonerate the insurer, unless
there is a stipulation in the
policy requiring the insured to
do so.
Defects in the notice or proof of loss are
waived when the insurer:
1. Writes to the insured that he considers the
policy null and void as the furnishing of notice
or proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy;
4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
obj ect i ons on account of not i ce and
preliminary proof; or
5. Makes objection on any ground other than
formal defect in the preliminary proof.
CLAIMS SETTLEMENT
The indemnification of the loss of the insured.
In case of an unreasonable delay/denial in the
payment of the insureds claim by the insurer, the
insured can recover:
i. attorneys fees;
ii. expenses i ncurred by reason of t he
unreasonable withholding;
iii. interest at double the legal interest rate fixed
by the Monetary Board; and
iv. amount of the claim (Zenith Insurance Corp. vs. CA,
GR No. 85296, 185 SCRA 398, May 14, 1990; Sec.
244).
TIME FOR PAYMENT OF CLAIMS
LIFE POLICIES
NON-LIFE
POLICIES
a. Maturing upon the
expiration of the term
The proceeds are
immediately payable to the
insured, except if proceeds
are payable in installments
or annuities, which shall be
paid as they become due.
b. Maturing at the death
of the insured, occurring
prior to the expiration of
the term stipulated The
proceeds are payable to
the beneficiaries within 60
days after: presentation of
claim and filing of proof of
death (Sec. 242).
The proceeds shall
be paid within 30
days after the
receipt by the
insurer of proof of
loss, and
ascertainment of the
loss or damage by
agreement of the
parties or by
arbitration but not
later than 90 days
from such receipt of
proof of loss,
whether or not
ascertainment is had
or made (Sec. 243).
EFFECT OF REFUSAL OR FAILURE TO PAY
THE CLAIM WITHIN THE TIME PRESCRIBED
Sections 242, 243 and 244 of the Insurance Code
provide that the insurer shall be liable to pay
interest twice the ceiling prescribed by the
Monetary Board which means twice 12% per
annum (legal rate of interest prescribed in CB No.
416) or 24% per annum interest on the proceeds
of the insurance from the date following the time
prescribed in Secs. 242 or 243, until the claim is
fully satisfied (Prudential Guarantee and Assurance, Inc v.
Trans-Asia Shipping Lines, Inc. GR No. 151890, June 20,
2006).
EXCEPTION
Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS
such refusal or failure to pay is based on the
ground that the claim is fraudulent (Ibid; Secs. 242,
243).
Prescriptive Period (Secs. 63 & 384)
RULES
1. The parties to a contract of insurance may
validly agree that an action on the policy
should be brought within a limited period of
time, provided such period is NOT less than 1
year from the time the cause of action
accrues. If the period agreed upon is less
than 1 year from the time the cause of action
accrues, such agreement is void. (Sec. 63)
a. The stipulated prescriptive period shall
begin to run from the date of the insurers
rejection of the claim filed by the insured
or beneficiary and not from the time of the
loss.
b. In case the claim was denied by the
insurer but the insured filed a petition for
reconsideration, the prescriptive period
should be counted from the date the claim
was denied at the first instance and not
from the denial of the reconsideration (Sun
Life Office, Ltd. v. Court of Appeals, GR No. 89741,
195 SCRA 193, March 13, 1991).
2. If there is no stipulation or the stipulation is
void, the insured may bring the action within
the prescriptive period provided for in the Civil
Code, which is 10 years in case the contract is
written.
3. In CMVLI, the written notice of claim must be
filed within 6 months from the date of the
accident; otherwise, the claim is deemed
waived even if the same is brought within one
year from its rejection (Vda. De Gabriel vs. CA, GR
No. 103883, 264 SCRA 137, November 14, 1996).
4. The suit for damages, either with the proper
court or with the Insurance Commissioner,
should be filed within 1 year from the date of
the denial of the claim by the insurer;
otherwise, claimants right of action shall
prescribe (Sec. 384).
Insurance Law
Special Kinds of Insurance
Marine Insurance
Insurance against risks connected with navigation,
to which a ship, cargo, freightage, profits or other
insurable interest in movable property, may be
exposed during a certain voyage or a fixed period
of time (Sec. 99).
Coverage:
1. Insurance against loss or damage to:
a. Vessel s, goods, f r ei ght , car go,
merchandise, profits, money, valuable
papers, bottomry and respondentia, and
interest in respect to all risks or perils of
navigation;
b. Persons or property in connection with
marine insurance;
c. Precious stones, jewels, jewelry and
precious metals whether in the course of
transportation or otherwise; and
d. Bridges, tunnels, piers, docks and other
aids to navigation and transportation (Sec.
99).
Cargo can be the subject of marine

insurance, and once it is entered into,
the implied warranty of seaworthiness
immediately attaches to whoever is
insuring the cargo, whether he be the
shipowner or not (Roque vs. IAC, GR No.
L-66935, November 11, 1985).
2. Mar i ne Pr ot ect i on and I ndemni t y
Insurance
Measure of Indemnity:
1. Valued policy The parties are bound by the
valuation, if the insured had some interest at
risk and there is no fraud (Sec. 156).
2. Open policy The following rules shall apply
in estimating a loss:
a. value of the ship value at the beginning of
the risk;
b. value of the cargo actual cost when
laden on board or market value at the
time and place of lading;
c. value of freightage gross freightage
exclusive of primage;
d. cost of insurance in each case, to be
added to the estimated value (Sec. 161).
Major divisions of transportation insurance:
1. Ocean Marine Insurance
Scope:
a. ships or hulls
b. goods or cargoes
c. earnings such as freight
d. liability incurred by reason of maritime
perils
2. Inland Marine Insurance
Classes:
a. Property in transit provides protection to
property frequently exposed to loss while it
is being transported from one location to
another.
b. Bailee liability insurance for those who
have temporary custody of the goods.
c. Fixed transportation property they are so
insured because they are held to be an
essential part of the transportation system
such as bridges, tunnels, etc.
d. Floater provides insurance to follow the
insured property wherever it may be
located, subject always to the territorial
limits of the contract.
INSURABLE INTEREST
1. SHIPOWNER
a) Over the vessel to the extent of its value,
provided that if chartered, the recovery is
only up to the amount not recoverable
from the charterer.
b) He also has an insurable interest on
expected freightage (Sec. 103).
c) No insurable interest if he will be
compensated by charterer for the value of
the vessel, in case of loss.
2. CARGO OWNER
Over the cargo and expected profits (Sec.

105).
3. CHARTERER
Over the amount he is liable to the

shipowner, if the ship is lost or damaged
during the voyage (Sec. 106).
4. OWNER/ DEBTOR (where the vessel or
cargo is hypothecated by bottomry or
respondentia)
Difference between the value of vessel or

goods and the amount of loan (Sec. 101).
In loans on bottomry and respondentia,

repayment of the loan is subject to the
condition that the vessel or goods,
respectively, given as a security, shall
arrive safely at the port of destination.
If a vessel is hypothecated by bottomry,

only the excess is insurable, since a loan
on bottomry partakes of the nature of an
insurance coverage to the extent of the
loan accommodation. The same rule
would apply to the hypothecation of the
cargo by respondentia (Pandect of Commercial
Law and Jurisprudence, Vitug, 2006ed).
5. CREDITOR/ LENDER
Amount of the loan

RISK INSURED AGAINST
It is only perils of the sea which may be insured
against unless perils of the ship are covered by an
all-risk policy.
PERILS OF THE
SEA
PERILS OF THE SHIP
Includes only those
casualties due to
the:
1. unusual violence;
or
2. extraordinary
action of wind
and wave; or
3. other
extraordinary
causes
connected with
navigation.
A loss which in the ordinary
course of events, results
from the:
1. natural and inevitable
action of the sea;
2. ordinary wear and tear
of the ship; or
3. negligent failure of the
ships owner to provide
the vessel with proper
equipment to convey the
cargo under ordinary
conditions.
SPECIAL MARINE INSURANCE CONTRACTS
AND CLAUSES
1. ALL-RISKS POLICY insurance against all
causes of conceivable loss or damage.
Except:
a. as otherwise excluded in the policy; or
b. due to fraud or intentional misconduct on
the part of the insured (Choa Tiek Seng vs. CA,
GR No. 84507, 183 SCRA 223, March 15, 1990).
The insured has the initial burden of proving
that the cargo was in good condition when the
policy attached and that the cargo was
damaged when unloaded from the vessel;
thereafter, the burden shifts to the insurer to
show the exception to the coverage (Filipino
Merchants Insurance vs. Court of Appeals, GR No. 85141,
179 SCRA 638, November 28, 1989).
2. BARRATRY CLAUSE
A clause which provides that there can be no
recovery on the policy in case of any willful
misconduct on the part of the master or crew
in pursuance of some unlawful or fraudulent
purpose without consent of owners, and to the
prejudice of the owners interest (Roque vs. IAC,
Ibid).
3. INCHAMAREE CLAUSE
A clause which makes the insurer liable for
loss or damage to the hull or machinery
arising from the:
a. Negligence of the captain, engineers, etc.
b. Explosions, breakage of shafts; and
c. Latent defect of machinery or hull (Bar
Review Materials in Commercial Law, Jorge Miravite,
2007ed).
4. SUE AND LABOR CLAUSE
A clause under which the insurer may become
liable to pay the insured, in addition to the
loss actually suffered, such expenses as he
may have incurred in his efforts to protect the
property against a peril for which the insurer
would have been liable (Sec. 163).
Note: Such clause constitutes an exception to
the principle that an insurance contract is one
of indemnity (where the insurer promises to
make good only the loss of the insured) since
the insurer is liable to pay additional expenses
for the protection of the property against an
insured peril.

Matters, although concealed, will NOT vitiate
the contract except when they caused the loss
(Sec. 110)
1. National character of the insured;
2. Liability of the thing insured to capture or
detention;
3. Liability to seizure from breach of foreign laws
of trade;
4. Want of necessary documents; and
5. Use of false or simulated papers.
Insurance Law
DISTINCTIONS ON CONCEALMENT
MARINE INSURANCE
OTHER PROPERTY
INSURANCE
Information of 3
rd
persons
The information or the
belief or expectation of
3rd persons in reference
to a material fact is
material and must be
communicated.
The information or
belief of a 3
rd
party is
not material and need
not be communicated,
unless it proceeds
from an agent of the
insured whose duty is
to give information.
Effect of concealment
The concealment of any
fact in relation to any of
the matters stated in Sec.
110 does not vitiate the
entire contract but merely
exonerates the insurer
from a risk resulting from
the fact concealed
Concealment of any
material fact will
vitiate the entire
contract, whether or
not the loss results
from the risk
concealed.
IMPLIED WARRANTIES
1. Seaworthiness of the ship at the inception of
the insurance (Sec. 113);
2. Against improper deviation (Sec. 123, 124,
125);
3. Against illegal venture;
4. Warranty of neutrality: The ship will carry
the requisite documents of nationality or
neutrality of the ship or cargo where such
nationality or neutrality is expressly warranted
(Sec. 120); and
5. Presence of insurable interest.
While the payment by the insurer for the insured
value of the lost cargo operates as a waiver of the
insurers right to enforce the term of the implied
warranty against the insured under the marine
insurance policy, the same cannot be validly
interpreted as an automatic admission of the
vessels seaworthiness by the insurer as to
foreclose recourse against the common carrier for
any liability under the contractual obligation as
such common carrier (Delsan Transportation Lines vs.
CA, GR No. 127897, 364 SCRA 24, November 15, 2001).
SEAWORTHINESS
A relative term depending upon the nature of the
ship, voyage, service and goods, denoting in
general a ships fitness to perform the service and
to encounter the ordinary perils of the voyage,
contemplated by the parties to the policy (Sec. 114).
GENERAL RULE
The warranty of seaworthiness is complied with
if the ship be seaworthy at the time of the
commencement of the risk. Prior or subsequent
unseaworthiness is not a breach of the
warranty nor is it material that the vessel
arrives in safety at the end of her voyage.
EXCEPTIONS
1. In the case of a TIME POLICY, the ship
must be seaworthy at the commencement
of every voyage she may undertake during
the period of the coverage.
2. In the case of CARGO POLICY, each
vessel upon which the cargo is shipped or
transshipped, must be seaworthy at the
commencement of each particular voyage.
3. In the case of a VOYAGE POLICY
contemplating a voyage in different stages,
the ship must be seaworthy at the
commencement of each stage of the
voyage.
Appl i cabi l i t y of i mpl i ed war r ant y of

seaworthiness to cargo owner It becomes
the obligation of a cargo owner to look for a
reliable common carrier, which keeps its
vessels in seaworthy conditions. The shipper
may have no control over the vessel but he
has control in the choice of the common
carrier that will transport his goods (Roque vs.
IAC, GR No. L-66935, Ibid).
DEVIATION
Departure from the course of the voyage insured,
or an unreasonable delay in pursuing the voyage,
or the commencement of an entirely different
voyage (Sec.123).
Instances:
a. Deviation from the agreed voyage;
b. Departure of vessel from the course of the
sailing fixed by mercantile usage;
c. Departure of vessel from the most natural,
direct and advantageous route if not fixed by
mercantile usage;
d. Unreasonable delay in pursuing voyage; and
e. Commencement of an entirely different
voyage (Secs. 121-123).
Kinds of Deviation:
1. PROPER
a. When caused by circumstances outside
the control of the ship captain or ship
owner;
b. When necessary to comply with a
warranty or to avoid a peril (real peril);
c. When made in good faith to avoid a peril
(non-existing/ assumed peril);
d. When made in good faith to save human
life or to relieve another vessel in distress
(Sec. 124).
Effect: In case of loss, the insurer is still
liable.
2. IMPROPER - Every deviation not specified in
Sec. 124 (Sec. 125).
Effect: In case of loss or damage subsequent
to an improper deviation, the insurer is not
liable (Sec. 126).
LOSS
I. TOTAL
a. ACTUAL
i. Total destruction;
ii. Irretrievable loss by sinking or by being
broken up;
iii. Damage rendering the thing valueless
to the owner for the purpose for which
he held it; or
iv. Other event which effectively deprives
the owner of the possession, at the port
of destination, of the thing insured (Sec.
130).
b. CONSTRUCTIVE
i. Actual loss of more than ! of the value
of the object;
ii. Damage reducing, by more than !, the
value of the vessel and of cargo; and
iii. Expense of transshipment exceeds ! of
value of cargo (Sec. 131, in relation to Sec.
139).
In case of constructive total loss, insured
may:
1. Abandon goods or vessel to the insurer
and claim for whole insured value (Sec.
139), or
2. Without abandoning vessel, claim for
partial actual loss (Sec. 155).
II. PARTIAL- that which is not total (Sec. 128).
ABANDONMENT
Act of the insured by which, after a constructive
total loss, he declared the relinquishment to the
insurer of his interest in the thing insured (Sec. 138).
Requisites for validity (PEN FACT):
1. There must be an actual relinquishment by
the person insured of his interest in the thing
insured (Sec. 138);
2. There must be a constructive total loss (Sec.
139);
3. The abandonment must be neither partial nor
conditional (Sec. 140);
4. It must be made within a reasonable time
after receipt of reliable information of the loss
(Sec. 141);
5. It must be factual (Sec. 142);
6. It must be made by giving notice thereof to
the insurer which may be done orally or in
writing (Sec. 143); and
7. The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment (Sec. 144).
Effects:
1. Transfer of Interest It is equivalent to a
transfer by the insured of his interest to the
insurer with all the chances of recovery and
indemnity (Sec.146).
2. 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 loss, are at the risk of the insurer and for
his benefit (Sec.148).
If an insurer refuses to accept a valid

abandonment, he is liable upon an actual
total loss, deducting from the amount any
proceeds of the thing insured which may
have come to the hands of the insured
(Sec. 154).
AVERAGE
Any extraordinary or accidental expense incurred
during the voyage for the preservation of the
vessel, cargo, or both, and all damages to the
vessel and cargo from the time it is loaded and the
voyage commenced until it ends and the cargo
unloaded.
GENERAL PARTICULAR
To whom inures
Has inured to the
common benefit and
profit of all persons
interested in the vessel
and cargo
Has not inured to the
common benefit and
profit of all persons
interested in the
vessel and her cargo.
By whom borne
To be borne equally by all
of the interests concerned
in the venture.
To be borne alone by
the owner of the
cargo or the vessel,
as the case may be.
Insurance Law
GENERAL PARTICULAR
Requisites
Requisites for the right to
claim contribution:
1. Common danger to the
vessel or cargo;
2. Part of the vessel or
cargo was sacrificed
deliberately;
3. Sacrifice must be for
the common safety or
for the benefit of all;
4. Sacrifice must be made
by the master or upon
his authority;
5. It must be not be
caused by any fault of
the party asking the
contribution;
6. It must be successful,
i.e. resulted in the
saving of the vessel or
cargo; and
7. It must be necessary.
Right of the insured in case of general average
GENERAL RULE
The insured may either hold the insurer directly
liable for the whole of the insured value of the
property sacrificed for the general benefit,
subrogating him to his own right of contribution, or
demand contribution from the other interested
parties as soon as the vessel arrives at her
destination.
The insurer is liable for any general average

loss (Sec. 136) where it is payable or has been
paid by the insured in consequence of a peril
insured against, as fixed in the policy.
The insurer shall be liable upon a partial loss,

only for such proportion of the amount insured
by him as the loss bears to the value of the
whole interest of the insured on the property
insured (Sec. 157).
The valuation in the policy is conclusive

between the parties thereto in the adjustment
of either a partial or total loss, if the insured
has some interest at risk and there is no fraud
on his part (Sec. 156).
Except that when a thing has been

h y p o t h e c a t e d b y b o t t o mr y o r
respondentia, before its insurance, and
without the knowledge of the person
actually procuring the insurance, he may
show the real value. But a valuation
fraudulent in fact entitles the insurer to
rescind the contract (Ibid).
EXCEPTIONS
1. After the separation of interests liable to
contribution; and
2. When the insured has neglected or waived his
right to contribution (Sec. 165).
FPA Clause (Free From Particular Average)
A clause agreed upon in a policy of marine
insurance in which it is stated that the insurer shall
not be liable for a particular average, and such
insurer shall be free therefrom, but he shall
continue to be liable for his proportion of all
general average losses assessed upon the thing
insured (Sec. 136).
CO-INSURANCE
A marine insurer is liable upon a partial loss, only
for such proportion of the amount insured by him
as the loss bears to the value of the whole interest
of the insured in the property insured (Sec. 157).
When the property is insured for less than its
value, the insured is considered a co-insurer of
the difference between the amount of insurance
and the value of the property.
Requisites:
1. The loss is partial;
2. The amount of insurance is less than the
value of the property insured.
Rules:
1. Co-i nsurance appl i es onl y t o mari ne
insurance;
2. Logically, there cannot be co-insurance in life
insurance.
3. Co-insurance applies in fire insurance ONLY
when expressly stipulated by the parties.
CO-INSURANCE REINSURANCE
The insured procures
insurance at less than
the value of the insured
property and is deemed
to be con-insurer as to
the deficiency. In case
of loss, the insured &
insurer shares the same
pro rata.
The insurer procures a
3
rd
person to insure him
against loss or liability
by reason of such
original insurance. In
case of loss, the
reinsurer will pay the
insurer for the risk
reinsured (Bar Review
Materials in Commercial Law,
Jorge Miravite, 2007ed).
Fire Insurance
A contract by which the insurer for a consideration
agrees to indemnify the insured against loss of, or
damage to, property by hostile fire, including loss
by lightning, windstorm, tornado or earthquake
and other allied risks, when such risks are
covered by extension to fire insurance policies or
under separate policies (Sec. 167).
Note: The liability of an insurer is to pay for direct
loss only. The insurer may be liable to pay for
consequential losses if covered by extension to
such fire policies or insured under separate policy.
Prerequisites to recovery:
1. Notice of loss must be immediately given,
unless delay is waived expressly or impliedly
by the insurer; and
2. Proof of loss according to best evidence
obtainable. Delay may also be waived
expressly or impliedly by the insurer.
Measure of Indemnity
1. Open policy only the expense necessary to
replace the thing lost or injured in the
condition it was at the time of the injury
2. Valued policy the parties are bound by the
valuation, in the absence of fraud or mistake
Note: It is very crucial to determine whether a
marine vessel is covered by a marine insurance or
fire insurance. The determination is important for 3
reasons:
1. Rul es on constructi ve total l oss and
abandonment applies only to marine
insurance;
2. Rule on co-insurance applies primarily to
marine insurance;
3. Rule on co-insurance applies to fire insurance
ONLY if expressly agreed upon (Commentaries
and Jurisprudence on the Commercial Laws of the
Philippines Agbayani, 1988ed).
Alteration as a special ground for rescission
by insurer
Requisites:
1. The use or condition of the thing is specifically
limited or stipulated in the policy;
2. Such use or condition as limited by the policy
is altered;
3. The alteration is made without the consent of
the insurer;
4. The alteration is made by means within the
control of the insured;
5. The alteration increases the risk (Sec. 168); and
6. There must be a violation of a policy provision
(Sec. 170).
FALL-OF-BUILDING CLAUSE
Clause in a fire insurance policy that if the building
or any part thereof falls, except as a result of fire,
the policy shall immediately cease.
OPTION TO REBUILD CLAUSE
Clause giving the insurer the option to reinstate or
replace the property damaged or destroyed or any
part thereof, instead of paying the amount of the
loss or the damage.
The insurer, after electing to rebuild, cannot be
compelled to perform this undertaking by
specific performance because this is an
obligation to do, not to give. Remedy: Art.
1167, NCC.
Casualty or Accident Insurance
Insurance covering loss or liability arising from
accident or mishap, excluding those falling under
other types of insurance such as fire or marine
(Sec. 174).
Classifications:
1. Accident or health insurance insurance
against specified perils which may affect the
person and/or property of the insured.
Examples: personal accident, robbery/theft
insurance
2. Third party liability insurance insurance
against specified perils which may give rise to
liability on the part of the insured for claims for
injuries to or damage to property of others.
a. Insurable interest is based on the interest
of the insured in the safety of persons,
and their property, who may maintain an
action against him in case of their injury
or destruction, respectively.
b. In a third party liability (TPL) insurance
contract, the i nsurer assumes the
obligation by paying the injured third party
to whom the insured is liable. Prior
payment by the insured to the third
person is not necessary in order that the
Insurance Law
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
i nsurance cont ract whi ch may be
garnished like any other credit (Perla
Compania de Seguros, Inc vs. Ramolete, GR No.
L-60887, 205 SCRA 487, November 13, 1991).
c. Aside from compulsory motor vehicle
liability insurance, casualty insurance are
governed by the general provisions
applicable to all types of insurance, and
outside of such statutory provisions, the
rights and obligations of the parties must
be determined by their contract, taking
into consideration its purpose and always
in accordance with the general principles
of insurance law.
d. In burglary, robbery and theft insurance,
the opportunity to defraud the insurer
the moral hazard is so great that insurer
have found it necessary to fill up the
policies with many restrictions designed
to reduce the hazard. Persons frequently
excluded are those in the insureds
service and employment. The purpose of
the exception is to guard against liability
should theft be committed by one having
unrestricted access to the property (Fortune
Insurance vs. CA, 244 SCRA 208).
e. Right of a third party injured to sue the
insurer of party at fault depends on
whether the contract of insurance is
intended to benefit third persons also or
only the insured.
Tests applied:
1. Indemnity against third party liability
injured third party can directly sue the insurer.
Purpose: To protect injured person against
the insolvency of the insured who causes
such injury.
2. Indemnity against actual loss or payment
third party has no cause of action against the
insurer. The third persons recourse is limited
to the insured alone (Sec. 53, Bonifacio Bros. vs.
Mora, GR L-20853, May 29, 1967).
Note: The insurer is NOT solidarily liable with the
insured. The insurers liability is based on
contract; that of the insured is based on torts.
Furthermore, the insurers liability is limited by the
amount of the insurance coverage (Pan Malayan
Insurance Corporation vs. CA, GR No. 77397,184 SCRA 54
April 3, 1990).
INTENTIONAL vs. ACCIDENTAL AS USED
IN INSURANCE POLICIES
Not given any technical meaning and construed in
their ordinary and common acceptation.
1. Intentional Implies the exercise of the
reasoning faculties, consciousness and
volition. Where a provision of the policy
excludes intentional injury, it is the intention of
the person inflicting the injury that is
controlling. If the injuries suffered by the
insured clearly resulted from the intentional
act of the third person, the insurer is relieved
from liability as stipulated (Biagtan vs. the Insular
Life Assurance Co. Ltd., GR No. 25579, March 29,
1972).
2. Accidental That which happens by chance
or fortuitously, without intention or design,
whi ch i s unexpect ed, unusual and
unforeseen.
NO ACTION CLAUSE
Requirement in a policy of liability insurance which
provides that suit and final judgment be first
obtained against the insured; that only thereafter
can the person injured recover on the policy
(Guingon vs. Del Monte, GR No. L-21806, 20 SCRA 1043,
August 17, 1967).
A no action clause must yield to the provisions of
the Rules of Court regarding multiplicity of suits
(Shafer vs. RTC, GR No. 78848, 167 SCRA 386, November
14, 1988).
Compulsory Motor Vehicle Liability Insurance (CMVLI)
A species of compulsory insurance that provides
for protection coverage that will answer for legal
liability for losses and damages for bodily injuries
or property damage that may be sustained by
another arising from the use and operation of
motor vehicle by its owner.
Purpose: To give immediate financial assistance
to victims of motor vehicle accidents and/ or their
dependents, especially if they are poor regardless
of the financial capability of motor vehicle owners
or operators responsible for the accident
sustained (Shafer vs. Judge, RTC, Ibid).
Claimants/victims may be a passenger or a 3
rd

party
It applies to all vehicles whether public and private
vehicles.
Note: It is the only compulsory insurance
coverage under the Insurance Code.
Methods of coverage:
1. Insurance policy;
2. Surety bond; or
3. Cash deposit
PASSENGER
Any fare-paying person being transported and
conveyed i n and by a motor vehi cl e for
transportation of passengers for compensation,
including persons expressly authorized by law or
by the vehicles operator or his agents to ride
without fare (Sec. 373[b]).
THIRD PARTY
Any person other than the passenger, excluding a
member of the household or a member of the
family within the second degree of consanguinity
or affinity, of a motor vehicle owner or land
transportation operator, or his employee in respect
of death or bodily injury arising out of and in the
course of employment (Sec. 373[c]).
NO FAULT CLAUSE
Clause that gives the victim (injured person or
heirs of the deceased) an option to file a claim for
death or injury without the necessity of proving
fault or negligence of any kind.
Purpose: To guarantee compensati on or
indemnity to injured persons in motor vehicle
accidents.
Rules:
1. No Fault Indemnity: P15,000.00 for all motor
vehicles (Insurance Memorandum Circular No. 4-2006,
July 26, 2006).
2. Proofs of loss:
a. Police report of accident;
b. Death certificate and evidence sufficient
to establish proper payee;
c. Medical report and evidence of medical or
hospital disbursement.
3. Claim may be made against one motor
vehicle only;
4. Proper insurer from which to claim -
a. In case of an occupant: Insurer of the
vehicle in which the occupant is riding,
mounting or dismounting from;
b. In any other case: Insurer of the directly
offending vehicle (Sec. 378).
5. In all cases, the right of the party paying the
claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained.
Note: The claimant is not free to choose from
which insurer he will claim the no fault indemnity
as the law makes it mandatory that the claim shall
lie against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from.
That said vehicle might not be the one that caused
the accident is of no moment since the law itself
provides that the party paying may recover
against the owner of the vehicle responsible for
the accident (Perla Compania de Seguros, Inc. vs. Ancheta,
GR No. L-49699, 169 SCRA 144, August 8, 1988).
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds
P15,000.00 and there is controversy in respect
thereto, the finding of fault may be availed of by
the insurer only as to the excess. The first
P15,000.00 shall be paid without regard to fault.
The essence of the no-fault indemnity insurance is
to provide victims of vehicular accidents or their
heirs immediate compensation although in limited
amount, pending final determination of who is
responsible for the accident and liable for the
victims injuries or death.
SPECIAL CLAUSES
1. AUTHORIZED DRIVER CLAUSE a clause
which aims to indemnify the insured owner
against loss or damage to the car but limits the
use of the insured vehicle to the insured
himself or any person who drives on his order
or with his permission (Villacorta vs. Insurance
Commissioner, GR No. 54171, 100 SCRA 467, October
28, 1980).
Note: The requirement that the person driving
the insured vehicle is permitted in accordance
with the licensing laws or other laws or
regulations to drive the motor vehicle (licensed
driver) is applicable only if the person driving is
other than the insured.
2. THEFT CLAUSE- a clause which includes
theft as among the risks insured against.
Where the car is unlawfully and wrongfully
t aken wi t hout t he owner s consent or
knowledge, such taking constitutes theft, and
thus, it is the theft clause and NOT the
authorized driver clause that should apply
(Palermo vs. Pyramids Ins., GR No. L-36480, 161 SCRA
677, May 31, 1988).
3. COOPERATION CLAUSE- a clause which
provides in essence that the insured shall give
all such information and assistance as the
i nsurer may requi re, usual l y requi ri ng
attendance at trials or hearings.
Insurance Law
Suretyship
An agreement whereby a surety guarantees the
performance by the principal or obligor of an
obligation or undertaking in favor of an obligee (Sec.
175).
It is considered an insurance contract if it is
executed by the surety as a vocation, and not
incidentally (Sec. 20).
When the contract is primarily drawn up by one
party, the benefit of doubt goes to the other party
(insured/obligee) in case of an ambiguity following
the rule in contracts of adhesion. Suretyship,
especially in fidelity bonding, is thus treated like
non-life insurance in some respects.
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond;
3. It is determined strictly by the terms of the
contract of suretyship in relation to the
principal contract between the obligor and the
obligee (Sec. 176).
SURETYSHIP
PROPERTY
INSURANCE
Classification
Accessory contract Principal contract
Number of parties
3 parties: surety,
obligor and obligee
2 parties: insurer and
insured
Nature
Credit accommodation Contract of indemnity
Recovery
Surety can recover
from principal
Insurer has no such right;
only right of subrogation
Cancellation
Bond can be
cancelled only with
consent of obligee,
Commissioner or court
May be cancelled
unilaterally either by
insured or insurer on
grounds provided by law
Acceptance
Requires acceptance
of obligee to be valid
No need of acceptance
by any third party
Scheme
Risk-shifting device;
premium paid being in
the nature of a service
fee
Risk-distributing device;
premium paid as a
ratable contribution to a
common fund
Life Insurance
Insurance on human lives and insurance
appertaining thereto or connected therewith which
includes every contract or pledge for the payment
of endowments or annuities (Sec. 179).
Kinds:
1. Ordinary Life, General Life or Old Line
Policy insured pays a fixed premium every
year until he dies. Surrender value after 3
years.
2. Limited Payment Policy insured pays
premium for a limited period. If he dies within
the period, his beneficiary is paid; if he
outlives the period, he does not get anything.
3. Endowment Policy insured pays premium
for specified period. If he outlives the period,
the face value of the policy is paid to him; if
not, his beneficiaries receive the benefit.
4. Term Insurance insurer pays once only,
and he is insured for a specified period. If he
dies within the period, his beneficiaries
benefit. If he outlives the period, no person
benefits from the insurance.
5. Industrial Life life insurance entitling the
insured to pay premiums weekly, or where
premiums are payable monthly or more often
(but not less than weekly), if the face value is
P2,000 or less, and the words industrial
policy printed upon the policy.
6. Variable Contract policy or contract on
either group/ individual basis issued by an
insurance company providing for benefits or
other contractual payments or val ues
thereunder to vary so as to reflect investment
results of any segregated portfolio of
investment (Bar Review Materials in Commercial Law,
Miravite, 2007ed).
LIABILITY OF INSURER IN CERTAIN CAUSES
OF DEATH OF INSURED
1. SUICIDE
Insurer is liable in the following cases:
a. If committed after two years from the date
of t he pol i cy s i ssue or i t s l ast
reinstatement;
b. If committed in a state of insanity
regardless of the date of the commission
unless suicide is an excepted peril (Sec.
180-A);
c. If committed after a shorter period
Any stipulation extending the 2-year period is
null and void.
2. AT THE HANDS OF THE LAW (e.g. by legal
execution)
It is one of the risks assumed by the insurer
under a life insurance policy in the absence of
a valid policy exception (Vance, p.572 cited in The
Insurance Code of the Philippines, De Leon H. 2002ed).
However, Justice Vitug believes that

death by suicide (if the insured is sane) or
at the hands of the law obviates against
recovery as being more in consonance
with public policy and as being implicit
under Sec. 87, ICP (Pandect of Commercial Law
and Jurisprudence, Vitug, 2006ed).
Miravite also opines that the beneficiary

of an insured who is executed for a crime
he committed cannot recover from the
insurer for 2 reasons: (1) his death is
caused through his connivance, and (2)
any stipulation to render the insurer liable
under these circumstances would be
contrary to public policy (Bar Review Materials
in Commercial Law, Miravite, 2007ed).
3. KILLING BY THE BENEFICIARY
GENERAL RULE
The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice or
accessory in willfully bringing about the
death of the insured, in which event, the
nearest relative of the insured shall receive
the proceeds of said insurance, if not
otherwise disqualified (Sec. 12).
EXCEPTIONS
a. Accidental killing;
b. Self-defense;
c. Insanity of the beneficiary at the time
he killed the insured
If the premiums paid came from conjugal

funds, the proceeds are considered conjugal.
If the beneficiary is other than the insureds
estate, the source of premiums would not be
relevant (Del Val vs. Del Val, 29 Phil 534).
Reason: A natural person cannot be placed in
the same footing as a juridical person.
The measure of indemnity in life or health

insurance policy is the sum fixed in the policy
except when a creditor insures the life of his
debtor (Sec. 183).
CASH SURRENDER VALUE
As applied to a life insurance policy, it is the
amount the insured, in case of default, after the
payment of at least 3 full annual premiums, is
entitled to receive if he surrenders the policy and
releases his claims upon it.
Insurance Law
Government Regulation
of Insurance Business
The Business of Insurance
REQUISITES PRIOR TO OPERATION
1. Certificate of authority and payment of
fees
No insurance company, whether domestic or
foreign, can transact any business in the
Philippines until after it shall have obtained a
certificate of authority for that purpose from
the Insurance Commissioner upon application
therefor and payment by the company
concerned of the fees prescribed by the Code
(Sec. 187).
The Insurance Commi ssi oner has the
discretion to refuse the issuance of a
certificate of authority on the very broad
ground that such refusal will best promote
the interest of the people of this country.
NO CERTIFICATE CAN BE GRANTED until
the Commissioner is satisfied that:
a) The applicant is qualified under Philippine
laws to transact business in the country;
b) The grant of such authority of the
organi zers and admi ni strators, the
financial organization and the amount of
capital reasonably assure the safety and
interests of the policy holders and the
public.
3. Capital Requirements
Except in case of reinsurers whose capital
requirements are higher, the paid up capital
stock of a domestic insurance company must
be at least 5 million pesos (P5,000,000.00).
The amount may be increased by the
S e c r e t a r y o f F i n a n c e u p o n t h e
recommendation of the Commissioner which
would reasonably assure the safety of the
interests of the policyholders and the public.
The Commissioner may require as a condition
to licensing that its stockholders pay in cash
i n proporti on to thei r subscri pti on, a
contributed surplus fund of not less than 1
million pesos in life insurance company or not
less than P500,000.00 in case of a non-life
insurance company.
4. Filing of Necessary Documents
A certified copy of the last annual statement
showing the condition and affairs of such
company.
If incorporated under Philippine laws, a copy
of the articles of incorporation and by-laws,
and amendments thereto, certified by the
SEC to be a copy of that which is filed in its
office.
5. Additional requirements for foreign
corporations
In addition to the requirements imposed on
domestic insurance companies, the following
requirements must be fulfilled by foreign
corporations:
a) Secure a license from the SEC to do
business in the Philippines by following the
requirements of the Corporation Code;
b) File a copy of the SEC certificate showing
that it is duly registered in accordance with
paragraph 1;
c) If incorporated, it must file a certified copy
of its articles of incorporation and its by-
laws, certified by the SEC as a copy of that
filed in its office;
d) If not incorporated, file a certificate setting
forth the nature and character of the
business, the location of its principal office,
the names of the persons composing the
partnership or association, the amount of
the capital employed and the names of the
persons who are managing the business.
The certificate must be verified by the
affidavit of the chief officer, or the manager
or agent of the company accompanied by a
copy of the written articles of said
company, if any;
e) Must fulfil the same capital requirements
as domestic companies and in addition,
must deposit with the Commissioner
securities for the benefit and security of its
policyholders and creditors.
Secur i t y deposi t s shal l be ( 1)

answerable for all the obligations of
the deposi ti ng i nsurer under i ts
insurance contracts; (2) at all times
free from any liens or encumbrance;
and (3) exempt from levy by any
claimant (Republic v. Del Monte Motors, GR
156956, October 9, 2006).
The right to lay claim on the fund is
dependent on the solvency of the insurer
and is subject to all other obligations of the
company arising from its insurance
contracts. Thus, claimants interest is
mer el y i nchoat e. Bei ng a mer e
expectancy, it has no attribute of property
(Ibid).
f) Must set aside an amount corresponding to
the legal reserves of the policies written in
the Philippines and invest the same only in
such classes of Philippine securities as
described by the Code which securities
cannot be taken out of the country without
the written consent of the Commissioner.
g) File with the Commissioner a written power
of attorney designating some person who
must be a resident of the Philippines as its
general agent, on whom any notice or
summons or legal processes may be
served It must also sign an agreement that
in case it shall be without any agent, the
service upon the Insurance Commissioner
shall have the same effect as if made on
the company.
REQUI SI TES FOR CONTI NUANCE I N
BUSINESS
1. Reserve Requirements
a. Every life insurance company must make
an annual valuation of its policies, unpaid
di vi dends and ot her obl i gat i ons
outstanding on December 31 of the
preceding year. The aggregate net value
so ascertained of the policies of the
company is deemed its reserve liability to
provide for which it must hold funds in
secure investments equal to such net
value.
b. Every non-life insurance company must
ascertain reserve for unearned premiums
on its outstanding policies equal to 40%
of the gross premiums received on
policies having not more than 1 year to
run and pro rate on all gross premiums
received on policies having more than 1
year to run.
2. Margin of Solvency
Margin of solvency is the excess value of an
i nsurance companys admi tted assets
exclusive of its paid up capital, in case of a
domestic company, or an excess of the value
of its admitted assets in the Philippines,
exclusive of its security deposits, in case of a
foreign company, over the amount of its
l i abi l i t i es, unear ned pr emi ums and
reinsurance reserves in the Philippines (Sec.
194).
MARGIN OF SOLVENCY REQUIRED OF
INSURANCE COMPANIES
a) In case of life insurance companies, at
least 2% of the total amount of its
insurance in force as of the preceding
calendar year on all policies except term
insurance.
b) In case of non-life insurance companies,
at least 10% of the total amount of its net
premium during the preceding calendar
year
c) The margin of insolvency, however, shall
NOT be less than P500,000.00.
CONSEQUENCES OF FAI LURE TO
MAINTAIN THE REQUIRED MARGIN OF
SOLVENCY
a. The company which fails to maintain the
required margin of solvency shall not be
permitted to take any new risks of any
kind or character unless and until it make
good such deficiency (Sec. 194);
b. No dividend may be declared by the
deficient company (Sec. 195).
3. Permitted Investments
The permitted areas of investment are broad
but defi ni tel y excl ude those that are
speculative.
The insurance company must submit a
monthly report of its investment to the
Commissioner. The latter may order the sale
or disposal of the same if he deems any of
them to be injudicious.
4. Annual Statement and examination of
companies
On or before April 30 of each year, insurance
companies must render a statement to the
Commissioner showing the exact condition of
its affairs on the preceding 30
th
day of
December.
SUSPENSI ON AND REVOCATI ON OF
AUTHORITY
The Commissioner may suspend or revoke the
certificate of authority based on the following
grounds:
1. If upon examination, it is found to be in an
unsound condition;
2. When its condition or method of business is
found to be such as to render its proceedings
hazardous to the public or its policyholders;
Insurance Law
3. Where its paid-up capital stock in case of
domestic corporation, or its security deposits,
in case of foreign company is impaired or
deficient;
4. Where its margin of solvency is deficient; and
5. Failure to comply with the provision of law or
regulation.
Insurance Commissioner
Main agency charged with the enforcement of the
Insurance Code and other related laws.
Functions:
1. ADJUDICATORY/ QUASI-JUDICIAL
a. Exclusive original jurisdiction -
Any dispute in the enforcement of any
policy issued pursuant to Chapter VI
(CMVLI) (Sec. 385, par. 2).
b. Concurrent original jurisdiction (with
the RTC) -
Where the maximum amount involved in
any single claim is P100,000.00 (Sec. 416),
except in case of maritime insurance
which is within the jurisdiction of the MTC
or the RTC depending on the value
involved (BP 129; admiralty & maritime
jurisdiction).
Where the amount exceeds P100,000.00,
the RTC has jurisdiction.
The f i l i ng of a compl ai nt wi t h t he
Commissioner shall preclude civil courts form
taking cognizance of the case.
A decision which has become final may be the
subject of a writ of execution which may be
served and enforced by a Sheriff (Sec. 416).
The Insurance Commi ssi oner has no
jurisdiction to decide the legality of a contract
of agency entered into between an insurance
company and its agent. The same is NOT
covered by the term doing or transacting
insurance business under Sec. 2, ICP,
neither is it covered by Sec. 416 of the same
Code whi ch grants the Commi ssi oner
adjudicatory powers (Philippine American Life
Insurance Co. vs. Ansaldo, GR No. 76452 234 SCRA
509, July 26, 1994).
2. ADMINISTRATIVE/ REGULATORY
a. Enforcement of insurance laws;
b. Issuance, suspension or revocation of
certificate of authority;
c. Power to examine books and records, etc.;
d. Rule-making authority; and
e. Punitive
! END OF INSURANCE LAW "
COMMERCIAL LAW
TRANSPORTATION LAWS
TRANSPORTATION LAWS
Governing Laws
1. Coastwise Shipping
a. New Civil Code (Art. 1732-1766) primary
law
b. Code of Commerce suppletory
2. Carriage from Foreign Ports to Philippine
Ports
a. New Civil Code primary law
b. Code of Commerce all matters not
regulated by the Civil Code
c. Carri age of Goods by Sea Act
suppletory to the Civil Code
3. Carriage from Philippine Ports to Foreign
Ports
The laws of the country to which the goods
are to be transported.
4. Overland Transportation
a. Civil Code primary law
b. Code of Commerce suppletory
5. Air Transportation
a. Civil Code
b. Code of Commerce
c. Warsaw Convention
Convention for the Unification of

Certain Rules relating to International
Carriage by Air signed in Warsaw on 12
October 1929. The agreement among
sovereign countries concerning the
regulation in a uniform manner of the
c o n d i t i o n s o f i n t e r n a t i o n a l
transportation by air in respect of the
documents used for such transportation
and of the liability of the carrier.
d. Montreal Convention
Convention amending the Warsaw

Convention which took effect on 28
May 1999.
International Transportation under
Warsaw Convention
Where the place of departure and the
place of destination are within the
territories of two contracting countries
regardless of whether or not there was a
br eak i n t he t r ans por t at i on or
transshipment; and
Where the place of departure and the
place of destination are within the territory
of a single contracting country, if there is
an agreed stopping place within a territory
subject to the sovereignty, mandate or
authority of another power, even though
the power is not a party to the Convention
(Mapa v. Court of Appeals, 275 GR No. 122308,
8 July 1997).
Transportation Laws
EXECUTIVE COMMITTEE
COMMERCIAL LAW
Constitutional Provisions
No franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to:
1. Citizens of the Philippines
2. Corporations or associations organized under
the laws of the Philippines at least sixty (60%)
per centum of whose capital is owned by such
citizens (Phil. Constitution, Art. XII, Sec. 11).
The State may, in the interest of national welfare
or defense, establish and operate vital industries
and upon payment of just compensation, transfer
to public ownership utilities and other private
enterprises to be operated by the government (Art.
XII, Sec. 18).
The State shall regulate or prohibit monopolies
when the public interest so requires; no
combination in restraint of trade or unfair
competition shall be allowed (Art. XII, Sec. 19).
The right to operate a public utility may exist
independently and separately from the
ownership of the facilities thereof. One can
own said facilities without operating them as a
public utility, or conversely, one may operate a
public utility without owning the facilities used
to serve the public. The devotion of property to
serve the public may be done by the owner, or
by the person in control thereof who may not
necessarily be the owner thereof. A foreigner
can own a public utility (Tatad v. Garcia, GR No.
114222, April 6, 1995).
Contract of Transportation Carriage
A contract whereby a person, natural or juridical,
obligates to transport persons, goods, or both,
from one place to another, by land, air or water, for
a price or compensation.
Classifications:
1. Common or Private;
2. Goods or Passengers;
3. For a fee/ for hire or Gratuitous;
4. Land, Water/maritime, or Air ;
5. Domest i c/ i nt er - i sl and/ coast wi se or
International/ foreign
IN RELATION WITH THE PUBLIC SERVICE ACT
(Commonwealth Act No. 146)
Authority to Operate Public Services
GENERAL RULE
No public service shall operate without having
been issued a certificate of public convenience, or
a certificate of public convenience and necessity.
EXCEPTIONS (PIA-WARP)
1. Warehouses;
2. Animal drawn vehicles and bancas moved by
oar or sail;
3. Airships, except for the fixing of maximum
rates for fare and freight;
4. Radio companies, except for rates fixing;
5. Public services owned or operated by the
government, except as to rates fixing;
6. Ice plants; and
7. Public markets
PUBLIC SERVICE
Includes every person that operates, manages or
cont r ol s i n t he Phi l i ppi nes f or hi r e or
compensation, with general or limited clientele,
whether permanent, occasional or accidental, and
done for general business purposes, any common
carrier, railroad, railway, subway, motor vehicle, for
freight or passenger or both, with or without a
fixed route, for whatever classification, freight or
carrier service of any class, express service,
steamboat, or steamship line, water craft engaged
in transportation of freight or passengers, or both,
canal, irrigation system, gas, electric light, heat,
power, water supply, petroleum, sewerage
system, communication systems, broadcasting
stations and other similar public services.
PUBLIC UTILITIES
Business or service engaged in regularly
supplying the public with some commodity or
service of public consequence such as electricity,
gas, water, transportation, telephone or telegraph
service.
CERTIFICATE OF PUBLIC CONVENIENCE
Authorization to operate public service issued by
the Public Service Commission for which no
franchise, either municipal or legislative, is
required by law.
A form of regulation through an administrative
agency (Associated Communications & Wireless Services-
United Broadcasting Networks v. National Telecommunications
Commission, GR No. 144109, 17 February 2003).
A certificate of public convenience is not a
requisite for the incurring of liability under the Civil
Code provisions which liability arises from the
moment a person or firm acts a common carrier
without regard to whether or not such carrier has
also complied with the requirements of the
applicable regulatory statute and implementing
regulations and has been granted a CPC or other
franchise (Loadstar Shipping v. Court of Appeals, GR No.
131621, 28 September 1999).
CERTIFICATE OF PUBLIC CONVENIENCE AND
NECESSITY
Authorization issued by the proper government
agency for the operation of public services for
which a franchise is required by law.
A CPC or a CPCN constitutes neither a franchise
nor a contract, confers no property right, and is a
mere license or a privilege. The holder of said
certificate does not acquire a property right in the
route covered thereby. Nor does it confer upon the
holder any proprietary right or interest or franchise
in the public highways. Revocation of this
certificate deprives him of no vested right. New
and addi ti onal burdens, al terati on of the
certificate, or even revocation or annulment
thereof is reserved to the State (Lugue v. Villegas, GR
No. L-22545, 28 November 1969).
It is a property and has a considerable value and
can be the subject of sale or attachment. The
CPC as a property cannot be taken or interfered
with without due process of law (Cogeo-Cubao Operators
and Drivers Assn. v. CA, GR No. 100727, 18 March 1992;
Raymundo v. Luneta Motor Co., GR Nos. 39902-03. 29
November 1933).
PRIOR OR OLD OPERATOR RULE
The policy of the law is not to issue a certificate of
public convenience to a second operator when a
prior operator is rendering sufficient, adequate
and satisfactory service, and who, in all things and
respects is complying with the rules and
regulations of the Commission.
Purpose: To prevent ruinous and wasteful
competition in order that the interests of the public
would be conserved and preserved.
PRIOR APPLICANT RULE
Presupposes a situation where two interested
persons apply for a certificate to operate a public
utility in the same community over which no
person has as yet granted any certificate. If the
circumstances between the two applicants are
equal, then the applicant who applied ahead of the
other will be granted the certificate.
PROTECTION OF INVESTMENT RULE
One of the purposes of the Public Service Act is to
protect and conserve investments which have
already been made for that purpose by public
service operators.
REGISTERED OWNER RULE
The registered owner of a certificate of public
convenience is liable to the public for the injuries
or damages suffered by third persons caused by
the operation of said vehicle, even though the
same had been transferred to a third person.
The registered owner is not allowed to escape
responsibility by proving that a third person is the
actual and real owner.
Reason: It would be easy for him, by collusion
with others or otherwise, to transfer the
responsibility to an indefinite person, or to one
who possesses no property with which to
respond financially for the damage or injury
done (Erezo, et al. v. Jepte, No. L-9605, 30 September
1957).
The registered owner is the lawful operator insofar
as the public and third persons are concerned;
consequentl y, i t i s di rectl y and pri mari l y
responsible for the consequences of its operation.
In contemplation of law, the owner/ operator of
record is the employer of the driver, the actual
operator and employer being considered as
merely its agent. The same principle applies even
if the registered owner of any vehicle does not use
it for public service, (Equitable Leasing Corp v. Suyom, GR
No. 143360, September 5, 2002), or otherwise stated, to
privately-owned vehicles.
A registered owner who has already sold or
transferred a vehicle has recourse to a third-party
complaint, in the same action brought against him
to recover for the damage or injury done, against
the vendee or transferee of the vehicle (Villanueva v.
Domingo, 438 SCRA 485, 2004).
KABIT SYSTEM
A system whereby a person who has been
granted a certificate of public convenience allows
other persons who own motor vehicles to operate
under such license, for a fee or percentage of
such earnings. It is void and inexistent under Art.
1409, New Civil Code.
Effects:
1. The transfer, sale, lease or assignment of the
privilege granted is valid between the
contracting parties but not upon the public or
third persons (Gelisan v. Alday, No. L-30212, 30
September 1987).
2. The registered owner is primarily liable for all
the consequences flowing from the operations
of the carrier.
Transportation Laws
The public has the right to assume that the
registered owner is the actual or lawful owner
thereof. It would be very difficult and often
impossible, as a practical matter, for the
public to enforce their rights of action for
injuries inflicted by the vehicle if they should
be required to prove who the actual owner is
(Benedicto v. IAC, GR No. 70876, 19 July 1990).
3. The thrust of the law in enjoining the Kabit
system is to identify the person upon whom
responsibility may be fixed with the end in
view of protecting the riding public (Lim v. CA,
GR No. 125817, 16 January 2002).
4. The registered owner cannot recover from the
actual owner and the latter cannot obtain
transfer of the vehicle to himself, both being in
pari delicto (Teja Marketing v. IAC, No. L-65510, 9
March 1987).
5. For the better protection of the public, both
the registered owner and the actual owner are
jointly and severally liable with the driver
(Zamboanga Transportation Co. v. CA, No. L-25292, 29
November 1969).
6. The determining factor which negates the
existence of Kabit System is the possession
of the franchise to operate and not the
issuance of one SSS ID Number for both bus
lines (Baliwag Transit v. CA, No. L-57493, 7 January
1987).
Exceptions to Kabit system:
1. When neither of the parties to the pernicious
Kabit system is being held liable for damages;
2. When the case arose from the negligence of
another vehicle in using the public road to
whom no representation or misrepresentation
as regards the ownership and operation of
passenger jeepney was made,
3. When the riding public was not bothered or
inconvenienced at the very least by the illegal
arrangement (Lim v. CA, GR No. 125817, 16
January 2002).
Pari Delicto Rule
Persons who are parties to the Kabit system
cannot invoke the same as against each other
either to enforce their illegal agreement or to
invoke the same to escape the liability.
Having entered into an illegal contract, neither can
seek relief from the courts, and each must bear
the consequences of his acts (Lita Enterprises v. IAC,
No. L-64693, 27 April 1984).
BOUNDARY SYSTEM
1. The driver does not receive a fixed wage but
gets only the excess of the receipt of the fares
collected by him over the amount he pays to
the jeep owner.
2. The gasoline consumed by the jeep is for the
account of the driver.
These two features are not sufficient to withdraw
the relationship between the owner and the driver
from that of employer and employee. The jeepney
owner is subsidiarily liable as employer in
accordance with Art.103 of RPC (Magboo v. Bernardo,
No. L-16790, 30 April 1963).
Indeed to exempt from liability the owner of a
public vehicle who operates it under the boundary
system on the ground that he is a mere lessor
would be not only to abet flagrant violations of the
Public Service Law, but also to place the riding
public at the mercy of reckless and irresponsible
drivers (Spouses Hernandez v. Spouses Dolor, GR No.
160286, July 30, 2004).
REQUREMENTS FOR GRANTING CPC OR
CPCN:
1. Filipino citizenship;
2. Public necessity;
3. Public interest; and
4. Applicants financial capability.
The Civil Aeronautics Board is expressly
authorized by RA No.776 to issue a temporary
operati ng permi t or Certi fi cate of Publ i c
Convenience and Necessity (PAL v. CAB, GR No.
119528, 26 March 1997).
NTC exercises regulatory power over CATV
operators to the exclusion of other bodies.
However, the physical realities of constructing
CATV system the use of public streets, rights of
ways, the founding of structures, and the parceling
of large regions allow an LGU a certain degree
of regulation over CATV operators. But since a
general law mandates that the regulation of CATV
operations shall be exercised by the NTC, an LGU
cannot enact an ordinance or approve a resolution
in violation of the said law. LGUs must recognize
that technical matters concerning CATV operation
are within the exclusive regulatory power of the
NTC (Batangas CATV v. CA, GR No. 138810, September
29, 2004).
Under section 16 (n) of Public Service Act, the
power of the Commission to suspend or revoke
any certificate may only be exercised whenever
the holder thereof has violated or willfully and
contumaciously refused to comply with any order,
rule or regulation of the Commission or any
provision of the Act. No certificate of public
convenience may be validly revoked in the
absence of a showing that there is willful and
contumacious violation.
Instances where the cancellation of the
certificate of public convenience are held
valid:
1. the holder is a mere dummy;
2. the operator ceased operation and placed his
buses on storage; or
3. the operator abandons totally the service
(Manzanal v. Ausejo, No. L-31056. August 4, 1988).
Note: Many of the provisions of CA 146 have
been repealed and the powers of the Public
Service Commission are now distributed among
the different government agencies, viz.: DOTC,
LTFRB, LTO, MARINA, PCG, NTC, ERB, NWRC,
CAB, ATO and PPA.
The legislature has delegated to the defunct
Public Service Commission, and presently the
LFTRB, the power of fixing rates of public
services. But nowhere under the provisions of law
are the regulatory bodies, the PSC and LFTRB
alike, authorized to delegate that power to a
common carrier like transport operator, or other
public service (KMU Labor v. Garcia, GR No. 115381,
December 23, 1984).
A publ i c uti l i ty i s enti tl ed to reasonabl e
compensation in return for the service it provides
and that it may exact reasonable charges in
accordance with the service provided or the rates
established therefor. In computing the just and
reasonable rates to be charged by a public utility,
three major factors are to be considered: 1) rate of
return; 2) the rate base; and 3) the return itself or
the computed revenue to be earned by the public
utility based on the rate of return and base rate
(Davao Light and Power Company, Inc. v. Diaz, GR No.
166173, April 3, 2007).
A rate is just and reasonable if it conforms to the
following requirements:
1. One which yields to the carrier a fair return
upon the value of the property employed in
performing the service; and
2. One which is fair to the public for the service
rendered.
Service of a Public Utility considered Unlawful
It shall be unlawful for any public service to
provide or maintain any service that is unsafe,
improper, or inadequate, or withhold or refuse any
service which can reasonably be demanded and
furnished, as founded and determined by the
Commission in a final order which shall be
conclusive and shall effect in accordance with this
Act, upon appeal or otherwise (Sec, 19[a]).
POWERS REQUIRING
PRIOR NOTICE AND
HEARING
POWERS
EXERCISABLE
WITHOUT PRIOR
NOTICE AND
HEARING
Key: RISE-FISE
1. Issuance of CPC or
CPCN;
2. Fixing of rates, tolls,
and charges;
3. Setting up of standards
and classifications;
4. Establishment of rules
to secure accuracy of
all meters and all
measuring appliances;
5. Issuance of orders
requiring
establishment or
maintenance of
extension of facilities;
6. Revocation, or
modification of CPC or
CPCN;
7. Suspension of CPC or
CPCN, except when it
is necessary to avoid
serious and irreparable
damage or
inconvenience to the
public or private
interest, in which case,
a suspension not more
than 30 days may be
ordered, prior to the
hearing (Manzanal v.
Ausejo, No. L-31056, 4
August 1988).
Key: VIRUS-CEP
1. Investigation any
matter concerning
public service;
2. Requiring
operators to
furnish safe,
adequate, and
proper service;
3. Requiring public
services to pay
expenses of
investigation;
4. Valuation of
properties of public
utilities;
5. Examination and
test of measuring
appliances;
6. Grant of special
permits to make
extra or special
trips in territories
specified in the
certificate;
7. Uniform
accounting system
and furnishing of
annual reports;
8. Compelling
compliance with
the laws and
regulations.
Transportation Laws
Parties in A Contract of Carriage
1. CARRIAGE OF PASSENGERS
a. Common carrier
Per s ons , c or por at i ons , f i r ms 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 (Art. 1732, Civil Code).
b. Passenger
One who travels in a public conveyance by
virtue of contract, express or implied, with
the carrier as to the payment of fare or that
which is accepted as an equivalent thereof
(Vda. De Neuca v. Manila Railroad Co., No. 31731-
R, Jan. 30, 1968).
The following are NOT considered
passengers, and are enti tl ed to
ordinary diligence only:
a. One who has not yet boarded any
part of a vehicle regardless of
whether or not he has purchased a
ticket;
b. One who remains on a carrier for
an unreasonable length of time
after he has been afforded every
safe opportunity to alight;
c. One who has boarded by fraud,
stealth, or deceit;
d. One who attempts to board a
moving vehicle, although he has a
ticket, unless the attempt be with
the knowledge and consent of the
carrier;
e. One who has boarded a wrong
vehi cl e, has been pr oper l y
informed of such fact, and on
alighting, is injured by the carrier;
f. One who rides any part of the
vehicle which is unsuitable or
dangerous or which he knows is
not designed or intended for
passengers.
2. CARRIAGE OF GOODS
a. Shipper
Any person, partnership or corporation
who delivers the goods to the carrier for
transportation and pays the consideration
or on whose behalf payment is made (Notes
and Cases on the Law on Transportation and Public
Utilities, Timoteo B. Aquino & Ramon Paul L.
Hernando, 2004ed).
b. Carrier
c. Consignee
Shipper or any 3
rd
person, natural or
juridical, to whom the goods are to be
delivered (Ibid).
Perfection of Contract
CONTRACT OF CARRIAGE OF GOODS
1. CONTRACT TO CARRY the carrier agrees
to accept and transport goods in the future;
2. CONTRACT OF CARRIAGE when the
goods are unconditionally placed in the
possession and control of the carrier, and
upon thei r recei pt by the carri er for
transportation (Ganzon v. CA, No. L-48757, 30 May
1988).
CONTRACT OF CARRIAGE OF PASSENGERS
1. CONTRACT TO CARRY a consensual
cont ract , an agreement t o carry t he
passenger at some future time;
2. CONTRACT OF CARRIAGE/ COMMON
CARRIAGE a real contract; until the carrier
is actually used can the carrier be said to
have already assumed the obligation of the
carrier (British Airways v. CA, GR No. 92288,
February 9, 1993).
Perfection of Contract as to:
1. Aircraft
There is a perfected contract to carry even if
no tickets issued, so long as there was a
meeting of the minds as to the subject matter
and consideration.
Perfected contract of carriage is established if
the passenger has checked in at the
departure counter, passed through customs
and immigration and proceeded to the ramp
of the aircraft (Korean Airlines v. CA, GR No.
114061, 3 August 1994).
2. Buses, Jeepneys and Streetcars
Once a public utility bus (or jeepney) stops, it
is in effect making a continuous offer to bus
riders. It follows that the passenger is deemed
to be accepting the offer if he is already
attempting to board the conveyances and the
contract of carriage is perfected from that
point (Dangwa Transportation v. CA, GR No. 95582, 7
October 1991).
3. Trains/Rail Transit
To be considered a passenger, a person must
purchase a ticket and must present himself at
the proper place and in a proper manner to be
transported (Vda. De Neuca v. Manila Railroad Co.,
No. 31731-R, Jan. 30, 1968; LRTA v. Navidad, GR
No. 145804, 6 February 2002).
One who was a stowaway was a mere
trespasser and is not considered a passenger.
Characteristics of A Common Carrier
1. Undertakes to carry for all people indifferently
and thus is liable for refusal without sufficient
reason;
2. Cannot lawfully decline to accept a particular
class of goods for carriage to the prejudice of
the traffic in these goods;
3. No monopoly is favored (Batangas Trans. v. Orlanes,
No. 28865, 19 December 1928);
4. Provides public convenience.
ANCILLARY BUSINESS
Art. 1732 of the New Civil Code avoids any
distinction between one whose principal business
activity is the carrying of persons or goods or both
and one who does such carrying only as an
ancillary activity (sideline). It also avoids a
distinction between a person or enterprise offering
transportation service on a regular or scheduled
basis and one offering such service on an
occasional, episodic or unscheduled basis (De
Guzman v. CA, No. L-47822, 22 December 1988).
LIMITED CLIENTELE
Neither does the law distinguish between a carrier,
offering its services to the general public, that is,
the general community or population and one who
offers services or solicits business only from a
narrow segment of the general population.
A person or entity is a common carrier even if he
did not secure a Certificate of Public Convenience
(De Guzman v. CA, Ibid).
MEANS OF TRANSPORTATION
Pipeline operators are common carriers. It makes
no distinction as to the means of transporting, as
long as it is by land, water or air. It does not
provide that the transportation should be by motor
vehicle (First Philippine Industrial Corporation vs. CA, GR
No. 125948, 29 December 1997).
Also, the distribution of electricity to end users
shall be a regulated common carrier business
requiring a national franchise (Section 22, Electric Power
Industry Reform Act of 2001 [RA 9136]).
One is a common carrier even if he has no fixed
and publicly known route, maintains no terminals,
and issues no tickets (Asia Lighterage Shipping, Inc. v.
CA, GR No. 147246, August 19, 2003).
Note: A travel agency is not a common carrier.
The services of a travel agency include procuring
tickets and facilitating travel permits or visas as
well as booking customers for tours (Estela Crisostomo
v. CA, GR No. 138334, August 25, 2003).
PRIVATE CARRIER
One which, without being engaged in the business
of carrying as a public employment, undertakes to
deliver goods or passengers for compensation
(Home Insurance Co. v. American Steamship Agency, No.
L-25599, 4 April 1968).
COMMON CARRIER PRIVATE CARRIER
Governing Law
Law on common
carriers
Law on obligations and
contracts
State regulation
Subject to State
regulation
Not subject to State
regulation
Availability
Holds himself out for all
people indiscriminately
Contracts with particular
individuals or groups
only
Diligence
Extraordinary diligence
is required
Ordinary diligence is
required
Presumption of negligence
There is a presumption
of fault or negligence
No presumption of fault
or negligence
Exempting Circumstance
Prove extraordinary
diligence and Art. 1734,
NCC
Caso fortuito, Art. 1174
NCC
Stipulation limiting liability
Parties may not agree
on limiting the carriers
liability except when
provided by law
Parties may limit the
carriers liability,
provided it is not
contrary to law, morals
or good customs
Tests Whether Carrier is Common or Private:
1. 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;
Transportation Laws
2. It must undertake to carry goods of the kind to
which its business in confined;
3. It must undertake to carry by the method by
which his business is conducted and over its
established roads; and
4. The transportation must be for hire (First
Philippine Industrial Corporation v. CA GR No. 125948,
29 December 1997).
In National Steel Corp. v. CA (GR No. 118126,
December 12, 1997) the SC held that the true test of a
common carrier is the carriage of goods or
passengers provided it has space for all who opt
to avail themselves of its transportation for a fee.
Distinction between a common carrier and a
private carrier lies in the character of the business.
If the undertaking is a single transaction, not a
part of the general business or corporation,
although involving the carriage of goods for a fee,
the person or corporation offering such service is
a PRIVATE CARRIER (Planters Products Inc. v. CA GR
No. 101503, 15 September 1993).
COMMON CARRIER DISTINGUISHED FROM
TOWAGE, ARRASTRE AND STEVEDORING
TOWAGE
One vessel is hired to bring another vessel to
another place; refers to a service rendered to a
vessel by towing for the mere purpose of
expediting her voyage without reference to any
circumstances of danger.
The operator of the tugboat cannot be considered
a common carrier.
A tug and its owners must observe ordinary
diligence in the performance of its obligation under
a contract of towage (Baer Senior & Co.s Successors v. La
Compania Maritima, No. 1963, 30 April 1906).
The exercise of ordinary prudence under a
contract of towage means ensuring that the
tugboat is free of mechanical problems. While
adverse weather has always been a real threat
to maritime commerce, the least that could
have done was to ensure that the tugboats
would be able to secure the barge at all times
during the engagement (Cargolift Shipping, Inc. v. L.
Acuario Marketing Corp., GR No. 146426, 27 June
2006).
ARRASTRE
The functions of an arrastre operator have nothing
to do with the trade and business of navigation,
nor to the use or operation of vessels. He is no
di f f er ent f r om t hat of a deposi t ar y or
warehouseman.
It is a public utility, discharging functions which
are heavily invested with public interest.
Nature of business and liability:
1. Similar to a warehouseman (Lua Kian v. Manila
Railroad, 21 SCRA 5).
2. Similar to a common carrier (Northern Motors v.
Prince Line, No. L-13884, 29 February 1960).
3. Solidary liability with the common carrier.
Note: In order that the arrastre operator may
be held liable, the consignee must prove that
the damage was due to the negligence and
while the goods are in the custody of the
arrastre operator (Hartford Fire Insurance v. E.
Razon, Inc., No. L-25362, 23 October 1967).
The legal relationship between the consignee and
the arrastre operator is akin to that of a depositor
and warehouseman. The relationship between the
consignee and the common carrier is similar to
that of the consignee and the arrastre operator.
Since it is the duty of the arrastre operator to take
good care of the goods that are in its custody and
to deliver them in good condition to the consignee,
such responsibility also devolves upon the carrier
(Firemans Fund Insurance Co. v. Metro Port Service, GR No.
83613, 21 February 1990).
STEVEDORING
The function of stevedores involves the loading
and unloading of coastwise vessels calling at the
port.
The carriage of goods from the warehouse or pier
to the holds of the vessel (Chief of Staff v. CIR, No.
L-21835. 19 August 1967).
The term consists of the handling of cargo
from the hold of the ship to the dock, in case of
pier-side unloading; or to a barge, in case of
unloading at sea (Anglo-Fil Trading Corp. v. Lazaro,
No. L-54958. 2 September 1983).
The loading on the ship of outgoing cargo is
also part of stevedoring work (Ibid).
Obligations of A Common Carriage in
The Carriage of Goods
1. DUTY TO ACCEPT THE GOODS
GENERAL RULE
A common carrier cannot ordinarily refuse to
carry a particular class of goods. A common
carrier that is granted a certificate of public
conveni ence i s duty bound to accept
p a s s e n g e r s o r c a r g o wi t h o u t a n y
discrimination.
EXCEPTION
For some sufficient reason the discrimination
against the traffic in such goods is reasonable
and necessary (Fisher v. Yangco Steamship Co., No.
8095, 5 November 1914).
Instances when the carrier may validly
refuse to accept the goods:
a. Goods sought to be transported are
dangerous obj ect s, or subst ances
including dynamite and other explosives;
b. Goods are unfit for transportation;
c. Acceptance would result in overloading;
d. Contrabands or illegal goods;
e. Goods are injurious to health;
f. Goods will be exposed to untoward danger
like flood, capture by enemies and the like;
g. Goods like livestock will be exposed to
disease;
h. Strike; and
i. Failure to tender goods on time (Notes and
Cases on the Law on Transportation and Public
Utilities, Aquino & Hernando, 2004ed).
In case of carriage by railway, the carrier is
exempted from liability if carriage is insisted
upon by the shipper, provided its objections
are stated in the bill of lading.
2. DUTY TO DELIVER THE GOODS
Not only to transport the goods safely but to
deliver the same to the person indicated in the
bill of lading. The goods should be delivered to
the consignee or any other person to whom
the bill of lading was validly transferred or
negotiated.
When a common carrier undertakes to convey
goods, the law implies a contract that they
shall be delivered at destination within a
reasonable time, in the absence of any
agreement as to the time of delivery (Saludo, Jr.
v.CA, GR No. 95536, 23 March 1992).
Time of Delivery
STIPULATED
IN CONTRACT/
BILL OF
LADING
NO STIPULATION
Carrier is bound
to fulfill the
contract and is
liable for any
delay; no matter
from what
cause it may
have arisen.
1.Within a reasonable time
which shall depend on the
expected date of arrival in
the bill of lading or on the
nature of goods.
2.Carrier is bound to forward
them in the 1
st
shipment of
the same or similar goods
which he may make to the
point of delivery (Art. 358
Code of Commerce).
Oft-Repeated Rule In the absence of a
special contract, a carrier is not an insurer
against delay in the transportation of goods.
Effects of delay:
a. Excusable delay in carriage merely
suspends and general l y does not
terminate the contract of carriage. When
the cause is removed, the master must
proceed with the voyage and make
delivery.
b. The carrier shall be made liable when
vessel or vehicle is unreasonably delayed.
c. Carrier remains duty bound to exercise
extraordinary diligence.
d. Natural disaster shall not free the carrier
from responsibility (Art.1740).
e. If delay is without just cause, the contract
limiting the common carriers liability
cannot be availed of in case of loss or
deterioration of the goods (Art.1747).
3. DUTY TO EXERCISE EXTRAORDINARY
DILIGENCE (Arts. 1734-1754, New Civil Code)
Inquiry may be made as to the nature of
passengers baggage, but beyond thi s
constitutional boundaries are already in danger
of being transgressed (Nocum v. Laguna Tayabas Bus
Co., No. L-23733, 31 October 1969).
Note: The above doctrine is not applicable
to aircrafts because of Section 8 of Anti-
hijacking Law or RA 6235.
The duty starts from the time the goods are
unconditionally placed in the possession of,
and received by the carrier for transportation,
until the same are delivered actually or
constructively by the carrier to the consignee
or to the person who has the right to receive
Transportation Laws
them.
It continues to be operative while the goods
are temporarily unloaded or stored in transit
and exists even during the time the goods are
stored in a warehouse of a carrier at the place
of destination until the consignee has been
advised of the arrival of the goods and has had
reasonable opportunity thereafter to remove
them or otherwise dispose of them (Art.
1736-1738).
Delivery of goods to the custom authorities is
not delivery to the consignee (Lu Do v. Binamira,
L- 9840, April 22, 1957).
Defenses of A Common Carrier in
1. CASO FORTUITO/ FORCE MAJEURE
Requisites: (FIPI-PEN)
a. The cause of the unforeseen and
unexpected occurrence, or the failure of
the debtor to comply with his obligation,
must be independent of the human will;
b. It must be impossible to foresee the event
which constitutes the caso fortuito, or if
foreseen, it must be impossible to avoid;
c. Occurrence must be such as to render it
impossible for the debtor to fulfill his
obligation in a normal manner;
d. The obligor must be free from any
participation in or the aggravation of the
injury resulting to the creditor (Reviewer on
Commercial Law, Sundiang and Aquino, 2006ed);
e. The natural disaster must also be the
proximate and only cause of the loss (Art.
1739);
f. The common carrier must exercise due
diligence to prevent or minimize the loss
before, during or after the occurrence of
the disaster (Ibid); and
g. The common carrier has not negligently
incurred delay in transporting the goods
(Art. 1740, Civil Code).
Note: Fire is not considered a natural disaster
or calamity as it arises almost invariably from
some act of man (Eastern Shipping Lines Inc. v. IAC,
GR No. 94151, 30 April 1991).
Mechanical defects are not force majeure if
the same was discoverable by regular and
adequate inspections (Notes and Cases on the Law
on Transportation and Public Utilities, Aquino &
Hernando, 2004 ed).
A tire blow-out is not considered as a
fortuitous event. There are human factors
involved in the situation (Yobido v. CA, GR No.
113003, 17 October 1997).
Heavy seas and rains are not caso fortuito,
but normal occurrences that an ocean going
vessel would encounter (Eastern Shipping Lines v.
CA, GR No. 94151, 30 April 1991).
2. ACTS OF PUBLIC ENEMY
Requisites:
a. Must be the proximate and only cause of
the loss; and
b. Exercise of due diligence to prevent or
minimize the loss before, during or after
the act causing the loss, deterioration or
destruction of the goods (Art. 1739, Ibid).
3. NEGLIGENCE OF THE SHIPPER OR
OWNER
a. Sole and proximate cause: absolute
defense
b. Contributory: partial defense (Art. 1741,
Ibid)
4. CHARACTER OF THE GOODS OR
DEFECTS IN THE PACKING OR IN THE
CONTAINER
Even if the damage should be caused by the
inherent defect/ character of the goods, the
common carrier must exercise due diligence
to forestall or lessen the loss (Art. 1742, Ibid).
The carrier which, knowing the fact of
improper packing of the goods upon ordinary
obser vat i on, st i l l accept s t he goods
notwithstanding such condition, is not relieved
of liability or loss or injury resulting therefrom
(Southern Lines, Inc. v. CA, L-16629, January 31, 1962).
5. ORDER OR ACT OF PUBLIC AUTHORITY
Said public authority must have the power to
issue the order (Art. 1743, Ibid). Consequently,
where the officer acts without legal process,
the common carrier will be held liable (Ganzon
v. CA, No. L-48757, 30 May 1988).
Obligations of A Common Carrier in
1. DUTY TO OBSERVE UTMOST DILIGENCE
TO PASSENGERS
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost
diligence of very cautious persons, with due
regard for all the circumstances (Art. 1755, Civil
Code).
The carrier has the duty to stop their
conveyances for a reasonable length of time in
order to afford passengers an opportunity to
board and enter, and they are liable for injuries
suffered by boarding passengers resulting from
the sudden starting up or jerking of their
conveyances (Dangwa Transportation Co. Inc. v. Court
of Appeals, GR No. 95582, 7 October 1991).
The duty exists from the moment the person
who purchased the ticket or token presents
himself at the proper place and in a proper
manner to be transported, having the bona fide
intention to use the facilities of the carrier (Jesusa
Vda de Nueca, et al. v. The Manila Railroad Company,
CA-No. 31731, 1968).
The duty continues until the passenger has,
after reaching his destination, safely alighted
form the carriers conveyance or has had a
reasonable opportunity to leave the carriers
premises and to look after his baggage and
prepare for his departure.
The duty of a common carrier to provide safety
to its passengers so obligates it not only during
the course of the trip, but for so long as the
passengers are within its premises and where
they ought to be in pursuance to the contract
of carriage (LRTA v. Navidad, GR No. 145804, 6
February 2002).
A c ommon c ar r i er s houl d ex er c i s e
extraordinary diligence even as to non-paying
passengers.
2. D U T Y T O T A K E C A R E O F T H E
PASSENGERS BAGGAGES
IN THE CUSTODY
OF THE
PASSENGERS
(HAND-CARRIED)
IN THE CUSTODY OF
THE COMMON
CARRIER
(CHECKED-IN)
Applicable rules
Arts. 1998 and
2000-2003 of the
Civil Code
Arts. 1733-1753 of the
Civil Code
Legal nature of the baggage
Necessary deposit Considered as goods
Required diligence by the common carrier
Diligence of a
depositary (ordinary
diligence)
Extraordinary diligence
Defenses of A Common Carrier in
The Carriage of Passengers
The pri mary def ense i s t he exerci se of
EXTRAORDINARY DILIGENCE.
The carrier is liable for the acts of its employees.
The carrier cannot escape liability by claiming that
it exercised due diligence in the selection and
supervision of employees.
It is no defense that the employee acted beyond
the scope of his authority because the riding
public is not expected to inquire from time to time,
before they board the carrier, whether or not the
driver is acting within the scope of his authority
and observing the existing rules and regulations
required of him by management (Marchan v. Mendoza,
No. L-24471, 30 April 1966).
The negligence of the carrier NEED NOT be the
sole cause of the damage or injury to the
passenger or the goods.
The concurrent negligence of a third person will
not exempt the common carrier from responsibility.
Liability of a Common Carrier for death or
injuries to passengers due to acts of its
employees and other passengers or strangers
FOR ACTS OF ITS
EMPLOYEES
FOR ACTS OF OTHER
PASSENGERS OR
STRANGERS
Required diligence
Extraordinary diligence Ordinary diligence
Nature of liability
Tort; however,
the employee must be
on duty at the time of
the act (Maranan v. Perez,
No. L-22272, 26 June 1967).
Not absolute; limited by
Art. 1763 of the Civil
Code
Diligence in the selection and supervision of
employees under Article 2180 of the Civil Code
cannot be interposed as a defense by the
common carrier because the liability of the carrier
Transportation Laws
arises from the breach of the contract of carriage.
The defense under said article is applicable to
negligence in quasi-delicts under Art. 2176 (Del
Prado v. Manila Electric Co., No. 29462. 7 March 1929).
The carrier is liable when its personnel allowed a
passenger to drive the vehicle causing it to collide
with another vehicle resulting to the injuries
suffered by the other passengers (MRR v. Ballesteros,
No. L-19161, 9 April 1966).
When the crime was committed by a train guard
who has no duties to discharge in connection with
the transportation of the victim, the crimes stands
on the same footing as if committed by a stranger
or co-passenger since the killing was not in the
line of duty (Gillaco v. Manila Railroad, No. L-8034, 18
November 1955).
DOCTRINE OF LAST CLEAR CHANCE
A negligent defendant is held liable to a negligent
plaintiff or even to a plaintiff who has been grossly
negligent where he should have been aware of it
in the reasonable exercise of due care and had in
fact an opportunity later than that of the plaintiff to
avoid an accident.
Principle of Last Clear Chance applies in a suit
between the owners and drivers of colliding
vehicles.
It does NOT apply where a passenger demands
responsibility from the carrier to enforce its
contractual obligation. For it would be inequitable
to exempt the negligent driver of the jeepney and
its owners on the ground that the other driver was
likewise guilty of negligence (Phil. Rabbit Bus Lines v.
IAC, GR No. 118664, 7 August 1998; Tiu v. Arriesgado, GR
No. 138060, 1 September 2004).
Doctrine of Last Clear Chance CANNOT likewise
be applied in collision of vessels because of Art.
827 of the Code of Commerce (Notes and Cases on the
Law on Transportation and Public Utilities, Aquino &
Hernando, 2004 ed).
ASSUMPTION OF RISK
Passengers must take such risks incident to the
mode of travel.
Carriers are NOT insurers of the lives of their
passengers.
A common carrier does not give its consent to
become an insurer of any and all risks to
passengers and goods. It merely undertakes to
perform certain duties to the public as the law
imposes, and holds itself liable for any breach
thereof (Pilapil v. CA, GR No. 52159, December 22,
1989).
Thus, in air travel, adverse weather conditions
or extreme climatic changes are some of the
perils involved in air travel, the consequences
of which the passenger must assume or
expect (Japan Airlines v. CA, GR No. 118664, 7
August 1998).
However, there is no assumption of risk by the
passenger when the common carrier failed to
exercise extraordinary diligence. Thus in the
case of Calalas vs. CA (GR No. 122039, 31 May
2000) there is no assumption of risk where the
carrier was filled to capacity and the passenger
was given an extension seat.
Obligations of Shipper, Consignee and Passenger
1. The shipper is also obliged to exercise DUE
DILIGENCE in avoiding damage or injury.
2. With respect to carriage of passengers, the
said passengers are likewise bound to
observe DUE DILIGENCE to avoid injury.
The contributory negligence on the part of the
passenger is NOT a defense that will excuse the
carrier from liability. It will only mitigate such
liability.
HOWEVER, the carrier may be able to prove that
the only cause of the loss of the goods is any of
the following acts of the shipper:
1. failure of the shipper to disclose the nature of
the goods;
2. i mproper marki ng or di rect i on as t o
destination; and
3. improper loading when he assumed such
responsibility (Francisco, pp 77-81).
The shipper must likewise see to it that the goods
are properly packed; otherwise, liability of the
carrier may be mitigated or barred depending on
the circumstances.
The matter of quantity, description and conditions
of the cargo inside the container is the sole
responsibility of the shipper, unless there is
stipulation to the contrary (US Lines v. Comm. of
Customs, No. L-73490, 18 June 1987; Reyma Brokerage v. Phil.
Home Assurance, GR No. 93464, 7 October 1991)
Extraordinary Diligence
REQUIREMENT OF EXTRAORDINARY
DILIGENCE
Rendition of service with the greatest skill and
utmost foresight (Davao Stevedore Co. v. Fernandez, 54
O.G. No. 5, 1957).
Rationale:
1. From the nature of the business and for
reasons of public policy (Art. 1733);
2. Relationship of trust;
3. Business is impressed with a special public
duty;
4. Possession of the goods;
5. Preciousness of human life
BUT a common carrier is not an absolute insurer
of all risks of travel.
Coverage:
1. Vigilance over goods (Arts. 1734-1754);
2. Safety of passengers (Arts. 1755-1763).
Stipulation Limiting/ Reducing the Carriers
Liability
a. Goods
The law allows as stipulation a degree of
diligence which is less than extraordinary with
respect to goods, provided that:
a. That the stipulation be in writing signed by
both parties;
b. That the stipulation be supported by a
valuable consideration other than the
service rendered by the common carrier;
c. That the stipulation be reasonable, just
and not contrary to law (Art. 1744).
BUT the parties cannot stipulate that the
carrier will not exercise any diligence in the
custody of goods.
Note: While the contract of carriage need not
be in writing to be enforceable, any stipulation
limiting the carriers liability has to be in writing
to be legally enforceable.
b. Passengers
The responsibility to observe extraordinary or
utmost diligence CANNOT be dispensed with
or lessened through stipulation or posting of
notices (Art. 1757).
EXTRAORDINARY DILIGENCE IN CARRIAGE
BY SEA
WARRANTY OF SEAWORTHINESS OF SHIP
Extraordinary diligence requires that the ship
which will transport the passengers and goods is
seaworthy (Trans-Asia Shipping v. CA, GR No. 118126,
March 4, 1996).
The carriers are deemed to warrant impliedly the
seaworthiness of the ship. The failure of a
common carrier to maintain in seaworthy condition
the vessel involved in its contract of carriage is a
clear breach of its duty prescribed in Art. 1755
(Caltex [Phils], Inc. v. Sulpicio Lines, GR NO 131166, Sept.
30, 1999).
Shippers of goods are not expected to inquire into
the vessels seaworthiness and compliance with
all maritime laws (Caltex [Phils.], Inc. v. Sulpicio Lines,
Ibid).
The unseaworthiness can be established by the
fact that it did not withstand the natural and
inevitable action of the sea.
The ship must not be only seaworthy but it must
also be cargoworthy. The ship must be an
efficient storehouse for her cargo.
The vessel must be adequately equipped and
properly manned.
Presentation of certificates of seaworthiness is not
sufficient to overcome the presumption of
negligence (Delsan Transport Lines v. Court of Appeals, GR
No. 127897, 2001).
NO OVERLOADING
Duty to exercise due diligence includes the duty to
take passengers or cargoes that are within the
carrying capacity of the vessel (Negros Navigation v.
CA, GR NO 110398, 7 November 1997).
BY LAND
CONDITION OF VEHICLE
Owners are required to make sure that the
vehicles they are using are in good order and
condition.
The duty to exercise extraordinary diligence also
requires the carrier to purchase and use vehicle
parts that are not defective.
Transportation Laws
COMPLIANCE WITH TRAFFIC RULES
In cases involving breach of contract of carriage,
proof of violation of traffic rules confirms that the
carrier failed to exercise extraordinary diligence.
The carrier is made liable and will not overcome
the presumption of negligence if there is violation
of traffic rules because extraordinary diligence
requires compliance with traffic rules and
regulations (Notes and Cases on the Law on Transportation
and Public Utilities, Aquino & Hernando, 2004ed).
BY AIR
1. AIRWORTHINESS
An aircraft, its engines, propellers and other
components and accessories are of proper
design and construction, and are safe for air
navi gati on purposes, such desi gn and
construction being consistent with accepted
engineering practice and in accordance with
aerodynamic laws and aircraft science (RA
779);
2. COMPETENT AND WELL TRAINED CREW
3. NOT TO DEVIATE FROM THE REQUIRED
AND PRESCRIBED ROUTE
4. DUTY TO INSPECT CARGO AND/ OR
BAGGAGE UNDER RA 6235
Air carriers are authorized to open and
investigate suspicious packages and cargoes
in the presence of the owner or shipper, or
authorized representative. If the latter refuses,
the air carrier is authorized to refuse the
loading thereof (Sec. 8, An Act Prohibiting Certain
Acts Inimical to Civil Aviation & for other Purposes [RA
6235]).
The ruling in Nocum v. Laguna Tayabas Bus
Co. (GR No. L-23733 31, October 1969)
does not apply when an aircraft is involved.
Unlike buses or jeepneys, passengers and
goods in aircrafts are subject to rigorous
inspection under the above-quoted law (Notes
and Cases on the Law on Transportation and Public Utilities,
Aquino & Hernando, 2004ed).
Carriage of Goods v. Carriage of Passengers
CARRIAGE OF GOODS CARRIAGE OF PASSENGERS
Parties
1. Common carrier
2. Shipper
3. Consignee May or may not be a party
to the contract; bound by the terms of
the Bill of Lading when he enforces the
carriers liability under the same
1. Common carrier
2. Passenger
Cause of liability
Delay in delivery, loss, destruction, or
deterioration of the goods
Death or injury to the passengers
Presumption of Negligence
Art.1735 of the Civil Code (in case of loss,
damage or deterioration of goods)
Reason: As to when and how goods were
damaged in transit is a matter peculiarly
within the knowledge of the carrier and its
employees (Mirasol v. Dollar, No. 29721, 27 March
1929).
Mere proof of delivery of goods to a
carrier in good order and the subsequent
arrival of the same goods at the place of
destination in bad order makes for a
prima facie case against the carrier
(Coastwise Lighterage Corp. v. CA, GR No.
114167, 12 July 1995).
Art.1756 of the Civil Code (in case of death or injury to
passengers)
Reason: The contract between the passenger and the
carrier imposes on the latter the duty to transport the
passenger safely; hence the burden of explaining should fall
on the carrier.
In a contract of carriage, it is presumed that the common
carrier is at fault or is negligent when a passenger dies or
is injured. In fact, there is even no need for the court to
make an express finding of fault or negligence on the part
of the common carrier. This statutory presumption may
only be overcome by evidence that the carrier exercised
extraordinary diligence (Diaz v. Court of Appeals, GR No.
14974, 25 July 2006)
CARRIAGE OF GOODS CARRIAGE OF PASSENGERS
Duration of liability
From the time the goods are unconditionally
placed in the possession of, and received by the
carrier for transportation until the same are
delivered actually or constructively by the carrier
to the consignee or to the person who has the
right to receive them (Art. 1736).
It remains in full force and effect even when they
are temporarily unloaded or stored in transit
unless the shipper or owner has made use of the
right of stoppage in transitu (Art. 1737).
It continues to be operative even during the time
the goods are stored in a warehouse of the carrier
at the place of destination until the consignee has
been advised of the arrival of the goods and has
had reasonable opportunity thereafter to remove
them or otherwise dispose of them (Art. 1738).
Delivery of goods to the custom authorities is not
delivery to the consignee (Lu Do v. Binamira, 101 Phil
120).
With respect to carriage of passengers by trains,
the extraordinary responsibility of common carriers
commences the moment the person who
purchases the ticket (or token or card) from the
carrier present himself at the proper place and in a
proper manner to be transported with a bona fide
intention to ride the coach (Vda. de Nueca v. Manila
Railroad Co, Ibid).
The duty of a common carrier to provide safety to
its passengers so obligates it not only during the
course of the trip, but for so long as the
passengers are within its premises and where they
ought to be in pursuance to the contract of
carriage (LRTA v. Navidad, GR No. 145804, 6 February
2002).
All persons who remain on the premises within a
reasonable time after leaving the conveyance are
to be deemed passengers, and what is a
reasonable time or a reasonable delay within this
r ul e i s t o be det er mi ned f r om al l t he
circumstances, and includes a reasonable time to
see after his baggage and prepare for his
departure (La Mallorca v. CA, No. L 20761, 27 July
1966; Abiotiz Shipping Corporation v. CA, GR No. 84458, 6
November 1989).
It is the duty of common carriers of passengers to
stop their conveyances a reasonable length of
time in order to afford passengers an opportunity
to enter, and they are liable for injuries suffered
from the sudden starting up or jerking of their
conveyances while doing so. The duty which the
carrier of passengers owes to its patrons extends
to persons boarding the cars as well as to those
alighting therefrom (Dangwa Trans. Co., Inc. v. CA, GR
No. 95582, 7 October 1991).
Valid Stipulations
1. Reduction of degree of diligence to ordinary
diligence, provided it be:
a) In writing, signed by the shipper or owner;
b) Supported by a valuable consideration other
than the service rendered by the carriers; and
c) Reasonable, just and not contrary to public
policy (Art. 1744).
2. Fixed amount of liability: A contract fixing the sum
to be recovered by the owner or shipper for the
loss, destruction or deterioration of the goods, if it
is reasonable and just under the circumstances
and has been fairly and freely agreed upon (Art.
1750).
3. Limited liability for delay: An agreement limiting
the common carriers liability for delay on account
of strikes or riots (Art. 1748).
4. Stipulation limiting liability to the value of the
goods appearing in the bill of lading, unless the
shipper or owner declares a greater value (Art.
1749).
The diligence required in the carriage of the
goods may be reduced by only one degree, from
extraordinary to ordinary diligence or diligence of
a good father of a family (Art. 1744, Art. 1745 [4]).
Stipulation limiting liability when a passenger is
carried gratuitously, but not for willful acts or gross
negligence (Art. 1758).
Transportation Laws
CARRIAGE OF GOODS
CARRIAGE OF
PASSENGERS
Void stipulations
1. That the goods are transported at the risk of the owner or shipper;
2. That carrier will not be liable for any loss, destruction or deterioration of the
goods;
3. That the carrier need not observe any diligence in the custody of the goods;
4. That the carrier shall exercise a degree of diligence less than that of a good
father of a family over the movable transported;
5. That the carrier shall not be responsible for the acts or omissions of his or its
employees;
6. That the carriers liability for acts committed by thieves or robbers who do not act
with grave or irresistible threat, violence or force is dispensed with or diminished;
7. That the carrier is not responsible for the loss, destruction or deterioration of the
goods on account of the defective condition of the car, vehicle, ship or other
equipment used in the contract of carriage (Art. 1745).
Dispensing with or
lessening the
extraordinary
responsibility of a
common carrier for
the safety of
passengers imposed
by law, by
stipulation, by
posting of notices,
by statements on
tickets or otherwise
(Art. 1757).
Defenses
1. Ordinary circumstance: Exercise of extraordinary diligence (Art. 1735)
2. Special circumstances (F-SPOC):
a. Flood, storm, earthquake, lighting, or other natural disaster or calamity
(plus force majeure)
b. Act of the public enemy in war, whether international or civil
c. Act or omission of the shipper or the owner of goods
d. The character of the goods or defects in the packing or in the containers
e. Order or act of competent public authority (Art. 1734).
1. Exercise of
extraordinary
diligence (Art.
1756)
2. Caso fortuito
Bill of Lading
The written acknowledgment of receipt of goods
and agreement to transport them to a specific
place to a person named or to his order.
Three-Fold Character of a Bill of Lading
A Bill of Lading operates both as a (1) receipt and
as a (2) contract. It is a contract for the goods
shipped and a contract to transport and deliver the
same as stipulated. It becomes effective upon
delivery to and accepted by the shipper. It is also
a (3) document of title.
Rules:
1. It is not indispensable for the creation of a
contract of carriage (Compania Maritima v. Insurance
Company of North America, No. L-18965, 30 October
1964).
2. Ambiguity is construed against the carrier, the
contract being one of adhesion.
3. The consignee, although the instrument is
oftentimes drawn up only by the consignor and
carrier, becomes bound by all the stipulations
contained therein by making a claim for loss
on the basis of said bill of lading (Sea-Land
Services Inc. v. IAC, GR No. 75118, Aug. 31, 1987).
4. The right of a party to recover for loss of
shipment consigned to him under a bill of
lading drawn up only by and between the
shipper and the carrier, springs from either a
relation of agency between him and the
shipper, or his status as stranger in whose
favor some stipulation is made in said contract
(stipulation pour autrui), and who becomes a
party thereto when he demands fulfillment of
that stipulation (Art. 1311 (2); Mendoza v. PAL Inc.,
GR No. 3678, February 29, 1952).
5. Acceptance of the bill of lading without dissent
raises the presumption that all the terms
therein where brought to the knowledge of the
shipper and agreed to by him and, in the
absence of fraud or mistake; he is estopped
from thereafter denying that he assented to
such terms (Notes and Cases on the Law on
Transportation and Public Utilities, Aquino & Hernando,
2004ed).
Limiting Stipulations as to Carriers Liability:
STIPULATION STATUS
1. Exempting common
carrier from any and all
liability for loss or
damage occasioned by
its own negligence
INVALID (contrary
to public policy)
2. Unqualified limitation to
an agreed valuation of
such liability regardless
of the value of the cargo
INVALID (contrary
to public policy)
3. Limited Liability to an
agreed valuation unless
the shipper declares a
higher value and pays
higher freight
VALID AND
ENFORCEABLE
(H.E. Heacock Co. v.
Macondray & Co., No.
16598 , 3 October 1921)
Kinds of Bill of Lading:
1. On board issued when the goods have
been actually placed aboard the ship with
very reasonable expectation that the shipment
is as good as on its way.
2. Received one in which it is stated that the
goods have been received for shipment with
or without specifying the vessel by which the
goods are to be shipped.
3. Negotiable one in which it is stated that the
goods referred to therein will be delivered to
the bearer or to the order of any person
named therein.
4. Non-negotiable - One in which it is stated
that the goods referred to therein will be
delivered to a specified person.
5. Clean One which does not indicate any
defect in the goods.
6. Foul One which contains a notation thereon
indicating that the goods covered by it are in
bad condition.
7. Spent One which covers goods that already
have been delivered by the carrier without a
surrender of a signed copy of the bill.
8. Through One issued by the carrier who is
obliged to use the facilities of other carriers as
well as his own facilities for the purpose of
transporting the goods from the city of the
seller to the city of the buyer, which bill of
lading is honored by the second and other
interested carriers who do not issue their own
bills.
9. Custody One wherein the goods are
already received by the carrier but the vessel
indicated therein has not yet arrived in the
port.
10. Port One which is issued by the carrier to
whom the goods have been delivered and the
vessel indicated in the bill of lading by which
the goods are to be shipped is already in the
port where the goods are held for shipment.
CARGO MANIFEST BILL OF L ADING
Declaration of entire
cargo
Declaration of specific part
of the cargo, is a matter of
business convenience
based on a contract
Purpose is to furnish
Customs officers
with a list of goods
carried
Purpose is to protect the
importer or consignee
(Macondray and Co. Inc. v. Acting
Commissioner, No. L-25783, 25
February 1975).
Breach of Contract of Carriage
LIABILITIES OF CARRIERS
Concurring Causes of Action arising from the
negligent act of the common carrier:
1. CULPA CONTRACTUAL ( Br each of
Contract)
Only the carrier is primarily liable and not the
driver, because there is no privity between the
driver and the passenger.
Basis: Art.1759, NCC.
No defense of due diligence in the
selection and supervision of employees.
2. CULPA AQUILIANA (Quasi-delict)
The carrier and driver are solidarily liable as
joint tortfeasors.
Basis: Art. 2180, NCC.
Whether due to willful intent or mere
inattention, if productive of injury, it will
give rise to an obligation to indemnify the
injured party.
Defense of due diligence in the selection
and supervision of employees is available.
Exception: maritime tort resulting in
collision (See notes on Collision).
Although the relation of passenger and
carrier is contractual both in origin and
nature, nevertheless, the act that breaks
the contract may also be a tort (Air France v.
Carrascoso, No. L-21428, September 28, 1966).
In the case of injury to a passenger due to
the negligence of the driver of the bus on
which the passenger was riding on and of
Transportation Laws
the driver of another vehicle, the drivers as
well as the owners of the two vehicles are
jointly and severally liable for damages. It
should not make any difference that the
liability of the bus owner springs from a
contract while that of the driver springs
from quasi-delict (Tiu v. Arriesgado, GR No.
1380601, September 2004; Fabre v. CA, GR No.
11127, 26 July 1996).
Since the employers (owner) liability is
primary, direct and solidary, its only
recourse is to recover what it has paid
from its employee (driver) who committed
the negligence (Philtranco v. CA, GR No.
120553, 17 June 1997).
3. CULPA CRIMINAL (Criminal negligence)
The driver is primarily liable. The carrier is
subsidiarily liable only if the driver is convicted
and declared insolvent.
Basis: Art. 100, RPC.
Note: The act of the shipper in furnishing the
carrier with inaccurate weight of payloader is not
an excuse to avoid liability, but said act constitutes
a contributory circumstance which mitigates the
liability of carrier (Compania Maritima v. CA, No.
L-31379, 29 August 1988).
Passengers have the right to be treated by the
carriers employees with kindness, respect,
courtesy and due consideration. Any discourteous
conduct on the part of these employees toward a
passenger gives the latter an action for damages
against the carrier (Korean Airlines v. CA, GR No.
1140613, August 1994; Zulueta v. Pan-Am World Airways,
No. L-285898, January 1973).
The carrier cannot limit its liability for injury to, or
loss of, goods shipped where such injury or loss
was caused by its own negligence (Shewaram v. PAL,
No. L-20099, 7 July 1966; Ysmael v. Barreto, No. 28028, 25
November 1927).

SPECIAL RULES ON LIABILITES OF AIRLINE
CARRIERS
1. In case of flight diversion due to bad weather
or other circumstances beyond the pilots
control, the relation between the carrier and
the passenger continues until the latter has
been landed at the port of destination and has
left the carriers premises. The carrier should
necessarily exercise extraordinary diligence in
safeguarding the comfort, convenience and
safety of its stranded passengers until they
have reached their final destination (Philippine
Airlines v. CA, GR No. 82619, 15 September 1993).
2. Even where overbooking of passengers is
allowed as a commercial practice, the airline
company would still be guilty of bad faith and
still be liable for damages if it did not properly
inform passenger that it could breach the
contract of carriage even if they were
confirmed passengers (Zalamea v. CA, GR No.
104235, 18 November 1993).
3. An open-dated ticket constitutes a complete
contract between the carrier and passenger.
Hence, the airline company is liable if it
refused to confirm a passengers flight
reservation (Singson v. CA, GR No. 119995, 18
November 1997).
4. An airline company which issued a confirmed
ticket to a passenger covering successive
trips on different airlines can be held liable for
damages occasioned by bumping off by one
of the successive airlines (Lufthansa German
Airlines v. CA, GR No. 836122, 4 November 1994).
5. An airline ticket providing that carriage by
successive air carriers is to be regarded as a
single operation is to make the issuing
carrier liable for the tortuous conduct of the
other carrier. A printed provision in the ticket
limiting liability only to its own conduct is not
enough to rebut that liability (KLM Royal Dutch
Airlines v. CA, No. L-31150, 22 July 1975).
6. An airline has the duty to inspect whether its
passengers have the necessary travel
documents, however, such duty does not
extend to checking the veracity of every entry
in these documents. An airline could not
vouch for the authenticity of a passport and
the correctness of the entries therein (Japan
Airlines v. Asuncion, GR No. 161730, January 28,
2005).
BREACH OF CONTRACT UNDER CODE OF COMMERCE AND COGSA
ARTICLE 366 COGSA Sec. 3 (6)
Applicability
1. Domestic/ inter-island/ coastwise transportation
2. Land, water, air transportation
3. Carriage of goods
1. International/overseas/foreign (from foreign country
to Phils.) transportation
Note: Subject to the rule on Paramount Clause
2. Water/ maritime transportation
3. Carriage of goods
BREACH OF CONTRACT UNDER CODE OF COMMERCE AND COGSA
ARTICLE 366 COGSA Sec. 3 (6)
Notice of damage
1. Condition precedent, if the cause of
action is due to the damaged
condition of the goods (Roldan v. Lim
Ponzo & Co., No. 11325, 7 December 1917).
2. Immediate filing of claim for patent
damage; may be oral or written
3. 24-hour period for claiming latent
damage
1. Not a condition precedent
2. Immediate filing of claim for patent damage;
3. 3-day period for claiming latent damage
Coverage
Damage, not misdelivery nor delay
(Roldan v. Lim Ponzo & Co., No. 11325, 7
December 1917).
Loss or damage, not delay, misdelivery or conversion.
It does not include a situation where there was indeed a
delivery but delivery to the wrong person or a misdelivery
(Ang v. American Steamship Agencies Inc., No. L-22491, 27 January 1967)
and damage arising from delay or late delivery (Mitsui O.S.K.
Lines Ltd. v. CA, GR No. 119571, 11 March 1998).
Liability of the carrier is US$500 per package in the absence
of a shippers declaration of a higher vale in the bill of lading
(Sec.4[5], COGSA).
Prescriptive period
If none provided, Civil Code applies.
If despite the notice of claim, the
carrier refuses to pay, action must
be filed in court
a. No bill of lading issued: within 6
years
b. Bill of lading issued: within 10
years.
1 year from the date of delivery (delivered but damaged goods),
or date when the vessel left port or from the date of delivery to
the arrastre (non-delivery or loss).
The one-year period shall run from delivery to the arrastre
operator and not to the consignee (Union Carbide Phils. Inc. v.
Manila Railroad Co., 77 GR No. 27798, June 15, 1977).
The insurer exercising its right of subrogation is bound by the
one-year prescriptive period. It does not apply to a claim
against an insurer for insurance proceeds (Fil. Merchants Ins. Co.
v. Alejandro, No. L-54140, 14 October 1986; Mayer Steel Pipe Corp. v. CA,
GR No. 124050, 19 June 1997).
The one-year prescriptive period is suspended by:
1. The express agreement of the parties (Universal Shipping
Lines, Inc. v. IAC, GR No. 74125, 31 July 1990).
2. The filing of an action in court until it is dismissed (Stevens
& Co. v. Nordeutscher Lloyd, No. L-17730, 29 September 1962).
Effect of extrajudicial demand
Toll the prescriptive period (must be written,
Art. 1155 NCC)
Does NOT toll the prescriptive period (Dole Phil. v. Maritime Co. No.
L-61352, 27 February 1987)
Stipulation as to shorter period
Parties can stipulate shorter period
because it merely affects the shippers
remedy and does not affect the liability
of the carrier (PHILAMGEN v. Sweetlines,
Inc., GR No. 87434, 5 August 1992).
The 1-year period CANNOT be shortened (Dole Philippines v. Maritime
Co, No. L-61352, 27 February 1987)
Transportation Laws
Breach of Contract of Carriage
Under Warsaw Convention
LIABILITY OF CARRIER FOR DAMAGES
1. Death or injury of a passenger if the accident
causing it took place on board the aircraft or
in the course of its operations of embarking or
disembarking (Art. 17, Warsaw Convention);
2. Destruction, loss or damage to any baggage
or goods, i f i t took pl ace duri ng the
transportation by air (Art. 18, Ibid);
Transportation by air The period during
which the baggage or goods are in the
charge of the carrier, whether in an
airport or on board an aircraft, or, in
case of a landing outside an airport, in
any place whatsoever.
It includes any transportation by land or
water outside an airport if such takes
place in the performance of a contract
for transportation by air, for the purpose
of loading, delivery, or transshipment.
3. Delay in the transportation of passengers,
baggage or goods (Art. 19, Ibid).
Note: The Hague Protocol amended the WC by
removing the provision that if the airline took all
necessary steps to avoid the damage, it could
exculpate itself completely (Art. 20[1]; Alitalia v. IAC,
GR No. 71929 , 4 December 1990)
LIMITS OF LIABILITY
1. DEATH OR INJURY OF PASSENGERS
Liability of the carrier for each passenger is
limited to 100,000 Special Drawing Rights
(SDR) and the carrier shall not be able to
exclude or limit its liability (Art. 21, Montreal
Convention).
2. DELAY IN CARRIAGE OF PERSONS Liability
of the carrier for each passenger is limited to
4,150 SDR.
3. DESTRUCTI ON, LOSS, DAMAGE OR
DELAY IN THE CARRIAGE OF BAGGAGE
Liability of the carrier for each passenger is
limited to 1,000 SDR.
UNLESS there is a special declaration of
interest and payment of a supplementary sum
by the passenger, then carrier will be liable to
not more than the declared sum, unless it
proves that the sum is greater than the actual
interest.
4. DESTRUCTI ON, LOSS, DAMAGE OR
DELAY IN THE CARRIAGE OF CARGO
Liability is 17 SDR per kilogram.
UNLESS there is a special declaration of
interest and payment of a supplementary sum
by the consignor, then carrier will be liable to
not more than the declared sum, unless it
proves that the sum is greater than the actual
interest (Art. 22, Ibid).
NOTE: As of April 2007 the exchange rate of
Special Drawing Rights (SDR) is 1.00 SDR = US
$1.51.
The foregoing limits shall not apply if it is proved
that the damage resulted from an act or omission
of the carrier, its servants or agents, done with
intent to cause damage or recklessly and with
knowledge that damage would probably result
(Art. 22, Ibid).
A carrier may stipulate that the contract of carriage
shall be subject to higher limits of liability than
those provided for in the Convention or to no limits
of liability whatsoever (Art. 25, Ibid).
Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is laid
down in the Convention shall be null and void (Art.
26, Ibid).
Thus, the WC does not operate as an
exclusive enumeration of the instances of an
absolute limit of the extent of liability. It does
not preclude the application of the Civil Code
and other pertinent local laws. It does not
regulate or exclude liability for other breaches
of contract by the carrier, or misconduct of its
empl oyees, or f or some part i cul ar or
exceptional type of damage (Alitalia v. IAC, GR
No. 71929, 4 December 1990).
In PanAm v. IAC (No. L-7046211, August 1988), the
WC was applied as regards the limitation on
the carriers liability, there being a simple loss
of baggage without any improper conduct on
the part of the officials or employees of the
airline or other special injury sustained by the
passenger.
Alitalia v. IAC (Ibid) cited KLM Royal v. Tuller,
where the WC has invariably been held
inapplicable, or as not restrictive of the
carriers liability, where there was satisfactory
evidence of malice or bad faith attributable to
its officers and employees.
An exception to the rule of limited liability is
when the benefits have been waived as the
carrier failed to raise timely objections during
trial; when questions and answers regarding
the actual claims and damages sustained by
the passenger were asked (British Airways v. CA,
GR No. 121824 , 29 January 1998).
The absence, irregularity or loss of passenger
ticket/ baggage check/ airway bill does not
affect the existence and validity of the contract
of transportation which shall nevertheless be
subject to the rules of the Convention (Art. 9).
ACTION FOR DAMAGESES
1. NOTICE OF COMPLAINT
A written complaint must be made within:
a. 7 days from receipt of damaged baggage;
b. 14 days from receipt of damaged goods;
or
c. 21 days from the date on which the
baggage or cargo have been placed at his
or her disposal, in case of delay.
If no complaint is made within the times
aforesaid, no action shall lie against the
carrier, save in the case of fraud on its part
(Art.31, Montreal Convention).
2. PRESCRIPTIVE PERIOD
Action must be filed within 2 years from:
a. date of arrival at the destination; an
intermediate place where carriage may be
broken (i.e. stopping place) is NOT a place
of destination (Santos III v. Northwest, GR No.
101538, 23 June 1992);
b. date on which the aircraft ought to have
arrived ; or
c. date on which the carriage stopped (Art.
35).
In United Airlines v. Uy (GR No. 127768, 19
November 1999), the two-year prescriptive
period was not applied where the airline
employed delaying tactics.
RULES IN CASE OF VARIOUS SUCCESSIVE
CARRIERS
1. CARRIAGE OF PASSENGERS
GENERAL RULE
Action is filed only against the carrier in
which the accident or delay occurred.
EXCEPTION
Agreement or contract whereby the first
carrier assumed liability for the whole
journey.
2. CARRIAGE OF BAGGAGE OR CARGO
a. Passenger or consignor can file an action
against the first carrier and the carrier in
which the damage occurred
b. Passenger or consignee entitled to
delivery can file an action against the last
carrier and the carrier in which the
damage occurred.
These carriers are jointly and severally liable
(Art. 36).
Note: A contract of international carriage by air,
although performed by different carriers under a
series of airline tickets constitutes a single
operation. Members of the International Air
Transportation Association (IATA) are under a
general pool partnership agreement wherein they
act as agent of each other in the issuance of
tickets to contracted passengers to boost ticket
sales worldwide and at the same time provide
passengers easy access to airlines which are
otherwise inaccessible in some parts of the world
(American Airlines v. CA, GR Nos. 116044-45, 9 March
2000).
Under a general pool partnership agreement, the
ticket-issuing airline is the principal in a contract of
carriage while the endorsee-airline is the agent.
The obligation of the former remained and did not
cease even when the breach occurred not on its
own flight but on that of another airline which had
undertaken to carry the passengers to one of their
destinations (China Airlines v. Chiok, GR No. 152122, July
30, 2003).
VENUE OF SUIT
1. ACTION FOR DAMAGES
Must be brought, at the option of the plaintiff,
in the:
a. Court of domicile of the carrier;
b. Court of its principal place of business;
c. Court where it has a place of business
through which the contract has been
made; or
d. Court of the place of destination.
It is the passengers ultimate destination
not an agreed stopping place that
determines the country where suit is to be
f i l ed. The pl ace of dest i nat i on i s
determined by the terms of the contract of
carriage.
2. ACTION FOR DAMAGES RESULTING
FROM THE DEATH OR INJURY
May also be brought in the place where the
passenger has his or her principal and
permanent residence at the time of the
accident (Art. 33).
Principal and permanent residence"
means the one fixed and permanent
abode of the passenger at the time of the
accident
The forum of action is a matter of
jurisdiction rather than of venue (Santos III v.
Northwest, GR No. 101538, 23 June 1992; 2A
C.J.S.).
Transportation Laws
Maritime Commerce (Arts. 573-869, Code of Commerce)
IMPORTANT CONCEPTS:
1. Merchant vessel
2. Maritime Lien and Preference of Credit
3. Doctrine of limited liability
4. Causes of revocation of voyage
5. Participants in maritime commerce
6. Charter party
7. Loans on bottomry and respondentia
8. Accidents in maritime commerce
MARITIME / ADMIRALTY LAW
It is the system of laws which particularly relates
to the affairs and business of the sea, to ships,
their crews and navigation, and to maritime
conveyance of persons and property (Notes and Cases
on the Law on Transportation and Public Utilities, Aquino &
Hernando, 2004ed).
CHARACTERISTICS OF MARITIME
TRANSACTION:
1. REAL
Similar to transactions over real property with
respect to effectivity against third persons
which is done through registration (Rubiso v.
Rivera, No. 11407, 30 October 1917). The evidence
of real nature is shown by:
a) limitation of the liability of the agents to the
actual value of the vessel and the freight
money; and
b) right to retain the cargo and embargo and
detention of the vessel (Luzon Stevedoring Corp
v. CA, No. L-58897, December 3, 1987).
2. HYPOTHECARY
The liability of the owner is limited to the value
of the vessel itself (DOCTRINE OF LIMITED
LIABILITY).
The real and hypothecary nature of maritime
law simply means that the liability of the carrier
in connection with losses related to maritime
contracts is confined to the vessel, which
stands as the guaranty for their settlement
(Aboitiz Shipping Corp. v. General Accident Fire and Life
Assurance Corp., GR No. 100446 , 21 January 1993).
MERCHANT VESSEL
Vessel engaged in maritime commerce, whether
foreign or otherwise (Bar Review Materials in Commercial
Law, Jorge Miravite, 2007ed).
Constitutes property which may be acquired and
transferred by any of the means recognized by
law. They shall continue to be considered as
personal property (Arts. 573, 585).
They are susceptible to maritime liens such as for
the repair, equipping and provisioning of the
vessel in the preparation of a voyage, as well as
mortgage liabilities, in satisfaction of which a
vessel may be validly arrested and sold (Ship
Mortgage Decree of 1978 [PD 1521]).
A mortgage on the vessel is generally like the
other chattel mortgage as to the requisites, the
only difference is that chattel mortgage of vessel
need not be noted in the registry of deeds but
record must be entered in the Collector of
Customs (now MARINA) at the port of entry (Phil.
Refining Corp. v. Jarque, No. 41506, 25 March 1935).
MARITIME LIEN
It constitutes a present right of property in the
ship, a jus in re, to be afterward enforced in
admiralty by process in rem (PNB v. CA, GR No.
128661, 8 August 2000).
If the maritime lien arose prior to the recording of
a preferred mortgage, it shall have priority over
the said mortgage lien (PNB v. CA, Ibid.).
Order of Preference in case of Sale of Vessel
R.A. 6106 P.D. 1521
Effectivity date
1969 1978
Applicability
Overseas shipping only Both domestic and
overseas shipping
Kind of sale
Judicial Judicial and
extrajudicial
Order of Preference
A preferred mortgage
shall have priority over
all claims against the
vessel, except the
following preferences in
the order stated:
1. Judicial costs of the
proceedings;
2. Taxes due the
Philippine
Government;
3. Salaries and wages
of the Captain and
Crew of the vessel
during its last
voyage;
4. General average or
salvage including
contract salvage,
bottomry loans, and
indemnity due
shippers for the
value of goods
transported but
which were not
delivered to the
consignee;
5. Costs of repair and
equipment of the
vessel, and
provisioning of food,
supplies and fuel
during its last
voyage; and
6. Preferred mortgages
registered prior in
time.
The preferred
mortgage lien shall
have priority over all
claims against the
vessel, except the
following preferences in
the order stated:
1. Expenses and fees
allowed and costs
taxed by the court
and taxes due to
the Government;
2. Crews wages;
3. General average;
4. Salvage, including
contract salvage;
5. Maritime liens
arising prior in time
to the recording of
the preferred
mortgage;
6. Damages arising
out of tort; and
7. Preferred mortgage
registered prior in
time.
Effect of sale: All pre-existing claims in the vessel
are terminated. They will then be satisfied from
the proceeds of the sale subject to the order of
preference.
HYPOTHECARY RULE/ DOCTRINE OF LIMITED
LIABILITY
Cases where applicable:
1. Art. 587 civil liability for indemnities to third
persons;
2. Art. 590 indemnities from negligent acts of
the captain (not the shipowner or ship agent);
3. Art. 837 collision; and
4. Art. 643 liability for wages of the captain
and the crew and for advances made by the
ship agent if the vessel is lost by shipwreck or
capture.
GENERAL RULE
No vessel, no liability. The liability of shipowner
and ship agent is limited to the amount of interest
in said vessel such that where vessel is entirely
lost, the obligation is extinguished (Luzon Stevedoring
v. Escano, 156 SCRA 169).
The interest extends to:
1. the vessel itself;
2. equipments;
3. freightage; and
4. insurance proceeds (Chua v. IAC, No. L-74811, 30
September 1988).
EXCEPTIONS:
1. Claims under Workmens Compensation
(Abueg v. San Diego, CA No. 773, 17 December 1946);
2. Injury or damage due to shipowner or to the
concurring negligence of the shipowner and
the captain;
3. The vessel is insured (Vasquez v. CA, No.
L-42926, 13 September 1985);
4. Expenses for repair on vessel completed
before loss;
5. In case there is NO total loss and the vessel
is not abandoned;
When shipowner was equally negligent, it
cannot escape liability by virtue of the limited
liability rule (Central Shipping Co v. Insurance Co. of N.
America, GR NO. 150751, September 20, 2004).
The limited liability doctrine applies not only to
the goods but also in all cases like death or
injury to passengers (Heirs of Amparo Delos Santos
v. CA, GR No. 51165, 21 June 1990).
The rights of a vessel owner or agent under
the limited liability rule are akin to those of the
rights of shareholders to limited liability under
our Corporation laws. In both insolvency of a
corporation and the sinking of a vessel, the
claimants or creditors are limited in their
recovery to the remaining value of accessible
assets (Aboitiz Shipping Corp. v. General Accident Fire
Transportation Laws
and Life Assurance Corp., GR No. 100446, 21 January
1993).
ABANDONMENT
Abandonment of the vessel is necessary to limit
the liability of the shipowner. The only instance
where abandonment is dispensed with is when the
vessel is entirely lost (Luzon Stevedoring v. CA, No.
L-58897, 3 December 1987).
Instances where the Shipowner or Ship Agent
may Abandon Vessel:
1. In case of civil liability from indemnities to
third persons (Art. 587);
2. In case of leakage of at least ! of the
contents of a cargo containing liquids (Art.
687); and
3. In case of constructive loss of the vessel (Sec.
138, Insurance Code).
RIGHT OF ABANDONMENT
SHIPOWNER OR SHIP
AGENT
CONSIGNEE
What may be abandoned
Vessel Goods shipped
Instances
1. In case of civil liability
from indemnities to
third persons (Art.
587);
2. Sec. 138, Insurance
Code;
3. In case of leakage of
at least ! of the
contents of a cargo
containing liquids (Art.
687)
1. Partial non-delivery,
where the goods are
useless without the
others (Art. 363);
2. Goods are rendered
useless for sale or
consumption for the
purposes for which
they are properly
destined (Art. 365);
and
3. In case of delay
through the fault of
the carrier (Art. 371).
Effects
1. Transfer of ownership
of the vessel from the
shipowner to the
shippers or insurer.
2. In case of #2, the
insurer must pay the
insured as if there
was actual total loss
of the vessel.
1. Transfer of
ownership on the
goods from the
shipper to the
carrier.
2. Carrier should pay
the shipper the
market value of the
goods at the point
of destination.
CAUSES OF REVOCATION OF VOYAGE
(WaB-PIE)
1. War or interdiction of commerce;
2. Blockade;
3. Prohibition to receive cargo at destination;
4. Embargo; or
5. Inability of the vessel to navigate (Art. 640).
Terms:
1. Interdiction of commerce A governmental
prohibition of commercial intercourse intended
to bring about an entire cessation for the time
being of all trade whatever.
2. Blockade A sort of circumvallation of a
place by which all foreign connection and
correspondence is, as far as human power
can effect it, to be cut off.
3. Embargo A proclamation or order of a state,
usually issued in time of war or threatened
hostilities, prohibiting the departure of ships or
goods from some or all the ports of such state
until further order.
PARTIES IN MARITIME COMMERCE
1. Shipowners and ship agents;
2. Captains and masters of the vessel;
3. Officers and crew of the vessel;
4. Supercargoes; and
5. Pilot
SHIPOWNERS AND SHIP AGENTS
Shipowner (proprietario)
Person who has possession, control and
management of the vessel and the consequent
right to direct her navigation and receive freight
earned and paid, while his possession continues.
Ship agent (naviero)
Per son ent r ust ed wi t h pr ovi si oni ng and
representing the vessel in the port in which it may
be found; also includes the shipowner (Chua Hek
Yong v. IAC, GR NO. 74811, Sept. 30, 1988).
Not a mere agent under civil law; he is
solidarily liable with the ship owner.
Powers and functions:
1. Capacity to trade;
2. Discharge duties of the captain, subject to Art.
609;
3. Contract in the name of the owners with
respect to repairs, details of equipment,
armament, provisions of food and fuel, and
freight of the vessel, and all that relate to the
requirements of navigation; and
4. Order a new voyage, make a new charter or
insure the vessel after obtaining authorization
from the shipowner or if granted in certificate of
appointment.
Civil Liabilities of the Shipowner and Ship
Agent
1. Al l contracts of the captai n, whether
authorized or not, to repair, equip and
provision the vessel (Art. 586);
2. Loss and damage to the goods loaded on the
vessel without prejudice to their right to free
themselves from liability by abandoning the
vessel to the creditors (Art. 587).
The ship owner cannot be held liable for any
damages that may have been discovered
after delivery of the cargo to consignee (Eastern
Shipping Lines, Inc. v. N.V. the Netherlands Insurance
Company, GR No. 146472 , 27 July 2000).
Duty of Ship Agent to Discharge the Captain
and Members of the Crew
If the seamen contract is not for a definite period
or voyage, he may discharge them at his
discretion (Art. 603).
If for a definite period, he may NOT discharge
them until after the fulfillment of their contracts,
EXCEPT on the following grounds (DIRTH):
1. Insubordination in serious matters;
2. Robbery;
3. Theft;
4. Habitual drunkenness;
5. Damage caused to the vessel or to its cargo
through mal i ce or mani fest or proven
negligence (Art. 605).
CAPTAINS AND MASTERS
They are the chiefs or commanders of ships.
The terms have the same meaning, but are
particularly used in accordance with the size of the
vessel governed and the scope of transportation,
i.e., large and overseas, and small and coastwise,
respectively.
Nature of position (3-fold character):
1. General agent of the shipowner;
2. Commander and technical director of the
vessel; and
3. Representative of the government of the
country under whose flag he navigates (Inter-
Orient Maritime Enterprises, Inc. v. NLRC, GR No.
115286, 11 August 1994).
The responsibility of the captain remains even

if the vessel is on a compulsory pilotage
(Wildvalley Shipping Co. v. Court of Appeals, No.
119602, 2000).
Qualifications:
1. Filipino citizen;
2. Legal capacity to contract; and
3. Must have passed the required physical and
mental examinations required for licensing
him as such (Art. 609).
Inherent powers:
1. Appoint crew in the absence of ship agent;
2. Command the crew and direct the vessel to
its port of destination;
3. Impose correctional punishment on those
who, while on board vessel, fail to comply with
his orders or are wanting in discipline;
4. Make contracts for the charter of vessel in the
absence of ship agent.
a. Supply, equip, and provision the vessel;
and
b. Order repair of vessel to enable it to
continue its voyage (Art. 610).
Sources of funds to comply with the inherent
powers of the captain (in successive order):
1. From the consignee of the vessel;
2. From the consignee of the cargo;
3. By drawing on the ship agent;
4. By a loan on bottomry;
5. By sale of part of the cargo (Art. 611).
Duties:
1. Bring on board the proper certificate and
documents and a copy of the Code of
Commerce;
2. Keep a Log Book, Accounting Book and
Freight Book;
3. Examine the ship before the voyage;
4. Stay on board during the loading and
unloading of the cargo;
5. Be on deck while leaving or entering the port;
6. Protest arrivals under stress and in case of
shipwreck;
7. Fol l ow i nstructi ons of and render an
accounting to the ship agent;
8. Leave the vessel last in case of wreck;
9. Hold in custody properties left by deceased
passengers and crew members;
10. Comply with the requirements of customs,
health, etc. at the port of arrival;
11. Observe rules to avoid collision;
12. Demand a pilot while entering or leaving a
port (Art. 612).
Transportation Laws
A ships captain must be accorded a

reasonable measure of discretionary authority
to decide what the safety of the ship and of its
crew and cargo specifically requires on a
stipulated ocean voyage (Inter-Orient Maritime
Enterprises Inc. v. CA, GR No.115286, 11 August
1994).
No liability for the following:
1. Damages caused to the vessel or to the cargo
by force majeure;
2. Obl i gati ons contracted for the repai r,
equipment, and provisioning of the vessel
unless he has expressly bound himself
personally or has signed a bill of exchange or
promissory note in his name (Art. 620).
Solidary Liabilities of the Ship Agent/
Shipowner for Acts Done by the Captain
towards Passengers and Cargoes
1. Damages to vessel and to cargo due to lack
of skill and negligence;
2. Thefts and robberies of the crew;
3. Losses and fines for violation of laws;
4. Damages due to mutinies;
5. Damages due to misuse of power;
6. For deviations;
7. For arrivals under stress; and
8. Damages due to non-observance of marine
regulations (Art. 618).
OFFICERS AND CREW
1. Sailing Mate/First Mate
2. Second Mate
3. Engineers
4. Crew
No liability under the following circumstances:
1. If, before beginning voyage, captain attempts
to change it, or a naval war with the power to
which the vessel was destined occurs;
2. If a disease breaks out and be officially
decl ared an epi demi c i n t he port of
destination;
3. If the vessel should change owner or captain
(Art. 647).
Sailing Mate/ First Mate
Second chief of the vessel who takes the place of
the captain in case of absence, sickness, or death
and shall assume all of his duties, powers and
responsibilities (Art. 627).
Second Mate
Takes command of the vessel in case of the
inability or disqualification of the captain and the
sailing mate, assuming in such case their powers
and responsibilities. An officer third in command
Engineers
Officers of the vessel but have no authority except
in matters referring to the motor apparatus. When
two or more are hired, one of them shall be the
chief engineer.
Crew
The aggregate of seamen who man a ship, or the
ships company.
Hired by the ship agent, where he is present and
in his absence, the captain hires them, preferring
Filipinos, and in their absence, he may take in
foreigners, but not exceeding 1/5 of the crew (Art.
634).
Just Causes for the Discharge of Seaman
While Contract Subsists (D HIPI) (Art. 637)
1. Perpetration of a crime;
2. Repeated insubordination, want of discipline;
3. Repeated incapacity and negligence;
4. Habitual drunkenness;
5. Physical incapacity;
6. Desertion an act by which a seaman
deserts and abandons a ship or vessel before
the expiration of his term of duty and without
leave and without intention to return (Singa Ship
Management Phils. v. NLRC, GR No.120276 , 24 July
1997).
Rules in case of Death of a Seaman
The seamans heirs are entitled to payment as
follows:
1. If death is natural:
a. if engaged on wage - compensation up to
time of death;
b. if by voyage - half of amount if death
occurs on voyage out; and full, if on
voyage in;
c. if by shares - none, if before departure;
full, if after departure
2. If death is due to defense of vessel - full
payment;
3. If captured in defense of vessel - full
payment;
4. If captured due to carelessness - wages up
to the date of the capture (Art. 645).
Complement of the Vessel
All persons on board, from the captain to the cabin
boy, necessary for the management, maneuvers,
and service; and thus include the crew, sailing
mates, engineers, stokers and other employees
on board not having specific designations.
Does not include the passengers or the persons
whom the vessel is transporting.
SUPERCARGOES
Persons who discharge administrative duties
assigned to them by ship agent or shippers,
keeping an account and record of transaction as
required in the accounting book of the captain (Art.
649).
PILOT
A person duly qualified and licensed to conduct a
vessel into or out of ports, or in certain waters.
The term generally connotes a person taken on
board at a particular place for the purpose of
conducting a ship through a river, road or channel,
or from a port.
Master pro hac vice (for the time being) in the
command and navigation of the ship.
While exercising his functions, a pilot is in sole
command of the ship and supersedes the master
for the time being in the command and navigation
of the ship; the master does not surrender his
vessel to the pilot and the pilot is not the master.
There are occasions when the master may and
should interfere and even displace the pilot, as
when the pilot is obviously incompetent or
intoxicated (Far Eastern Shipping Company v. CA, GR No.
130068, 1 October 1998).
Compulsory Pilotage
States possessing harbors have enacted laws or
promulgated rules requiring vessels approaching
their ports to take on board pilots licensed under
the local laws (Notes and Cases on the Law on
2004ed).
Liability of Pilot
GENERAL RULE
On compulsory pilotage grounds, the Harbor Pilot
is responsible for damage to a vessel or to life or
property due to his negligence.
EXCEPTIONS
1. Accident caused by force majeure or natural
cal ami ty provi ded the pi l ot exerci sed
prudence and extra diligence to prevent or
minimize damages.
2. Countermanded or overruled by the master of
the vessel in which case the registered owner
of the vessel is liable (Sec.11, Art. III PPA Admin
Order 03-85).
The fact that the law compelled the master to
take the pilot does not exonerate the vessel
from liability. The owners of the vessel are
responsible for the acts of the pilot, and they
must be left to recover the amount against
him (Far Eastern Shipping Co v. CA, GR No. 130068, 1
October 1998).
Special Contracts of Maritime Commerce
1. Charter party
2. Bill of lading
3. Contract of transportation of passengers on
sea voyages
4. Loan on bottomry
5. Loan on respondentia
6. Marine insurance
CHARTER PARTY
A contract by virtue of which the owner or agent
binds himself to transport merchandise or persons
for a fixed price.
A contract by which an entire ship, or some
principal part thereof is let/ leased by the owner to
another person for a specified time or use (Planters
Products, Inc. v. CA, GR No. 101503, 15 September 1993).
Parties:
1. Ship owner or ship agent; and
2. Charterer
Classes:
1. BAREBOAT OR DEMISE
The charterer provides crew, food and fuel.
The charterer is liable as if he were the owner,
except when the cause arises from the
unworthiness of the vessel. The shipowner
leases to the charterer the whole vessel,
transferring to the latter the entire command,
possession and consequent control over the
vessels navigation, including the master and
the crew, who thereby become the charters
servants.
The charterer becomes the owner of the
vessel pro hac vice, just for that one particular
purpose only. Because the charterer is treated
Transportation Laws
as owner pro hac vice, the charterer assumes
the customary rights and liabilities of the
shipowner to third persons and is held liable
for the expense of the voyage and the wages
of the seamen.
A bareboat or demise charter transforms a
common carrier into a private carrier. The
same however is not true in a contract of
affreightment because of the nature of such
contract which leaves the control and
supervision of the vessel with the common
carrier (Coastwise Lighterage v. CA. GR No. 114167,
July 12, 1995).
2. CONTRACT OF AFFREIGHTMENT
A contract whereby the owner of the vessel
leases part or all of its space to haul goods for
others.
The shipowner retains the possession,
command and navigation of the ship, the
charterer merely having use of the space in
the vessel in return for his payment of the
charter hired.
Kinds:
a. Time charter vessel is chartered for a
fixed period of time or duration of voyage.
b. Voyage or trip charter the vessel is
leased for one or series of voyages usually
for purposes of transporting goods for
charterer.
LEASE CHARTER PARTY
Concept
Civil law concept Commercial law concept
Rescission
If for a definite period,
lessee cannot give up
the lease by paying a
portion of the amount
agreed upon.
Charterer may rescind
charter party by paying
half of the freightage
agreed upon.
Binding effect in case of Sale
If the leased property
is sold to one who
knows of the existence
of the lease, the new
owner must respect
the lease.
The new owner is not
compelled to respect the
charter party so long as
he can load the vessel
with his own cargo (Art.
689).
BAREBOAT OR
DEMISE CHARTER
CONTRACT OF
AFFREIGHTMENT
(TIME OR VOYAGE
CHARTER)
Owner Pro Hac Vice
Charterer regarded as
owner pro hac vice for
the voyage
Charterer is not
regarded as owner.
Control of vessel
Owner of vessel
relinquishes possession,
command and navigation
to charterer
The vessel owner
retains possession,
command and
navigation of the ship
Liability for Negligence
Charterer becomes liable
to others caused by its
negligence
Owner remains liable
as carrier and must
answer for any breach
of duty
Conversion
Common carrier is
converted to private
carrier.
Common carrier is
NOT converted to a
private carrier.
Requisites of a Valid Charter Party
1. Consent of the contracting parties;
2. Existing vessel which should be placed at the
disposition of the shipper;
3. Freight; and
4. Compliance with Art. 652 of the Code of
Commerce
Clauses Which May Be Included In a Charter
Party
1. Jason Clause - A stipulation in a charter party
that in case of a maritime accident for which
the shipowner is not responsible by law,
contract or otherwise, the cargo shippers,
consignees or owners shall contribute with the
shipowner in general average (Pandect of
Commercial Law and Jurisprudence, Justice Jose Vitug,
2006ed).
2. Clause Paramount or Paramount Clause -
A clause in a charter party providing that the
COGSA shall apply, even though the
transportation is domestic, subject to the
extent that any term of the bill of lading is
repugnant to the COGSA or applicable law,
then to the extent thereof the provision of
the bill of lading is void (Ibid).
Rights and Obligations of Parties
SHIPOWNER OR
SHIP AGENT
CHARTERER
1. If the vessel is chartered
wholly, not to accept cargo
from others;
2. To observe represented
capacity;
3. To unload cargo
clandestinely placed
4. To substitute another
vessel if load is less than
3/5 of capacity;
5. To leave the port if the
charterer does not bring
the cargo within the lay
days and extra lay days
allowed;
6. To place in a vessel in a
condition to navigate;
7. To bring cargo to nearest
neutral port in case of war
or blockade (Arts. 669-678).
1. To pay the
agreed
charter price;
2. To pay
freightage on
unboarded
cargo;
3. To pay losses
to others for
loading
uncontracted
cargo and
illicit cargo;
4. To wait if the
vessel needs
repair;
5. To pay
expenses for
deviation
(Arts. 679-687).
Note: Because of the implied warranty of
seaworthi ness, shi ppers of goods, when
transacting with carriers, are not expected to
i nqui re i nt o t he vessel s seawort hi ness,
genuineness of its licenses and compliance with
maritime laws (Caltex v. Sulpicio Lines, GR No. 131166,
30 September 1999).
Rescission of a Charter Party
At charterers
request (Art 688)
At
shipowners
request
(Art. 689)
Fortuitous
causes
(Art. 690)
1.By abandoning
the charter and
paying half of
the freightage;
2.Error in tonnage
or flag;
3.Failure to place
the vessel at the
charterers
disposal;
4.Return of the
vessel due to
pirates, enemies
or bad weather;
5.Arrival at a port
for repairs.
1. If the extra
lay days
terminate
without the
cargo
being
placed
alongside
the vessel;
2. Sale by the
owner of
the vessel
before
loading by
the
charterer.
1. War or
interdiction
of
commerce;
2. Blockade;
3. Prohibition
to receive
cargo;
4. Embargo;
and
5. Inability of
the vessel
to
navigate.
Terms:
1. Primage bonus to be paid to the captain
after the successful voyage.
2. Demurrage the sum fixed in the charter
party as a remuneration to the owner of the
ship for the detention of his vessel beyond the
number of days allowed by the charter party
for loading or unloading or for sailing.
3. Deadfreight the amount paid by or
recoverable from a charterer of a ship for the
portion of the ships capacity the latter
contracted for but failed to occupy.
4. Lay Days days allowed to charter parties
for loading and unloading the cargo.
5. Extra Lay Days days which follow after the
lay days have elapsed.
USUAL FORMS OF CONSUMMATI NG
CONTRACTS
1. C.I.F. cost, insurance and freight;
2. F.O.B. free on board;
3. F.A.S. free alongside ship; and
4. C. & F. cost and freight.
TRANSHIPMENT OF GOODS
The act of taking cargo out of one ship and
loading it in another, or the transfer of goods from
t he vessel st i pul at ed i n t he cont ract of
affreightment to another vessel before the place of
destination named in the contract has been
reached, or the transfer for further transportation
from one ship or conveyance to another.
It is not dependent on the ownership of the
transporting ships or in the change of carriers, but
rather on the fact of actual physical transfer of
cargo from one vessel to another.
If done without legal excuse, however competent
and safe the vessel into which the transfer is
made, is a violation of contract and infringement of
right of shipper and subjects carrier to liability if
freight is lost event by cause otherwise excepted
(Magellan Manufacturing v. CA, GR No. 95529, 22 August
1991).
LOAN ON BOTTOMRY AND RESPONDENTIA
A real, unilateral, aleatory contract, by virtue of
which one person lends to another a certain
amount of money or goods on things exposed to
maritime risks, which amount, with its earnings, is
to be returned if the things are safely transported,
and which is lost if the latter are lost.
LOAN ON BOTTOMRY
LOAN ON
RESPONDENTIA
Definition
Loan made by shipowner
or ship agent guaranteed
by the vessel itself and
repayable upon arrival of
vessel at destination (Art.
719).
Loan taken on
security of the cargo
laden on a vessel, and
repayable upon safe
arrival of cargo at
destination (Art. 719).
Transportation Laws
LOAN ON BOTTOMRY
LOAN ON
RESPONDENTIA
Who may contract
Shipowner or ship agent.
Outside of the residence
of the owners - the
captain.
Only the owner of the
cargo.
Common elements
1. Exposure of security to marine peril;
2. Obligation of the debtor conditioned only upon
safe arrival of the security at the point of
destination.
Forms
1. Public instrument
2. Policy signed by the contracting parties and
the broker taking part therein
3. Private instrument (Art. 720)
BOTTOMRY/
RESPONDENTIA
ORDINARY LOAN
(MUTUUM)
Usury Law
Not subject to Usury Law Subject to Usury Law
Liability
Liability of the borrower
is contingent on the safe
arrival of the vessel or
cargo at destination
Not subject to any
contingency (absolute
liability)
Preference of credit
The last lender is a
preferred creditor
The first lender is a
preferred creditor
When Loan on Bottomry or Respondentia
Regarded as Simple Loan
1. Lender loaned an amount larger than the
value of the object due to fraudulent means
employed by the borrower (Art. 726).
2. Full amount of the loan is not used for the
cargo or given on the goods if all of them
could not have been loaded, the balance will
be considered a simple loan (Art. 727).
3. If the effects on which the money is taken is
not subjected to any risk (Art. 729).
Note: Under existing laws, the parties to a loan,
whether ordinary or maritime, may agree on any
rate of interest (CB Circular 905); provided the same
is not contrary to law, morals, good customs,
public order or public policy (Art. 1306 NCC).
MARINE INSURANCE
LOAN ON BOTTOMRY
OR RESPONDENTIA
Nature of Contract
Consensual contract Real contract
When indemnity paid
Indemnity is paid after
the loss has occurred
Indemnity is paid in
advance by way of a
loan
Liability
In case of loss of the
vessel due to a risk
insured against, the
obligation of the insurer
becomes absolute
In case of loss of the
vessel due to a marine
peril, the obligation of
the borrower to pay is
extinguished
Hypothecary Nature of Bottomry/
Respondentia
GENERAL RULE
The obligation of the borrower to pay the loan is
extinguished if the goods given as security are
absolutely lost by reason of an accident of the
sea, during the voyage designated, and if it is
proven that the goods were on board.
EXCEPTIONS (IF-BED)
1. Loss due to inherent defect;
2. Loss due to the barratry on the part of the
captain;
3. Loss due to the fault or malice of the
borrower;
4. The vessel was engaged in contraband; and
5. The cargo loaded on the vessel is different
from that agreed upon.
Concurrence of Marine Insurance and Loan on
Bottomry/Respondentia
1. The insurable interest of the owner of a ship
hypothecated by bottomry is only the excess
of the value over the amount secured by
bottomry (Sec. 101, Insurance Code).
2. The value of what may be saved in case of
shipwreck shall be divided between the lender
and the insurer in proportion to the interest of
each one (Art. 735, Code of Commerce).
Note: If a vessel is hypothecated by bottomry only
the excess is insurable, since a loan on bottomry
partakes of the nature of an insurance coverage to
the extent of the loan accommodation. The same
rule would apply to the hypothecation of the cargo
by respondentia (Pandect of Commercial Law and
Jurisprudence, Vitug, 2006ed).
Accidents in Maritime Commerce
1. Averages
2. Arrival Under Stress
3. Collision
4. Shipwreck
AVERAGE
An extraordinary or accidental expense incurred
during the voyage in order to preserve the cargo,
vessel or both, and all damages or deterioration
suffered by the vessel from departure to the port
of destination, and to the cargo from the port of
loading to the port of consignment (Art. 806).
The person whose property has been saved must
contribute to reimburse the damage caused or
expense incurred if the situation constitutes
general average.
Classes:
1. Particular or Simple Average
2. Gross or General Average
Where both vessel and cargo are saved, it is
general average; where only the vessel or only the
cargo is saved, it is particular average.
Expenses incurred to refloat a vessel, which
accidentally ran aground, in order to continue its
voyage, do not constitute general average. Not
only is there absence of a marine peril, common
safety factor, and deliberateness. It is the safety of
the property, and not the voyage, whi ch
constitutes the true foundation of general average
(A. Magsaysay, Inc. v. Agan, GR No. L-6393, Jan. 31, 1955).
PARTICULAR OR
SIMPLE
GROSS OR
GENERAL
Definition
Damages or expenses
caused to the vessel or
cargo that did not inure
to the common benefit,
and borne by respective
owners. (Art. 809)
Damages or expenses
deliberately caused in
order to save the
vessel, its cargo or
both from real and
known risk. (Art. 811)
Requisites
1. common danger;
2. deliberate sacrifice;
3. success;
4. proper formalities
and legal steps.
Liability
The owner of the
goods which
gave rise to the
expense or
suffered the
damage shall
bear this
average. (Art.
810)
1. All the persons having an
interest in the vessel and the
cargo therein at the time of
the occurrence of the
average shall contribute to
satisfy this average. (Art. 812)
2. The insurers (Art.859) and
lenders on bottomry and
respondentia shall likewise
contribute. (Art.732)
Number of interests involved
Only one interest
involved
Several interests involved
Share in the damage or expense
100% share In proportion to the value of
the owners property saved
Right to recover
No
reimbursement
There may be reimbursement
Kinds (not exclusive)
Art. 809 Art. 811
Procedure for recovery
1. Assembly and deliberation
2. Resolution of the captain
3. Entry of the resolution in
the logbook
4. Detailed minutes
5. Delivery of the minutes to
the maritime judicial
authority of the first port,
within 24 hours from arrival,
6. Ratification by captain
under oath. (Arts. 813-814)
Goods Not Covered By General Average Even
If Sacrificed
1. Goods carried on deck (Art. 855).
2. Goods not recorded in the books or records of
the vessel (Art. 855 [2]).
3. Fuel for the vessel if there is more than
sufficient fuel for the voyage (Rule IX, York-
Antwerp Rule).
Jettison
Act of throwing cargo overboard in order to lighten
the vessel.
Order of goods to be cast overboard:
1. Those which are on the deck, preferring the
heaviest one with the least utility and value;
2. Those which are below the upper deck,
beginning with the one with greatest weight
Transportation Laws
and smallest value (Art. 815).
Jettisoned goods are not res nullius nor deemed
abandoned within the meaning of civil law so as
to be the object of occupation by salvage (Pandect of
Commercial Law and Jurisprudence, Vitug, 2006ed).
In order that the jettisoned goods may be included
in the gross or general average, the existence of
the cargo on board should be proven by means of
the bill of lading (Art. 816).
York-Antwerp (Y-A) Rules on Determining
Liability for Averages With Regard To Deck
Cargo:
1. Deck cargo is allowed only in domestic/
coastwise/ inter-island shipping, and is
prohibited in international/ overseas/ foreign
shipping.
2. If deck cargo is loaded with the consent of the
shipper on overseas trade, it must always
contribute to general average, but should the
same be jettisoned, it would not be entitled to
reimbursement because there is violation of
the Y-A Rules.
3. If deck cargo is loaded with the consent of the
shipper on coastwise shipping, it must always
contribute to general average and if jettisoned
would be entitled to reimbursement.
Reason: In domestic shipping, voyages are
usually short and the seas are generally not
rough. In overseas shipping, the vessel is
exposed for many days to perils of the sea.
DOMESTIC INTERNATIONAL
Deck cargo is allowed Deck cargo is not allowed
With shippers consent
General average Particular average
Without shippers consent
Captain is liable Captain is liable
ARRIVAL UNDER STRESS (ARRIBADA)
The arrival of a vessel at the nearest and most
convenient port instead of the port of destination,
if during the voyage the vessel cannot continue
the trip to the port of destination.
WHEN
LAWFUL
WHEN
UNLAWFUL
WHO
BEARS
EXPENSES
The inability
to continue
voyage is
due to lack of
provisions,
well-founded
fear of
seizure,
privateers,
pirates, or
accidents of
the sea
disabling it to
navigate (Art.
819).
1.Lack of
provisions due to
negligence to
carry according to
usage and
customs;
2.Risk of enemy
not well known or
manifest
3.Defect of vessel
due to improper
repair; and
4.Malice,
negligence, lack of
foresight or skill of
captain (Art. 820).
The
shipowner or
ship agent is
liable in case
of unlawful
arrival under
stress. But
they shall not
be liable for
the damages
caused by
reason of a
lawful arrival
(Art. 821).
It is the duty of the captain to continue the voyage
without delay after the cause of the arrival under
stress has ceased, failing in such duty renders
him liable. However, in case the cause has been
risk of enemies, there must first be an assembly
before departure (Art. 825).
Steps:
1. Captain should determine during the voyage if
there is well founded fear of seizure,
privateers and other valid grounds;
2. Captain shall assemble the officers and
summon the persons interested in the cargo
who may attend the meeting but without a
right to vote;
3. The officers shall determine and agree if there
is well-founded reason after examining the
circumstances. The captain shall have the
deciding vote;
4. The agreement shall be drafted and the
proper minutes shall be signed and entered in
the log book;
5. Objections and protests shall likewise be
entered in the minutes.
COLLISION
Impact of two vessels both of which are moving.
Allision
Impact between a moving vessel and a stationary
one.
Nautical Rules to Determine Negligence:
1. When two vessels are about to enter a port,
the farther one must allow the nearer to enter
first; if they collide, the fault is presumed to be
imputable to the one who arrived later, unless
it can be proved that there was no fault on its
part.
2. When two vessels meet, the smaller should
give the right of way to the larger one.
3. A vessel leaving port should leave the way
clear for another which may be entering the
same port.
4. The vessel which leaves later is presumed to
have collided against one which has left
earlier.
5. There is a presumption against the vessel
which sets sail in the night.
6. There is a presumption against the vessel
with spread sails which collides with another
which is at anchor and cannot move, even
when the crew of the latter has received word
to lift anchor, when there was no sufficient
time to do so or there was fear of a greater
damage or other legitimate reason.
7. There is a presumption against an improperly
moored vessel.
8. There is a presumption against a vessel
which has no buoys to indicate the location of
its anchors to prevent damage to vessels
which may approach it.
9. Vessels must have proper look-outs or
persons trained as such and who have no
other duty aside therefrom (Smith Bell vs. CA, GR
No. 56294, May 20, 1991).
Nautical Rules as to Sailing Vessel and
Steamship:
1. Where a steamship and a sailing vessel are
approaching each other from opposite
directions, or on intersecting lines, the
steamship, from the moment the sailing
vessel is seen, shall watch with the highest
diligence her course and movements so as to
be able to adopt such timely means of
precaution as will necessarily prevent the two
boats from coming in contact.
2. The sailing vessel is required to keep her
course unless the circumstances require
otherwise.
Zones of Time in the Collision of Vessels:
1. First zone all time up to the moment when
risk of collision begins.
No rule is as yet applicable for none is

necessary.
2. Second zone time between moment when
risk of collision begins and moment it
becomes a practical certainty.
It is in this period where conduct of the

vessels is primordial. It is in this zone that
vessels must strictly observe nautical
rules, unless a departure therefrom
becomes necessary to avoid imminent
danger.
3. Third zone time when collision is certain
and time of impact.
An error in this zone would no longer be

legally consequential.
Error in Extremis
Sudden movement made by a faultless vessel
during the third zone of collision with another
vessel which is at fault during the 2
nd
zone. Even
i f such sudden movement i s wrong, no
responsibility will fall on said faultless vessel
(Urrutia and Co. v. Baco River Plantation Co., No.
7675 , 25 March 1913).
Cases Covered By Collision and Allision
1. One vessel at fault
Vessel at fault is liable for damage caused to
innocent vessel as well as damages suffered
by the owners of cargo of both vessels (Art.
826).
2. Both vessels at fault
Each vessel must bear its own loss, but the
shippers of both vessels may go against the
shipowners who will be solidarily liable (Art.
827).
3. Vessel at fault not known
Each vessel must bear its own loss, but the
shippers of both vessels may go against the
shipowners who will be solidarily liable (Art.
828).
Doctrine of Inscrutable Fault In case of
collision where it cannot be determined which
between the two vessels was at fault, both
vessels bear their respective damage, but
both should be solidarily liable for damage to
the cargo of both vessels.
4. Third vessel at fault
The third vessel will be liable for losses and
damages (Art. 831).
5. Fortuitous event/force majeure
No liability. Each bears its own loss (Art. 830)
subject to NCC requirement on fortuitous
event to exercise due diligence before, during
and thereafter and provided that there is no
delay.
The doctrine of res ipsa loquitur applies in

case a moving vessel strikes a stationary
object, such as a bridge post, dock, or
navigational aid (Far Eastern Shipping v. CA, GR
No. 130068 , 1 October 1998; Luzon Stevedoring v.
CA, No. L-58897, 3 December 1987).
Even if the cause of action against the

common carrier is based on quasi-delict, the
defense of due diligence in the selection and
supervision of employees is unavailing in
case of a maritime tort resulting in collision. It
Transportation Laws
is not a civil tort governed by the Civil Code
but a maritime one governed by Arts. 826-839
of the Code of Commerce (Manila Steamship v.
Insa Abdulhaman, GR No. 9534, Sept. 29, 1956).
Doctrine of Last Clear Chance and Rule on

Contributory Negligence cannot be applied in
collision cases because of Art. 827 of the
Code of Commerce (Notes and Cases on the Law on
2004ed).
MARITIME PROTEST
Condition precedent or prerequisite to recovery of
damages arising from collisions and other
maritime accidents.
It is a written statement made under oath by the
captain of a vessel after the occurrence of an
accident or disaster in which the vessel or cargo is
l ost or damaged, wi t h r espect t o t he
circumstances attending such occurrence, for the
purpose of recovering losses and damages.
Excuses for not filing protest:
1. Where the interested person is not on board
the vessel; and
2. On collision time, need not be protested. (Art.
836)
Cases applicable:
1. Collision (Art. 835);
2. Arrival under stress (Art. 612 [8]);
3. Shipwrecks (Arts. 612[15], 843);
4. Where the vessel has gone through a
hurricane or when the captain believes that
the cargo has suffered damages or averages
(Art. 624).
Who makes: Captain
When made: within 24 hours from the time the
collision took place.
Before whom made: competent authority at the
point of collision or at the first port of arrival, if in
the Philippines and to the Philippine consul, if the
collision took place abroad (Art. 835).
SHIPWRECK
It is the loss of the vessel at sea as a
consequence of its grounding, or running against
an object in sea or on the coast. It occurs when
the vessel sustains injuries due to a marine peril
rendering her incapable of navigation.
If the wreck was due to malice, negligence or lack
of skill of the captain, the owner of the vessel may
demand indemnity from said captain (Art. 841).
The rules on collision or allision, as may be
pertinent, can equally apply to shipwrecks.
Salvage Law (Act No. 2616)
Two concepts:
1. Service one person renders to the owner of a
ship or goods, by his own labor, preserving
the goods or the ship which the owner or
those entrusted with the care of them have
either abandoned in distress at sea, or are
unable to protect or secure.
2. Compensation allowed to persons by whose
voluntary assistance a ship at sea or her
cargo or both have been saved in whole or in
part from impending sea peril, or such
property recovered from actual peril or loss,
as in cases of shipwreck, derelict or
recapture.
Requisites to a valid salvage claim: (SEVO)
1. Valid object of salvage;
2. Object must have been exposed to marine
peril (not perils of the ship);
3. Services voluntarily rendered and not
required as an existing duty or from special
contract; and
4. Services are successful, total or partial.
A salvor, in view of the maritime law, has an

interest in the property. This is called a lien,
but it never goes, in the absence of a contract
expressly made, upon the idea of debt. He is,
to all intents and purposes, a joint owner and
if the property is lost he must bear his share
like the other joint owners (Erlanger v. Swedish East
Asiatic, No. 10051, 9 March 1916).
Subjects of Salvage:
1. Ship itself;
2. Jetsam goods which are cast into the sea,
and there sink and remain under water;
3. Floatsam or Flotsam goods which float upon
the sea when cast overboard;
4. Ligan or Lagan goods cast into the sea tied
to a buoy, so that they may be found again by
the owners (p.173, Judge Diaz).
Persons who have no right to a reward for
salvage:
1. Crew of the vessel saved;
2. Person who commenced salvage in spite of
opposition of the captain or his representative;
3. In accordance with Sec. 3 of the Salvage Law,
a person who fails to deliver a salvaged
vessel or cargo to the Collector of Customs.
Derelict
A ship or her cargo which is abandoned and
deserted at sea by those who are in charge of it,
without any hope of recovering it, or without any
intention of returning to it.
The intention of those in charge must be

ascertained. If those in charge left with the
intention of returning, or of procuring
assistance, the property is not derelict, but if
they quitted the property with the intention of
finally leaving it, it is derelict and a change of
their intention and an attempt to return will not
change its nature (Erlanger & Galinger v. Swedish
East Asiatic Co. Ltd., No. 10051, 9 March 1916).
If it is clear that the intention to return is slight,

the salvage which was done thereafter is
considered valid (Notes and Cases on the Law on
2004ed).
SALVAGE TOWAGE
Law applicable
Governed by special
law (Act No. 2616)
Governed by Civil Code
on contract of lease
Requirement of Success
Requires success,
otherwise no payment
Success is not required
Consent
Must be done with the
consent of the captain/
crewmen
Only the consent of the
tugboat owner is
needed
Accident
Vessel must be
involved in an accident
Vessel need not be
involved in an accident
Ownership of fees
Fees distributed among
crewmen
Fees belong to the
tugboat owner
RULES ON SALVAGE REWARD:
1. The reward is fixed by the RTC judge in the
absence of agreement or where the latter is
excessive (Sec. 9).
2. The reward should constitute a sufficient
compensation for the outlay and effort of the
salvors and should be liberal enough to offer
an inducement to others to render services in
similar emergencies in the future.
3. If sold (no claim being made within 3 months
from publ i cati on), the proceeds, after
deducting expenses and the salvage claim,
shall go to the owner; if the latter does not
claim it within 3 years, 50% of the said
proceeds shall go to the salvors, who shall
divide it equitably, and the other half to the
government (Secs. 11-12).
4. If a vessel is the salvor, the reward shall be
distributed as follows:
a. 50% to the shipowner;
b. 25% to the captain; and
c. 25% to the officers and crew in proportion
to their salaries (Sec. 13).
Saving passengers from a sinking ship,
without rendering any service in rescuing the
vessel, is not a salvage service, being a duty
of humanity and not for reward.
! END OF TRANSPORTATION LAWS "
Transportation Laws
COMMERCIAL LAW
(Batas Pambansa Blg. 68)
CORPORATION CODE
CORPORATION CODE
General Provisions
Section 1
Title of the Code
The Corporation Code of the Philippines.
Section 2
Corporation Defined
CORPORATION
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.
ATTRIBUTES OF A CORPORATION
1. It is an artificial being with separate and
distinct personality.
2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attributes and properties
expressly authorized by law or incident to its
existence.
THEORIES ON FORMATION OF A
CORPORATION
1. CONCESSION THEORY
A corporation is an artificial creature without
any existence until it has received the
imprimatur of the state acting according to
law, through the SEC (Tayag v. Benguet Consolidated,
Inc., GR No. L-23145, Nov. 29, 1968).
Tayag rejects the Genossenschaft Theory
which treats a corporation as the reality of
the group as a social and legal entity,
i ndependent of state recogni ti on and
concession.
2. THEORY OF CORPORATE ENTERPRISE
OR ECONOMIC UNIT
The corporation is not merely an artificial
being, but more of an aggregation of persons
doing business, or an underlying business
unit (Philippine Corporate Law, Cesar Villanueva,
2001ed).
I.
ARTIFICIAL BEING WITH SEPARATE
PERSONALITY
DOCTRINE OF SEPARATE PERSONALITY A
corporation is a legal or juridical person with a
personality separate and apart from its individual
EXECUTIVE COMMITTEE
COMMERCIAL LAW
stockholders or members and from any other legal
entity to which it may be connected (The Corporation
Code of the Philippines, Hector S. De Leon & Hector M. De
Leon, Jr., 2006ed).
Consequences:
1. Liability for acts or contracts
Obligations incurred by a corporation, acting
through its authorized agents are its sole
liabilities. Similarly, a corporation may not
generally, be made to answer for acts or
liabilities of its stockholders or members or
those of the legal entities to which it may be
connected and vice versa (Cease v. CA, GR NO.
33172, October 18, 1979).
2. Right to bring actions
It may bring civil and criminal actions in its own
name in the same manner as natural persons
(Art. 46, New Civil Code).
3. Right to acquire and possess property
Property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members (Art.
44(3), NCC).
The interest of shareholders in corporate
property is merely inchoate and therefore
does not entitle them to intervene in
litigation involving corporate property (Saw
v. CA, GR No. 90580, April 8, 1991).
4. Acquisition by court of jurisdiction Service
of summons may be made on the president,
general manager, corporate secretary,
treasurer or in-house counsel (Sec. 11, Rule 14,
Rules of Court).
5. Changes i n i ndi vi dual membershi p
Cor por at i on r emai ns unchanged and
unaffected in its identity by changes in its
individual membership (The Corporation Code of the
Philippines Annotated, De Leon & De Leon, Jr., 2006ed).
6. Entitlement to constitutional guaranties
Cor por at i ons ar e ent i t l ed t o cer t ai n
constitutional rights.
a. Due process (Albert v. University Publishing, Inc.,
GR No. 19118, June 16, 1965)
b. Equal Protection of the law (Smith, Bell &
Co. v. Natividad, 40 Phil 136, 1919)
c. Prot ect i on agai nst unreasonabl e
searches and seizures (Stonehill v. Diokno,
GR No. 23372, June 14, 1967)
However, it is NOT entitled to certain
constitutional rights such as political rights or
purely personal rights, not only because it is an
artificial being but also because it is a mere
creature of law (Reviewer in Commercial Law, Jose R.
Sundiang & Timoteo Aquino, 2006ed).
It is not entitled to invoke the right against self-
incrimination (Bataan Shipyard v. PCGG, GR No.
75885, May 27, 1987). The State has the reserved
right to investigate its contracts and find out
whether it has exceeded its powers. It would
be a strange anomaly to hold that a state,
having chartered a corporation to make use of
certain franchises, could not in the exercise of
sovereignty inquire how these franchises,
could not, in the exercise of sovereignty inquire
how these franchises had been employed, and
whether they had been abused, and demand
the production of the corporate books and
papers for that purpose (Ibid).
7. Moral Damages
A corporation is not entitled to moral damages
because it has no feelings, no emotions, no
senses (ABS-CBN v. Court of Appeals, GR No.
128690, Jan. 21, 1999). The only exception to this
rule is when corporation has a good reputation
that is debased, resulting in its humiliation in
the business realm (Coastal Pacific Trading, Inc. v.
Southern Rolling Mills Co., Inc., 28 July 2006).
In Filipinas Broadcasting vs. Ago Med., it was
held that a juridical person such as a
corporation can validly complain for libel or any
other form of defamation AND claim for moral
damages. The SC had ratiocinated that Art.
2219 (7) does not qualify whether the plaintiff
is a natural or a juridical person (Filipinas
Broadcasting v. Ago Medical Center-Bicol, et. al., GR No.
141994, Jan. 17, 2005).
8. Liability for torts
A corporation is liable whenever a tortuous act
is committed by an officer or agent under the
express di rect i on or aut hori t y of t he
stockholders or members acting as a body, or,
generally, from the directors as the governing
body (PNB v. CA, GR NO. 27155, May 18, 1978).
9. Liability for Crimes
Since a corporation is a mere legal fiction, it
cannot be held liable for a crime committed by
its officers since it does not have the essential
element of malice, EXCEPT if by express
provision of law (i.e. Anti-Dummy Law and
Anti-Money Laundering Act), the corporation is
held criminally liable; In such case the
responsible officers would be criminally liable
(People v. Tan Boon Kong, GR NO. 32652, March 15,
1930).
DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY
The doctrine that a corporation is a legal entity
distinct from the persons composing it is a theory
introduced for purposes of convenience and to
serve the ends of justice. But when the veil of
corporate fiction is used as a shield to defeat
public convenience, justify wrong, protect fraud, or
Corporation Law
defend a crime, this fiction shall be disregarded
and the individuals composing it will be treated
identically (Cruz v. Dalisay, A.M. R-181-P, July 31, 1987).
The doctrine requires the court to see through the
protective shroud which exempts its stockholders
from liabilities that they ordinarily would be subject
to, or distinguishes a corporation from a seemingly
separate one, were it not for the existing corporate
fiction (Lim v. CA, GR No. 124715, January 24, 2000).
Nature of Piercing Doctrine (Philippine Corporate
Law, Cesar Villanueva, 2001ed):
1. Has res judicata effect
When the piercing doctrine is applied against
a corporation in a particular case, such
corporation still possessed such separate
personality in any other case, or with respect
to other issues (Tantoco v. Kaisahan ng mga
Manggagawa sa La Campana and CIR, 106 Phil 199
[1959]).
2. To prevent fraud or wrong and not available
for other purposes
The doctrine could not be employed by a
corporation to complete its claims against
another corporation and cannot therefore be
employed by the claimant who does not
appear to be the victim of any wrong or fraud
(Traders Royal Bank v. CA, GR No. 93397, March 3,
1997).
3. Essentially a judicial prerogative only
To pierce the veil of corporate fiction being a
power belonging to the courts, a sheriff who
has ministerial duty to enforce a final and
executory decision cannot pierce the veil of
corporate fiction by enforcing the decision
against the stockholders who are not parties
to the action (Cruz v. Dalisay, Ibid).
4. Must be shown to be necessary and with
factual basis
To disregard the separate juridical personality
of a corporation, the wrongdoing must be
clearly and convincingly established, it cannot
be presumed (Luxuria Homes, Inc. v. CA, GR No.
125986, January 28, 1999).
When directors and officers are unable to
compensate a party for a personal obligation,
it is far-fetched to allege that a corporation is
perpetuating fraud or promoting injustice, and
thereby could be held liable for the personal
obligations of its directors and officers by
piercing the corporate veil (Francisco Motors, Inc. v.
CA, GR No. 100812, June 25, 1999).
Mere ownership by a single stockholder or by
another corporation of all or substantially all of
the capital stock does not justify the
application of the doctrine. There must be
other circumstances that must be present
(Francisco v. Mejia, GR No. 141617, August 14, 2001).
Classification:
A. FRAUD CASES
The veil of separate corporate personality
may be lifted when such personality is used to
defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a
shield to confuse the legitimate issues; or
when the corporation is merely an adjunct, a
business conduit or an alter ego of another
corporation. In such cases, the corporation
will be considered as a mere association of
persons. The liability will directly attach to the
stockholders or to the other corporation (China
Banking Corporation v. Dyne-Sem Electronics, GR No.
149237, June 11, 2006).
Elements:
a. There must have been fraud or evil
motive in the affected transaction and the
mere proof of control of the corporation by
itself would not authorize piercing.
b. The main action should seek for the
enf orcement of pecuni ary cl ai ms
pertaining to the corporation against
corporate officers or stockholders, or vice-
versa; and
c. The corporate entity has been used in the
perpetration of the fraud or in justification
of wrong, or to escape personal liability.
There is always an element of malice or evil
motive in fraud cases.
B. ALTER EGO CASES (OR CONDUIT CASES)
Fraud is not an element in these cases but
that the stockholders or those who compose
the corporation did not treat the corporation
as a separate entity but only as part of the
property or business of an individual or group
of individuals or another corporation.
Probative factors:
i. Stock ownership by one or common
ownership of both corporations;
ii. Identity of directors and officers;
iii. The manner of keeping corporate books
and records; and
iv. Methods of conducting the business
(Concept Builders, Inc. v. NLRC, GR No. 108734,
May 29, 1996).
Four Policy Bases in Piercing:
a. Even when the controlling stockholder or
managing officer intends consciously to do
no evil, the use of the corporation as an
alter ego is in direct violation of a central
corporate law principle of treating the
corporation as a separate juridical entity
from its members and stockholders;
b. If the stockholders do not respect the
separate entity, others cannot also be
expected to be bound by the separate
juridical entity;
c. Applies even when there are no monetary
claims sought to be enforced against the
stockholders or officers of the corporation;
d. When the underlying business enterprise
does not really change and only the
medium by which that business enterprise
is changed.
Instrumentality or Alter Ego Rule
When one corporation is so organized and
controlled and its affairs are conducted so that
it is in fact a mere instrumentality or adjunct of
the other, the fiction of the corporate entity to
the instrumentality may be disregarded
Test:
1. Control, not mere majority or complete
stock control, but complete dominion, not
only of finances but of policy and
business in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no
separate mind, will, or existence of its
own;
2. Such control must have been used by the
defendant to commit fraud or wrong in
contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of (Concept Builders
Inc. v. NLRC, GR No. 108734, May 29, 1996).
C. EQUITY CASES
When piercing the corporate fiction is
necessary to achieve justice or equity.
The dumping ground where no fraud or alter
ego circumstances can be culled to warrant
piercing.
EFFECTS
In any case where the separate corporate identity
is disregarded, the corporation will be treated
merely as an association of persons and the
stockholders or members will be considered as
the corporation, that is, liability will attach
personally or directly to the officers and
stockholders (Umali v. Court of Appeals, No. 89306,
Where there are two corporations, they will be
merged into one, the one being merely regarded
as the instrumentality, agency, conduit or adjunct
of the other (Koppel [Phils.] v. Yatco, GR No. 47673,
October 10, 1946).
BUT when the veil of corporate fiction is pierced,
the corporate character is not necessarily
abrogated. The corporati on conti nues for
legitimate objectives (Reynoso IV v. Court of Appeals,
GR No. 116124-25, November 22, 2000).
II.
CREATED BY OPERATION OF LAW
DOCTRINE OF CORPORATE ENTITY
A corporation comes into existence upon the
issuance of the certificate of incorporation (Sec. 19).
Then and only then will it acquire a juridical
personality to sue and be sued, enter into
contracts, hold or convey property or perform any
legal act, in its own name (Corporation Code of the
Philippines, Ruben C. Ladia, 2001ed).
Corporations cannot come into existence by mere
agreement of the parties as in the case of
business partnerships. They require special
authority or grant from the State. This power is
exercised by the State through the legislature,
either by a special incorporation law or charter
which directly creates the corporation or by means
of a general corporation law under which
individuals desiring to be and act as a corporation
may incorporate (The Corporation Code of the Philippines,
De Leon & De Leon, Jr., 2006ed).
Sec. 16, Article XII of the 1987 Constitution
expressly authorizes the legislature to create
government-owned or controlled corporations
through special charters only if these entities are
required to meet the twin conditions of common
good and economic viability (MIAA v. CA, 20 July
2006). The intent of the Constitution in requiring the
test of economic viability is to prevent the creation
of government-owned or controlled corporation
that cannot survive on their own in the market
place and thus merely drain the public coffers
(Ibid).
FRANCHISES OF CORPORATION
1. PRIMARY OR CORPORATE FRANCHISE/
GENERAL FRANCHISE
The right or privilege granted by the State to
individuals to exist and act as a corporation
after its incorporation.
2. SECONDARY OR SPECIAL FRANCHISE
The special right or privilege conferred upon
an existing corporation to the business for
which it was created. (e.g. use of the streets
of a municipality to lay pipes or tracks, or
operation of a public utility or a messenger
and express delivery service)
Corporation Law
PRIMARY SECONDARY
Nature of franchise
Refers to the
franchise of being or
existing as a
corporation
Refers to the exercise of
right or privilege. e.g.
public utility or
telecommunication
franchise
To whom vested
Vested in the
individuals who
compose the
corporation
Vested in the corporation
after its incorporation and
not upon the individuals
who compose the
corporation.
Alienability
Cannot be sold or
transferred, in the
absence of legislative
authority to do so.
This is because it is
inseparable from the
corporation itself.
May be sold or transferred
under a general power
granted to a corporation to
dispose of its properties;
may also be subject to
sale on execution or levy.
TESTS TO DETERMINE THE NATIONALITY OF
CORPORATIONS:
1. Incorporation Test determined by the state
of incorporation, regardless of the nationality
of its stockholders.
2. Domicile Test determined by the state
where it is domiciled.
Note: The domicile of a corporation is the
place fixed by the law creating or recognizing
it; in the absence thereof, it shall be
understood to be the place where its legal
representation is established or where it
exercises its principal functions (Art. 51, NCC).
3. Control Test determined by the nationality
of the controlling stockholders or members.
This test is applied in times of war. Also
known as the Wartime Test.
PHI LI PPI NE NATI ONAL UNDER THE
FOREIGN INVESTMENT ACT OF 1991 (R.A.
NO. 7042):
a. a corporation organized under Philippine laws
of which 60% of the capital stock outstanding
and entitled to vote is owned and held by
Filipino citizens;
b. a corporat i on organi zed abroad and
regi st ered as doi ng busi ness i n t he
Philippines under the Corporation Code of
which 100% of the capital stocks entitled to
vote belong to Filipinos.
Note: However, it provides that where a
corporation and its non-Filipino stockholders own
stocks in a SEC-registered enterprise, at least
60% of the capital stock outstanding and entitled
to vote of both corporations and at least 60% of
the members of the board of directors of both
corporations must be Filipino citizens (double
60% rule).
III.
RIGHT OF SUCCESSION
It is the capacity to have continuity of existence
despite the changes on the persons who compose
it. Thus, the personality continues despite the
change of stockhol ders, members, board
members or officers (Reviewer in Commercial Law,
Sundiang & Aquino, 2006ed).
IV.
POWERS, ATTRIBUTES AND PROPERTIES
THEORY OF SPECIAL CAPACITIES/ LIMITED
CAPACITY DOCTRINE
No corporation under the Code, shall possess or
exercise any corporate power, except those
conferred by law, its Articles of Incorporation,
those implied from express powers and those as
are necessary or incidental to the exercise of the
powers so conferred (Sec. 45). The corporations
capacity is limited to such express, implied and
incidental powers (Reviewer in Commercial Law, Sundiang
& Aquino, 2005ed).
If the act of the corporation is not one of those
express, implied or incidental powers, the act is
ultra vires (Ibid).
Section 3
Classes of Corporation
CLASSIFICATION UNDER THE CODE
1. Stock corporation
A corporation which has capital stock divided
into shares and is authorized to distribute to
hol ders of such shares, di vi dends or
allotments of the surplus profits on the basis
of the shares held (Sec. 3); or
For a stock corporation to exist, the above
requisites must be complied with for even if
there is a statement of capital stock, the
corporation is still not a stock corporation if
dividends are not supposed to be declared,
i.e. there is no distribution of retained earning
(CIR v. Club Filipino, Inc. de Cebu GR No. L-12719,
May 31, 1962).
2. Non-stock corporation
A corporation which does not issue stocks nor
distribute dividends to their members (Sec. 87).
OTHER CLASSIFICATIONS
1. As to organizers:
a. Public by State only; or
b. Private by private persons alone or with
the State.
2. As to purpose:
a. Public organized for the government of
a portion of the State for the general good
and welfare.
b. Private formed for some private
purpose, benefit or end
i. Government-owned or controlled
corporat i on cr eat ed by t he
g o v e r n me n t o r o f wh i c h t h e
government is the majority stockholder.
(i.e., GSIS, NAPOCOR, PNR, PNB)
ii. Quasi public corporation private
corporations which have accepted from
the State the grant of franchise or
contract involving the performance of
public duties but which are organized
f or prof i t s (i . e. , el ect ri c, wat er,
transportation companies).
3. As to governing law:
a. Public Special Laws and Local
Government Code; or
b. Private Law on Private Corporations.
4. As to legal right to corporate existence:
a. De jure corporation corporation
created in strict or substantial conformity
wi t h t h e ma n d a t o r y s t a t u t o r y
requirements for incorporation and the
right of which to exist as a corporation
cannot be successfully attacked or
questioned by any party even in a direct
proceeding for that purpose by the state;
or
b. De facto corporation organized with a
c o l o r a b l e c o mp l i a n c e wi t h t h e
requirements of a valid law and its
existence cannot be inquired collaterally
but such inquiry may be made by the
Solicitor General in a quo warranto
proceeding.
Note: The only difference between a de
f act o cor por at i on and a de j ur e
corporation is that a de jure corporation
can successfully resist a suit brought by
the State challenging its existence; a de
facto corporation cannot sustain its right
to exist as against the State.
c. Corporation by estoppel group of
persons that assumes to act as a
corporation knowing it to be without
authority to do so, and enters into a
transaction with a third person on the
strength of such appearance. It cannot be
permitted to deny its existence in an
action under said transaction (Sec. 21). It is
neither de jure nor de facto.
d. Corporation by prescription one
which has exercised corporate powers for
an indefinite period without interference
on the part of the sovereign power, e.g.
Roman Catholic Church.
5. As to laws of incorporation:
a. Domestic corporation corporation
formed, organized or existing under
Philippine laws; or
b. Foreign corporation a corporation
formed, organized or existing under any
laws other than those of the Philippines
and whose laws allow Filipino citizens
and corporations to do business in its
own country or state.
6. As to whether they are open to the public
or not:
a. Open one which is open to any person
who may wish to become a stockholder
or member thereto; or
b. Close - those whose shares of stock are
held by limited number of persons like the
family or other closely-knit group (Sec. 96;
The Corporation Code of the Philippines, De Leon &.
De Leon, Jr., 2006ed).
7. As to relationship of management and
control:
a. Holding corporation it is one which
controls another as a subsidiary by the
power to elect management. It is one that
holds stocks in other companies for
purposes of control rather than for mere
investment.
b. Subsidiary corporation one which is
so related to another corporation that the
majority of its directors can be elected
either directly or indirectly by such other
corporation. It is always controlled; or
c. Affiliate one related to another by
owning or being owned by common
management or by a long-term lease of
its properties or other control device. It
may be the controlled or controlling
corporation, or under common control; or
d. Parent and subsidiary corporation
when a corporation has a controlling
f i nanci al i nt erest i n one or more
corporations, the one having control is the
parent corporation, and the others are the
subsidiary corporations (Philippine Corporate
Law, Cesar Villanueva, 2001ed).
Corporation Law
8. As to number of persons who compose
them:
a. Aggregate corporation a corporation
consisting of more than one person or
member; or
b. Corporation sole a corporation
consisting of only one person or member;
a special form of corporation usually
associated with the clergy (Sec.110).
9. As to whether they are for religious
purposes or not:
a. Ecclesiastical corporation one
organized for religious purposes; or
b. Lay corporation one organized for a
purpose other than for religion.
10. As to whether they are for charitable
purposes or not:
a. Eleemosynary corporation one
established for or devoted to charitable
purposes or those supported by charity;
or
b. Civil corporation one established for
business or profit.
CONCEPT OF GOING PUBLIC AND GOING
PRIVATE
A corporation is deemed to be going public when
it decides to list its shares in the stock exchange.
These include corporations that will make initial
public offering of its shares. A corporation is said
to be going private when it would restrict the
shareholders to a certain group. In a sense, these
also include close and closely held corporation
(Philippine Corporate Law Compendium, Timoteo Aquino,
2006ed).
ONE-MAN CORPORATION
A corporation wherein all or substantially all of the
stocks is held directly or indirectly by one person.
However, it should still follow the formal
requirements of a corporation (e.g. number of
incorporators, board of directors composed of
stockholders owning shares in a nominal capacity)
in order to validly enjoy the attributes of the
corporation, so as to avoid the application of the
doctrine of piercing the veil of corporate entity.
PARTNERSHIP CORPORATION
Creation
Created by mere
agreement of the parties
Created by law or by
operation of law
Number of incorporators
May be organized by at
least two persons
Requires at least five
incorporators (except a
corporation sole)
Commencement of juridical personality
Acquires juridical
personality from the
moment of execution of
the contract of partnership
Acquires juridical
personality from the
date of issuance of the
certificate of
incorporation by the
Securities and
Exchange Commission
Powers
Partnership
may exercise any power
authorized by the partners
(provided it is not contrary
to law, morals, good
customs, public order,
public policy)
Corporation can
exercise only the
powers expressly
granted by law or
implied from those
granted or incident to its
existence
Management
When management is not
agreed upon, every
partner is an agent of the
partnership
The power to do
business and manage
its affairs is vested in the
board of directors or
trustees
Effect of mismanagement
A partner as such can sue
a co-partner who
mismanages
The suit against a
member of the board of
directors or trustees who
mismanages must be in
the name of the
corporation
Right of succession
Partnership has no right
of succession
Corporation has right of
succession
Extent of liability to third persons
Partners are liable
personally and
subsidiarily (sometimes
solidarily) for partnership
debts to third persons
Stockholders are liable
only to the extent of the
shares subscribed by
them (limited liability
feature)
Transferability of interest
Partner cannot transfer
his interest in the
partnership so as to make
the transferee a partner
without the unanimous
consent of all the existing
partners because the
partnership is based on
the principle of delectus
personarum
Stockholder has
generally the right to
transfer his shares
without prior consent of
the other stockholders
because corporation is
not based on this
principle
PARTNERSHIP CORPORATION
Term of existence
Partnership may be
established for any period
of time stipulated by the
partners
Corporation may not be
formed for a term in
excess of 50 years
extendible to not more
than 50 years in any one
instance
Firm name
Limited partnership is
required by law to add the
word Ltd. to its name
Corporation may adopt
any name provided it is
not the same as or
similar to any registered
firm name
Dissolution
May be dissolved at any
time by any or all of the
partners
Can only be dissolved
with the consent of the
State
Governing Law
Governed by the NCC Governed by the
Corporation Code
Advantages / Disadvantages of Incorporation
ADVANTAGES DISADVANTAGES
1.has a legal capacity to
act and contract as a
distinct unit in its own
name;
2.continuity of existence;
3.its credit is
strengthened by its
continuity of existence;
4.centralized
management in the
board of directors;
5.its creation,
management,
organization and
dissolution are
standardized as they
are governed under
one general
incorporation law;
6.makes feasible gigantic
financial undertakings
due to numerous
investors;
7.limited liability;
8.shareholders are not
the general agents of
the business;
9.transferability of
shares.
1.complicated in
formation and
management;
2.high cost of
formation and
operations;
3.its credit is
weakened by the
limited liability
feature;
4.lack of personal
element;
5.greater degree of
governmental
supervision;
6.management and
control are
separated from
ownership;
7.stockholders voting
rights are
theoretical due to
proxies and
widespread
ownership;
8.stockholders have
little voice in the
conduct of the
business.
(The Corporation Code of the Philippines, De Leon &. De Leon,
Jr., 2006ed)
Section 4
Corporations created by
special laws or charters
Section 5
Corporators and
Incorporators,
Stockholders and
Members
COMPONENTS OF A CORPORATION
1. Corporators those who compose a
corporation, whether as stockholders or
members.
2. Incorporators those mentioned in the
Articles of Incorporation as originally forming
and composing the corporation, having signed
the Articles and acknowledged the same
before a notary public. They have no powers
beyond those vested in them by the statute.
There is only one set of incorporators hence,
they will remain to be such incorporators up to
the termination of the life of the corporation.
Qualifications:
a. natural person;
b. not less than 5 but not more than 15;
c. of legal age;
d. maj ori t y must be resi dent s of t he
Philippines; and
e. in stock corporations, each must own or
subscribe to at least one share (Sec. 10);
while in non-stock corporations, members
are not owners of shares of stocks, and
their membership depends on terms
provided in the articles of incorporation or
by-laws (Sec. 91).
GENERAL RULE
Only natural persons can be incorporators.
EXCEPTION
When otherwise allowed by law, e.g., Rural
Banks Act of 1992, where incorporated
cooperatives are allowed to be incorporators
of rural banks.
Note: However, i t i s undeni abl e that
corporations can be corporators.
3. Stockholders owners of shares of stock in
a stock corporation.
4. Members corporators of a non-stock
corporation.
Corporation Law
INCORPORATORS CORPORATORS
Nature of membership
signatory to the Articles
of Incorporation
stockholder (stock
corporation) or member
(non-stock corporation)
Contractual capacity
must have contractual
capacity
may be such through a
guardian
Permanence
fait accompli;
accomplished fact (the
Articles of Incorporation
cannot be amended to
replace them)
they may cease to be
such if they
subsequently lose their
shareholdings
Number
number is limited to
5-15
No restriction as to
number
OTHER COMPONENTS
1. Promoter - A person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor (Sec.
3, Securities Regulation Code [R.A. 8799]).
He is an agent of the incorporators but not of
the corporation.
Contracts by the promoter for and in behalf of
a proposed corporation generally bind only
him, subject to and to the extent of his
representations, and not the corporation,
unless and until after these contracts are
ratified, expressly or impliedly, by its Board of
Directors/Trustees (Cagayan Fishing Development Co.,
Inc. v. Sandiko, 65 Phil. 223).
2. Subscriber A person who has agreed to
take and pay for original and unissued shares
of a corporation formed or to be formed.
3. Underwriter A person who guarantees on a
firm commitment and/ or declared best effort
basis the distribution and sale of securities of
any kind by another company (Sec. 3, R.A.
8799).
Section 6
Classification Of Shares
1. Common shares
The basic class of stock ordinarily and usually
issued without extraordinary rights and
privileges, and the owners thereof are entitled
to a pro rata share in the profits of the
corporation and in its assets upon dissolution
and, likewise, in the management of its affairs
without preference or advantage whatsoever.
Represent the residual ownership interest
in the corporation.
Have complete voting rights. They cannot
be deprived of said rights except as
provided by law.
2. Preferred shares
Shares with a stated par value which entitle
the holder thereof to certain preferences over
the holders of common stock. The preference
may be (a) as to asset; or (b) as to dividends;
or (c) as may be determined by the board of
directors when so authorized to do so (The
Corporation Code of the Philippines, De Leon &. De Leon,
Jr., 2006ed).
Al l pr ef er r ed s t oc k c ont r ac t s ar e,
fundamentally attempts to endow certain
owners with rights analogous to creditor
rights. The reason why there is an effort to
extend such right is to make preferred shares
attractive to investors for they can remain as
such and at the same time enjoy certain
advantages that are available to creditors
(Philippine Corporate Law Compendium, Aquino, 2006ed).
Limitations:
a. If deprived of voting rights, it shall still be
entitled to vote on matters enumerated in
Section 6, par. 6.
b. Preference must not be violative of the
Code.
c. May be issued only with a stated par
value.
d. The board of directors may fix the terms
and conditions only when so authorized
by the articles of incorporation and such
terms and conditions shall be effective
upon filing a certificate thereof with the
SEC.
Kinds:
a. Cumulative one which entitles the
owner thereof to payment not only of
current dividends but also back dividends
not previously paid whether or not during
the past years dividends were declared or
paid.
b. Non-cumulative one which grants the
holders of such shares only to the
payment of current dividends but not back
dividends when and if dividends are paid
to the extent agreed upon before any other
stockholders are paid the same.
c. Participating - one which entitles the
sharehol der to parti ci pate wi th the
common shares in excess distribution at
some predetermined or at a fixed ratio as
may be determined.
d. Non-participating one which entitles the
sharehol der thereof to recei ve the
stipulated preferred dividends and no
more.
e. Cumulative participating share which
is a combination of the cumulative share
and participating share.
3. Voting shares
Shares with a right to vote.
Under the code, whenever a vote i s
necessary to approve a particular corporate
act, such vote refers only to stocks with voting
rights except in certain cases when even non-
voting shares may also vote (Sec. 6, par. 6 and last
par.).
If stock is originally issued as voting stock, it
may not thereafter be deprived of the right to
vote without the consent of the holder.
4. Non-voting shares
Shares without right to vote.
The law only authorizes the denial of voting
rights in the case of redeemable shares and
preferred shares, provided that there shall
always be a class or series of shares which
have complete voting rights.
These redeemable and preferred shares,
when such voting rights are denied, shall
nevertheless be entitled to vote on the
following fundamental matters:
(ISA-MAID-I)
a. amendment of Articles of Incorporation;
b. adoption and amendment of by-laws;
c. s a l e o r d i s p o s i t i o n o f a l l o r
substantially all of corporate property;
d. incurring, creating or increasing bonded
indebtedness;
e. increase or decrease of capital stock
f. merger or consolidation of capital stock
g. investments of corporate funds in another
corporation or another business purpose;
and
h. corporate dissolution
5. Share in escrow
Share subject to an agreement by virtue of
which the share is deposited by the grantor or
his agent with a third person to be kept by the
escrow agent until the performance of a
certain condition or the happening of a certain
event contained in the agreement (Cannon v.
Handley, 12 Phil. 315).
The escrow deposit makes the depository a
trustee under an express trust (Articles 1440 and
1441 of the New Civil Code).
6. Over-issued stock
Stock issued in excess of the authorized
capital stock. It is also known as spurious
stock. Its issuance is considered null and
void.
7. Watered stock
A stock issued not in exchange for its
equivalent value either in cash, property,
share, stock dividends, or services (Sec. 65).
Water in the stock represents the difference
between the fair market value at the time of
the issuance of the stock and the par or
issued value of said stock. Both par and no
par stocks can thus be watered stocks.
It includes stocks:
a. issued without consideration (bonus
share).
b. issued as fully paid when the corporation
has received a lesser sum of money than
its par or issued value (discount share).
c. issued for a consideration other than
actual cash such as property or services,
the fair valuation of which is less than its
par or issued value.
d. issued as stock dividend when there are
no sufficient retained earnings to justify it.
8. Par value shares
Shares with a value fixed in the articles of
incorporation and the certificates of stock.
Primary purpose of par value is to fix the
minimum subscription or issue price of the
shares, thus assuring creditors that the
corporation would receive a minimum amount
for its stock.
Easily sold as the
public is more
attracted to buy
this kind of share
Subscribers are liable to
the corporate creditors
for their unpaid
subscription
Greater protection
to creditors
The stated value of the
share is not an accurate
criterion of its true value
Unlikelihood of sale
of subsequently
issued shares at a
lower price
Unlikelihood of
distribution of
dividends that are
only ostensible
profits
9. No par value shares
Shares having no par value but have issued
value stated in the certificate or articles of
incorporation.
Corporation Law
No par value stockholders have the same
rights as holders of par value stock.
Issued as fully paid
and non-assessable
Legalize issuance of
large stock for property
Price is flexible Conceal money or
property represented
by the shares
Enjoy wider
distribution because
of it is low-priced
Promote the issuance
of watered stock
Tell no untruth
concerning the value
of the stockholders
contribution
Lesser protection to
creditors
More easily issued,
thereby simplifying
accounting
procedures
Limitations:
a. No par value shares cannot have an
issued price of less than P5.00;
b. The ent i r e consi der at i on f or i t s
issuance constitutes capital so that no
part of it should be distributed as
dividends;
c. They cannot be issued as preferred
stocks;
d. They cannot be issued by banks, trust
compani es, i nsurance compani es,
public utilities and building and loan
association (BPI-TB);
e. The articles of incorporation must s t a t e
the fact that it issued no par value shares
as well as the number of said shares;
f. Once issued, they are deemed fully
paid and non-assessable (Sec. 6).
10. Street certificate
A stock certificate endorsed by the registered
holder in blank and the transferee can
command its transfer to his name from the
issuing corporation.
11. Convertible share
A share that is changeable by the stockholder
from one class to another at a certain price
and within a certain period.
12. Fractional share
A share with a value of less than one full
share.
13. Promotion share
Shares issued to promoters or those in some
way i nt er est ed i n t he company, f or
incorporating the company, or for services
rendered in launching or promoting the
welfare of the company.
14. Founders' shares (Sec. 7)
Shares classified as such in the articles if
incorporation and issued to organizers and
promoters of a corporation in consideration of
some supposed right or property such as
special preference in voting rights and
dividend payments. BUT if an exclusive right
to vote and be voted for as director is granted,
this privilege is subject to approval by the
SEC, and cannot exceed 5 years from the
date of approval.
15. Redeemable shares (Sec. 8)
Shares of stocks issued by the corporation
which said corporation can purchase or take
up from their holders as expressly provided
for in the articles of incorporation and
certificate of stock representing said shares at
a fixed date or at the option of the issuing
corporation or the stockholder or both at a
certain redemption price.
Limitations:
a. May be issued onl y when expressl y
pr ov i ded f or i n t he ar t i c l es of
incorporation;
b. The terms and conditions affecting
said shares must be stated BOTH in
the articles of incorporation and in
the certificates of stock representing
such shares;
c. May be deprived of voting rights in the
articles of incorporation, unless otherwise
provided in the Code.
Redeemable shares may be redeemed,
regardless of the existence of unrestricted
retained earnings (Sec. 8), provided that the
corporation has, after such redemption,
sufficient assets in its books to cover debts
and liabilities inclusive of capital stock.
Redemption may not be made where the
corporation is insolvent or if such redemption
would cause insolvency or inability of the
corporation to meet its debts as they mature.
Such limitation is based on the principle that
corporate assets are a trust fund for creditors
(TRUST FUND DOCTRINE).
When redeemable shares are reacquired, the
same shall be considered retired and no
longer issuable unless otherwise provided for
in the Articles of Incorporation.
For tax purposes, there are cases when
redemption of shares is considered a
s c h e me t o c i r c u mv e n t t h e t a x
consequences of cash dividends. Hence,
the amounts received by the shareholders
shall be treated as cash dividends
because proceeds of redemption in such a
case are additional wealth and not merely
a return of the capital (Philippine Corporate Law
Compendium, Aquino, 2006ed).
Corporations which issue redeemable
shares wi th mandatory redempti on
features are required by the SEC to
maintain a sinking fund (SEC Rules Governing
Redeemable and Treasury Shares, [CCP] No. 1-1982).
16. Treasury shares (Sec. 9)
Shares of stock which have been issued and
fully paid for, but subsequently reacquired by
the i ssui ng corporati on by purchase,
redemption, donation or through some other
lawful mean.
Treasury shares are not retired shares.
They do not revert to the unissued shares of
the corporation but are regarded as property
acquired by the corporation which may be
reissued or resold at a price to be fixed by the
Board of Directors (SEC Rules Governing Redeemable
and Treasury Shares, CCP No. 1-1982).
If purchased from stockholders: The
transaction in effect is a return to the
stockholders of the value of their investment
in the company and a reversion of the shares
to the corporation. The corporation must have
surplus profits with which to buy the shares so
that the transaction will not cause an
impairment of the capital.
I f acqui red by donat i on f rom t he
stockholders: The act would amount to a
surrender of their stock without getting back
their investments that are instead, voluntarily
given to the corporation.
Treasury shares need not be sold at par or
issued value but may be sold at the best price
obtainable, provided it is reasonable. When
treasury shares are sold below its par or
issued value, there can be no watering of
stock because such watering contemplates an
original issuance of shares.
Treasury shares have no voting rights as long
as they remain in treasury (uncalled and
subject to reissue) (Sec. 57).
Reason: A corporation cannot in any
proper sense be a stockholder in itself and
equal distribution of voting rights will be
effectively lost.
Neither are treasury shares entitled to
dividends or assets because dividends cannot
be declared by a corporation to itself.
Treasury shares may be declared as property
dividend to be issued out of the retained
earnings previously used to support their
acquisition provided that the amount of the
retained earnings has not been subsequently
impaired by losses.
DOCTRINE OF EQUALITY OF SHARES Where
the articles of incorporation do not provide for any
distinction of the shares of stock, all shares issued
by the corporation are presumed to be equal and
enjoy the same rights and privileges and are also
subject to the same liabilities (Sec. 6, par. 5).
WHEN CLASSIFICATION OF SHARES MAY BE
MADE (The Corporation Code of the Philippines, De Leon &.
De Leon, Jr., 2006ed):
1. By the incorporators The classes and
number of shares which a corporation shall
issue are first determined by the incorporators
as stated in the articles of incorporation filed
with the SEC.
2. By the Board of Directors and the
Stockholders After the corporation comes
into existence, they may be altered by the
board of directors and the stockholders by
amending the articles of incorporation
pursuant to Sec. 16.
A corporation may issue such classes or
series of shares as the prospects and needs
of its business may require. Furthermore, it
may classify its shares for the purpose of
insuring compliance with constitutional or
legal requirements (Sec. 6, par. 4).
Shares may also be issued in different
classes to create preferences or to deny or
grant certain rights e.g. voting or non-voting
shares.
CERTIFICATE OF STOCK
A written acknowledgment by the corporation of
the interest, right, and participation of a person in
the management, profits, and assets of a
corporation.
Note: Confers NO immediate legal right or title to
any of the property of a corporation. Merely
represents a distinct undivided share or interest in
the common property of the corporation.
DEFINITION OF TERMS
1. Capital Stock or Legal Stock or Stated
Capital The amount fixed in the corporate
charter to be subscribed and paid in cash,
kind or property at the organization of the
corporation or afterwards and upon which the
corporation is to conduct its operation.
2. Capital The value of the actual property or
estate of the corporation whether in money or
property. Its net worth (or stockholders
equity) is its assets less its liabilities.
3. Authorized Capital Stock amount of
capital stock as specified in the articles of
incorporation.
Corporation Law
4. Subscribed Capital Stock The total
amount of the capital stock subscribed
whether fully paid or not.
5. Outstanding Capital Stock - The portion of
the capital stock issued to subscribers,
whether fully paid or partially paid (as long as
there is a binding subscription contract)
except treasury stocks (Sec. 137).
6. Unissued Capital Stock The portion of the
capital stock that is not issued or subscribed.
It does not vote and draws no dividends.
7. Legal Capital The amount equal to the
aggregate par value and/ or issued value of
the outstanding capital stock.
Incorporation and Organization of Private Corporation
Section 10
Number and Qualifications
of Incorporators.
a. natural person;
b. not less than 5 but not more than 15;
c. of legal age;
d. majority must be residents of the Philippines;
and
e. each must own or subscribe to at least one
share of the capital stock of the corporation.
STEPS IN THE CREATION OF A
CORPORATION
1. PROMOTION A promoter is a person who,
acting alone or with others, takes initiative in
founding and organizing the business or
enterprise of the issuer and receives
consideration therefore (Sec. 3.10, SRC).
Steps: (DIA)
a. Discovery
b. Investigation
c. Assembly
2. INCORPORATION
Steps (DFPI):
a. Drafting and execution of Articles of
Incorporation by the incorporators and
other documents required for registration
of the corporation;
b. Filing with the SEC of the articles of
incorporation;
c. Payment of filing and publication fees;
and
d. Issuance by the SEC of the certificate of
incorporation.
3. F O R M A L O R G A N I Z AT I O N A N D
COMMENCEMENT OF THE TRANSACTION
OF BUSINESS
These are conditions subsequent, which may
be satisfied by substantial compliance in order
that a corporation may legally continue as
such.
Formal organization:
a. Adoption of By-Laws and filing of the
same with the SEC;
b. Election of board of directors/trustees,
and officers;
c. Establishment of principal office;
d. Providing for subscription and payment of
capital stock.
CORPORATIONS ASSOCIATIONS
Definition
Artificial being created
by operation of law with
right of succession, and
the powers, attributes
and properties
expressly authorized by
law and incident to its
existence
Used to indicate a
collection of persons
who have joined
together for a certain
object
Governing Law
Corporation Code Civil Code or some
other laws
Possession of Juridical Personality
A legal entity deriving
its existence from
franchise
A creature of contract
without a legal entity
separate from the
individuals composing it.
Capacity to act in its name
Can sue and be sued
and can acquire
properties under its
name
Cannot sue or be sued
and cannot acquire
properties under its
common name
Validity and enforcement of acts
Acts are valid under its
own name. Has
separate personality
from its stockholders.
Acts may be valid
although unenforceable
under the name they
have adopted.
CORPORATIONS ASSOCIATIONS
Powers, rights and privileges
Has powers, rights and
privileges incident to
incorporation.
An unregistered
association cannot
exercise the powers,
rights and privileges
incident to incorporation
and expressly granted
to registered
corporations.
Policy of judicial non-interference
Courts will not
generally interfere
unless there is flagrant
violation of the law
Courts will not interfere
with the internal affairs
of an unincorporated
association
Section 11
Corporate Term
LIMITATIONS
1. The corporate term shall not exceed 50 years.
2. The extension cannot be made earlier than 5
years prior to the expiration date.
Note: Mere extension of term made before the
expiration of original term constitutes a
continuation of the old and not the creation of a
new corporation.
Section 12
Minimum Capital Stock
required of Stock
Corporations.
CAPITAL STOCK REQUIREMENT
GENERAL RULE
No minimum authorized capital stock as long as
the paid-up capital is not less than P5,000.00.
EXCEPTIONS
1. As provided for by special law;
a. Private Development Banks
- P4M for class A
- P2M for class B
- P1M for class C
b. Investment Companies paid up at least
P50,000,000.00.
c. Savings and Loan Corporation to be fixed
by the Monetary Board, but not less than
P100,000.00.
d. Financing Companies
Paid up: - P10M for Metro Manila and other
1
st
class city
- P5M for other classes of cities
- P2.5 M for others
2. Insurance companies
a. Insurance Broker P250,000.00
b. General Agent P 250,000.00
c. 3. Reinsurance Broker P 0.5 M
3. Provided that at least 25% of the authorized
capital stock has been subscribed and at least
25% of the total subscription must be paid-up.
Section 13
Amount of Capital Stock
to be subscribed and paid
for purposes of
incorporation.
FI LI PI NO OWNERSHI P PERCENTAGE
REQUIREMENT (7th Regular Foreign Investment Negative
List/ E.O. No. 584, December 8, 2006)
No Foreign Equity (100% Filipino-owned)
1. Mass Media except recording (Art. XVI, Sec. 11
of the 1987 Constitution; Presidential Memorandum dated
04 May 1994);
2. Practice of all professions;
3. Retail trade enterprises with paid-up capital of
less than US$2,500,000(Sec. 5, RA 8762);
4. Cooperatives (Ch. III, Art. 26, RA 6938);
5. Private Security Agencies (Sec. 4, RA 5487);
6. Small-scale Mining 6.(Sec. 3, RA 7076);
7. Utilization of Marine Resources in archipelagic
waters, territorial sea, and exclusive economic
zone as well as small-scale utilization of
natural resources in rivers, lakes, bays, and
lagoons (Art. XII, Sec. 2, 1987 Constitution);
8. Ownership, operation and management of
cockpits (Sec. 5, PD 449);
9. Manufacture, repai r, stockpi l i ng and/or
distribution of nuclear weapons (Art. II, Sec. 8,
1987 Constitution);
10. Manufacture, repai r, stockpi l i ng and/or
distribution of biological, chemical and
radiological weapons and anti-personnel mines
(Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines);
11. Manufacture of fi recrackers and other
pyrotechnic devices (Sec. 5, RA 7183).
Corporation Law
Up to Twenty Percent (20%) Foreign Equity
1. Private radio communications network (RA
3846)
Up to Twenty-Five Percent (25%) Foreign
Equity
1. Private recruitment, whether for local or
overseas employment (Art. 27, PD 442);
2. Contracts for the construction and repair of
locally-funded public works (Sec. 1 of CA 541,
LOI 630) except:
a. i nf r ast r uct ur e/ devel opment pr oj ect s
covered in RA 7718; and
b. projects which are foreign funded or
assi st ed and r equi r ed t o under go
international competitive bidding (Sec. 2a, RA
7718);
3. Contracts for the construction of defense-
related structures (Sec. 1, CA 541).
Up to Thirty Percent (30%) Foreign Equity
1. Advertising (Art. XVI, Sec. 11, 1987 Constitution)
Up to Forty Percent (40%) Foreign Equity
1. Exploration, development and utilization of
natural resources (Art. XII, Sec. 2, 1987
Constitution);
2. Ownership of private lands (Art. XII, Sec. 7, 1987
Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4, RA 9182);
3. Operation and management of public utilities
(Art. XII, Sec. 11, 1987 Constitution; Sec. 16, CA 146);
4. Ownership/establishment and administration of
educational institutions (Art. XIV, Sec. 4, 1987
Constitution);
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
rice and corn and the by-products thereof (Sec.
5, PD 194;Sec. 15, RA 8762);
6. Contracts for the supply of materials, goods
and commodities to government-owned or
controlled corporation, company, agency or
municipal corporation (Sec. 1, RA 5183);
7. Project Proponent and Facility Operator of a
BOT project requiring a public utilities franchise
(Art. XII, Sec. 11, 1987 Constitution; Sec. 2a, RA 7718);
8. Operation of deep sea commercial fishing
vessels (Sec. 27, RA 8550);
9. Adjustment Companies (Sec. 323, PD 612 as
amended by PD 1814);
10. Ownership of condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units
or owned by a corporation (Sec. 5, RA 4726);
11. 11.Manufacture, repai r, storage and/or
distribution of products/ingredients requiring
PNP clearance (RA 7042 as amended by RA 8179);
and
12. Manufacture, repair, storage and/or distribution
of product s/ i ngredi ent s requi ri ng DND
clearance (RA 7042 as amended by RA 8179).
Up to Sixty Percent (60%) Foreign Equity
1. Fi nanci ng compani es regul ated by the
Securities and Exchange Commission (Sec. 6,
RA 5980 as amended by RA 8556);
2. Investment houses regulated by the SEC (Sec.
5, PD 129 as amended by RA 8366).
Section 14 / Section 15.
Contents/ Forms of
Articles of Incorporation
ARTICLES OF INCORPORATION (AOI)
The document prepared by t he persons
establishing a corporation and filed with the SEC
containing the matters required by the Code.
The Articles of Incorporation have been described
as one that defines the charter of the corporation,
and the contractual relationships between the
State and the corporation, the stockholder and the
State, and between the corporation and its
stockholders (Lanuza v. CA, GR No.131394, March 28,
2005).
Significance:
1. The issuance of a certificate of incorporation
signals the birth of the corporations juridical
personality; and
2. It is an essential requirement for the existence
of a corporation, even a de facto one.
Contents (Sec. 14):
1. Corporate Name (Sec. 18)
The corporation acquires juridical personality
under the name stated in the certificate of
incorporation. It is the name of the corporation
which identifies and distinguishes it from other
corporations, firms or entities.
The incorporators constitute a body politic and
corporate under the name stated in the
certificate. A corporation has the power of
succession under its corporate name.
2. Purpose Clause
Significance:
a) A person who intends to invest his money
in the business corporation will know
where and in what kind of business or
activity his money will be invested;
b) The directors and the officers of the
corporation will know within what scope of
business they are authorized to act; and
c) A third person who has dealings with the
corporation may know by perusal of the
articles whether the transaction or dealing
he has with the corporation is within the
authority of the corporation or not.
Limitations:
a. Purpose or purposes must be lawful;
b. Purpose or purposes must be stated with
sufficient clarity;
c. If there is more than one purpose, the
primary as well as the secondary purpose
must be specified; and
d. Purposes must be capable of being
lawfully combined.
A corporation the primary object of which
is without statutory authority can have no
lawful existence, even though some of its
declared purposes may be lawful.
3. Principal Office
The articles of incorporation must state the
place where the principal office of the
corporation is to be established or located,
which place must be within the Philippine (Sec.
14 [3]).
Purpose: To fix the residence of the
corporation in a definite place, instead of
allowing it to be ambulatory (Young Auto Supply
Co. v. CA, GR No. 104175, June 25, 1993).
It is now required by the SEC that all
corporations and partnerships applying for
registration should state in their Articles of
Incorporation the specific address of their
principal office, which shall include, if feasible,
the street number; street name; barangay; city
or municipality; and specific residence
address of each incorporator, stockholder,
director or trustee in line with the full
disclosure requirement of existing laws (SEC
Circ. No. 3, Series of 2006).
4. Term of Existence (Sec. 11)
The corporate life may be reduced or
extended by amendment of the articles of
i ncor por at i on by compl yi ng wi t h t he
procedural requirements laid down in Sec. 37.
The extension of corporate term is subject
to the following limitations:
a. The term shall not exceed 50 years in any
one instance;
b. The amendment is effected before the
expiration of the corporate term of
exi stence, for after di ssol uti on by
expiration of the corporation term there is
no more corporate life to extend (Alhambra
Cigar v. SEC, GR No. 23606, July 29, 1968).
c. The extension cannot be made earlier
than 5 years prior to the expiration date
unless there are justifiable reasons
therefore as may be determined by the
SEC.
Note: The expiration of the term for which the
corporation was created does not, however,
produce its immediate dissolution for all
purposes (Sec. 122).
DOCTRINE OF RELATION OR RELATING
BACK DOCTRINE
The filing and recording of a certificate of
extension after the term cannot relate back to
the date of the passage of the resolution of
the stockholders to extend the life of the
corporation. However, the Doctrine of
Relations applies if the failure to file the
application for extension within the term of the
corporation is due to the neglect of the officer
with whom the certificate is required to be
filed or to a wrongful refusal on his part to
receive it (Philippine Corporate Law Compendium,
Aquino, 2006ed)
5. Incorporators (See Section 5)
6. Directors and Trustees
The Board of Directors is the governing body
in a stock corporation while Board of Trustees
is the governing body in a non-stock
corporation. They exercise the powers of the
corporation (Sec. 23; Reviewer in Commercial Law, Jose
R. Sundiang & Timoteo Aquino, 2005ed).
Matters required to be stated in the AOI:
a. Statement of the names, nationalities and
residences of the incorporating directors
and must show that at least a majority of
the incorporators are residents of the
Philippines;
b. The number of directors or trustees,
which shall not be less than 5 but not
more than 15.
Exceptions:
1. educational corporations registered
as non-stock corporation whose
number of trustees though not less
than five and not more than fifteen
should be divisible by five; and
Corporation Law
2. in close corporations where all the
stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board (Corporation Code
of the Philippines, Ruben C. Ladia, 2001ed).
c. The incorporating directors or trustees
shall hold office until their successors are
duly elected and qualified.
d. Must own at least one (1) share of the
capital stock of the corporation of which
he is a director.
7. Capitalization
Matters required to be stated in the AOI:
(NAPS-ASSS)
a. the amount of its authorized capital stock
in lawful money of the Philippines;
b. the number of shares and kind of shares
into which it is divided;
c. in case the shares are par value shares,
the par value of each;
d. the names, nationalities and residences
of the original subscribers;
e. the amount subscribed and paid by each
on his subscription;
f. sworn statement of the treasurer elected
by the subscribers showing that at least
25% of the authorized capital stock of the
corporation has been subscribed;
g. sworn statement of the treasurer elected
by the subscribers showing that at least
25% of the total subscription has been
fully paid to him in actual cash and/or in
property the fair valuation of which is
equal to at least 25% of the said
subscription; and
h. sworn statement of the treasurer elected
by the subscribers showing that such
paid-up capital being not less than five
thousand pesos.
Section 16
Amendment of AOI
CORPORATE CHARTER
An instrument or authority from the sovereign
power bestowing the right or privilege to be and
act as a corporation.
A contract of a three-fold nature. a contract
between the State and the corporation, a contract
between the corporation and its stockholders, and
a contract between the stockholder inter se.
Procedure in Amending AOI:
i. Resolution by at least a majority of the board
of directors or trustees;
ii. Vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of
non-stock corporations.
iii. Submission and filing with the SEC of:
a. the original and amended articles together
containing all the provisions required by
law to be set out in the articles of
incorporation. Such articles, as amended,
shall be indicated by underscoring the
change or changes made;
b. a copy thereof, duly certified under oath
by the corporate secretary and a majority
of the directors or trustees stating the fact
that such amendments have been duly
approved by the required vote of the
stockholders or members; and
c. a favorable recommendation of the
appr opr i at e gover nment agency
concerned if required by law.
Limitations:
1. The amendment of any provision or matters
stated in the articles of incorporation is not
allowed when it will be contrary to the
provisions or requirement prescribed by the
Code or by special law or changes any
provision in the articles of incorporation
stating an accomplished fact;
2. It must be for legitimate purposes;
3. It must be approved by the required vote of
the board of directors or trustees and the
stockholders or members;
4. The original articles and amended articles
together must contain all provisions required
by law to be set out in the articles of
incorporation;
5. Such articles, as amended, must be indicated
by underscoring the changes made, and a
copy thereof duly certified under oath by the
corporate secretary and a majority of the
di rectors or trustees stati ng that the
amendments have been duly approved by the
required vote of the stockholders or members
must be submitted to the SEC;
6. The amendments shall take effect only upon
their approval by the SEC;
Note: However, express approval is not
i ndi spensabl e. Thi s i s because t he
amendment shall also take effect from the
date of filing with the said Commission if it is
not acted upon by the Commission within 6
months from the date of filing for a cause not
attributable to the corporation (Approval by
Inaction).
7. If the corporation is governed by special law,
the amendments must be accompanied by a
favorable recommendation of the appropriate
government agency;
8. No right or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
i ncur r ed by any such cor por at i on,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either
by the subsequent dissolution of said
corporation or by any subsequent amendment
or repeal of this Code or of any part thereof
(Section 145 of the Corporation Code).
Section 17
Grounds for Rejection of
the Articles of
Incorporation or
Amendment thereto
(NOTA)
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed therein;
2. That the purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurers Affidavit concerning the
amount of capital stock subscribed and/or paid
is false;
4. That the required percentage of ownership of
the capital stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the Constitution.
Note: These grounds are not exclusive.
Before rejecting the Articles of Incorporation or its
amendment s, t he SEC shoul d gi ve t he
incorporators reasonable time within which to
correct or modify the objectionable portions of the
articles or amendments.
Any decision of the Commission rejecting the
articles of incorporation or disapproving any
amendment thereto is appealable by petition for
review to the Court of Appeals in accordance with
the pertinent provisions of the Rules of Court.
All the grounds enumerated in Section 17 can be
determined on the basis of the Articles of
Incorporation itself and the other required
document s. General l y, i f t he Art i cl es of
Incorporation and its supporting documents are in
order, the SEC has no recourse but to issue the
Certificate of Incorporation (Philippine Corporate Law
Compendium, Timoteo Aquino, 2006ed).
Grounds for Suspension or Revocation of
Certificate of Registration (FR
2
-SBC) (Pres. Decree
No. 902-A)
1. Fr aud i n pr ocur i ng i t s cer t i f i cat e of
incorporation;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of, or damage to, the general public;
3. Refusal to comply with or defiance of a lawful
order of the SEC restraining the commission of
acts which would amount to a grave violation
of its franchise;
4. Continuous inoperation for a period of at least
5 years after commencing the transaction of its
business (Sec.22);
5. Failure to file the by-laws within the required
period;
6. Failure to file required reports.
Section 18
Corporate Name
A corporations right to use its corporate and trade
name is a property right, a right in rem which it
may assert or protect against the whole world in
the same manner as it may protect its tangible
property against trespass or conversion (Philips
Export B.V. v. CA, GR NO. 96161, February 21, 1992).
Statutory limitation:
The proposed name must not be:
a. identical; or
b. deceptively or confusingly similar to that of
any existing corporation or to any other name
already protected by law; or
c. patently deceptive, confusing or contrary to
law.
Remedies of corporation whose name has
been adopted by another:
1. Injunction
2. De-registration
A corporation can change the name originally
selected by it after complying with the formalities
prescribed by law, to wit: amendment of the
articles of incorporation and filing of the
amendment with the SEC (Sec. 16).
An authorized change in the name of the
corporation, whether effected by a special act or
under a general law, has no more effect upon its
identity as a corporation than a change of name of
natural person upon his identity. It does not affect
the property, rights, or liabilities of the corporation,
nor lessen or add to its obligations. It is in no
Corporation Law
sense a new corporation, nor the successor of the
original corporation. It is the same corporation with
a different name and its character is in no respect
changed (Rep. Planters Bank v. CA, GR No. 93073,
December 21, 1992).
Section 19
Commencement of
Corporate Existence
A corporation commences to have juridical
personality and legal existence only from the
moment the SEC issues to the incorporators a
certificate of incorporation under its official seal
(Sec.19).
It is the certificate of incorporation that gives
juridical personality to a corporation and
places it under the jurisdiction of the
Commission.
In the case of religious corporations, the Code
does not require the SEC to issue a certificate of
incorporation. In fact, Sec. 112 clearly states that
from and after the filing with the Commission of
the articles of incorporation, the chief archbishop
shall become a corporation sole.
The issuance of the articles calls the corporation
into being but it is not really ready to do business
until it is organized. The corporation must formally
organize and commence the transaction of its
business or the construction of its works within
two years from the date of its incorporation,
otherwise, its corporate powers shall cease and it
shall be deemed dissolved (Sec. 22).
Section 20
De Facto Corporations
DE FACTO CORPORATION
A corporation which actually exists for all practical
purposes as a corporation but which has no legal
right to corporate existence as against the State. It
is one which has not complied with all the
requi rements necessary to be a de j ure
corporation but has complied sufficiently to be
accorded corporate status as against third parties
although not against the state.
Requisites (GAVE)
1. The existence of a valid law under which it
may be incorporated;
2. A bona fide attempt in good faith to
incorporate under such law. Thus, issuance of
a certificate of incorporation by the SEC is a
minimum requirement.
3. Actual use or exercise in good faith of
corporate powers; and
4. It must act in good faith.
Example of Defects which will preclude the
creation of a De Facto Corporation:
a. Absence of Articles of Incorporation;
b. Failure to file articles of incorporation with the
SEC; or
c. Lack of certificate of incorporation from the
SEC.
I nstances when Creati on of De Facto
Corporation Results:
a. AOI fails to state all the matters required by the
Code;
b. The name of the corporation closely resembles
that of a pre-existing corporation that it will
tend to deceive the public;
c. The incorporators or a certain number of them
are not residents of the Philippines;
d. The acknowledgement of the AOI or certificate
of incorporation is insufficient or defective
in form or acknowledged before the wrong
officer;
e. The percentage of Filipino ownership of the
capital stock required for the business is
less than that prescribed by law.;
f. The minimum paid-up capital stock has not
been pai d to and recei ved by the
corporate treasurer contrary to hi s
affidavit; and
g. The failure to submit its by-laws on time.
Note: In the case of a de facto corporation, the
only way in which its corporate existence can be
questioned is in a direct proceeding by the State,
brought for that purpose. Private individuals
cannot raise the objection in such a case, either
directly or indirectly, and nobody can raise the
objection collaterally
Such a corporation is practically as good as a de
jure corporation. It is deemed to have a
substantial legal existence and ordinarily, in its
relation with all persons except the State, has the
same powers and is subject to the same liabilities,
duties and responsibilities, as a corporation de
jure, and is bound by all such acts as it might
rightfully perform if it were a corporation de jure.
The officers and directors of a de facto corporation
are subject to all the liabilities and penalties
attending to officers and directors duly chosen by
a corporation de jure, including the liability under
the criminal law, and their acts are binding when
such acts would be within the power of such
officers if the corporation were one de jure (The
Corporation Code of the Philippines, De Leon & De Leon, Jr.,
2006ed).
Section 21
Corporation by Estoppel
All persons not stockholders or members who
assume to act as a corporation knowing it to be
without authority to do so shall be liable as
general partners for all debts, liabilities, and
damages incurred or arising as a result thereof.
An unincorporated association which represented
itself to be a corporation will be estopped from
denying its corporate capacity in a suit against it
by a third person who relied in good faith on such
representation., liabilities and damages incurred
or arising as a result thereof. When any such
ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
A corporation by estoppel has no real
existence in law. It is neither a de jure nor a
de facto corporation, but is a mere fiction
existing for the particular case, and vanishing
where the element of estoppel is absent. It
exists only between the persons who
misrepresented their status and the parties
who relied on the misrepresentation. Its
existence may be attacked by any third party
except where the attacking party is estopped
to treat the entity other than as a corporation.
A third party who, knowing an association to
be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may
be barred from denyi ng i ts corporate
existence in a suit brought against the alleged
corporation (Lim Tong Lim v. Phil. Fishing Gear
Industries, Inc., GR No. 136448, November 3, 1999).
Section 22
Effects of Non-use of
Corporate Charter and
Continuous Inoperation of
a Corporation
1. If a corporation does not formally organize and
commence the transaction of its business or
the construction of its works within two (2)
years from the date of its incorporation, its
corporate powers cease and the corporation
shall be deemed dissolved.
2. I f a corporat i on has commenced t he
transaction of its business but subsequently
becomes continuously inoperative for a period
for at least five (5) years, the same shall be a
ground for the suspension or revocation of its
cor por at e f r anchi se or cer t i f i cat e of
incorporation.
Note: If the non-use of corporate charter or
continuous inoperation of a corporation is due to
causes beyond its control as found by the
Commission, the effects mentioned shall not take
place
Board of Directors/Trustees/Officers
Section 23
Board of Directors and
Trustees
QUALIFICATIONS
7. For a stock corporation, ownership of at
least 1 share of the capital stock of the
corporation in his own name, and if he ceases
to own at least one share in his own name, he
automatically ceases to be a director. For a
non-stock corporation, only members of the
corporation can be elected to the Board of
Trustees.
In order to be eligible as a director, what is
material is the legal title to, not beneficial
ownership of the stocks appearing on the
books of the corporation.
A person who does not own a stock at the
time of his election or appointment does
not disqualify him as a director if he
becomes a shareholder before assuming
the duties of his office.
A person who is not a stockholder cannot
be a director, but he can be an ex officio
member without voting rights in the board
(Grace Christian High School v. CA, GR No.
111155, October 23, 1997).
8. A majority of the directors/trustees must be
residents of the Philippines (Sec. 23).
9. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6 years,
or a violation of the Corporation Code
committed within five years from the date of
his election (Sec. 27).
10. Only natural persons can be elected directors/
trustees.
In case of corporate stockholders or
members, their representation in the board
can be achieved by making their individual
representatives trustees of the shares or
Corporation Law
membership to make them stockholders/
members of record.
11. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation.
12. Must be of legal age.
TERM OF OFFICE
The directors or trustees shall serve for a term of
one year and until their successors are elected
and qualified. If no election is conducted or no
qualified candidate is elected, they shall continue
to act as such in a hold-over capacity until an
election is held and a qualified candidate is so
elected (HOLDOVER PRINCIPLE) (Corporation Code
of the Philippines, Ruben C. Ladia, 2001ed).
BOARD OF DIRECTORS/ TRUSTEES AS
REPOSITORY OF CORPORATE POWERS
GENERAL RULE
The corporate powers of the corporation shall be
exercised, all business conducted and all property
of such corporation controlled and held by the
board of directors or trustees (Sec. 23).
Section 23 of the Corporation Code expressly
provides that all corporate powers shall be
exercised by the board. Just as a natural
person may authorize another to do certain
acts in its behalf, so may the board validly
delegate some of its functions to individual
off i cer or agent s. Absent such val i d
delegation, the rule is that the declarations of
an individual director relating to the affairs of
the corporation, but not in the course of, or
connected with the performance of authorized
duties of such director, is held not binding on
the corporation (AF Realty & Devt v. Dieselman
Freight Services, GR No.111448, January 16, 2002).
EXCEPTIONS
1. In case of an Executive Committee duly
authorized in the by-laws;
2. In case of a contracted manager which may
be an individual, a partnership, or another
corporation.
In case the contracted manager is another
corporation, the special rule in Sec. 44
applies.
3. I n case of cl ose cor por at i ons, t he
stockholders may directly manage the
business of the corporation instead, if the
articles of incorporation so provide.
Note: The power to purchase real property is
vested in the board of directors or trustees. While
a corporation may appoint agents to negotiate for
the purchase of real property needed by the
corporation, the final say will have to be with the
board, whose approval will finalize the transaction.
A corporation can only exercise its powers and
transact its business through its board of directors
and through its officers and agents when
authorized by a board resolution or by its by-laws
(Spouses Constantine Firme v. Bukal Enter prises and
Development Corporation, GR No. 146608, October 23, 2003).
Section 24
Election of Directors or
Trustees
STOCK
CORPORATION
NON-STOCK
CORPORATION
Presence during election
Owners of a majority of
the outstanding capital
stock, in person or by
their authorized
representative as such
by written proxy, must
be present at the
election of the directors.
A majority of the
members entitled to
vote, in person or by
proxy, if allowed in its
articles of incorporation
or by-laws, must be
present in the election.
Manner of voting
Cumulative voting is
mandatory; a matter of
right granted by law to
each stockholder with
voting rights.
generally not available
unless allowed by the
articles of incorporation
or by-laws, since each
member is entitled only
to one vote.
The SEC used to enjoy original and exclusive
jurisdiction to hear and decide cases involving
controversies in the election or appointment of
di rectors, trustees or managers of such
corporation. (PD No. 902-A, Sec. 5(a) )
BUT as amended by RA 8799, the jurisdiction of
the SEC under Section 5, of PD No. 902-A is now
transferred to Courts of General Jurisdiction
(RTC). Thus, RTC now has jurisdiction over
election contest or those relating to any
controversy or dispute involving title or claim to
any elective office in a stock or non-stock
corporation, the validation of proxies, the manner
and validity of elections and the qualifications or
candidates, including the proclamation of winners,
to the office of director, trustee or other officer
directly elected by the stockholders in a close
corporation or by members of a non-stock
corporation where the articles of incorporation or
by-laws so provide (Section 2, Rule 6 of the Interim Rules
of Procedure for Intra-Corporate Controversies).
METHODS OF VOTING
1. Straight Voting every stockholder may vote
such number of shares for as many persons
as there are directors to be elected.
2. Cumulative Voting for One Candidate a
stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
3. Cumulative Voting by Distribution by this
method, a stockholder may cumulate his
shares by multiplying also the number of his
shares by the number of directors to be
elected and distribute the same among as
many candidates as he shall see fit.
Cumulative voting being a statutory right, a
corporation is without power to deprive the
stockholders of its use or even restrict the
right to vote to only one way or method. A
stockholder may or may not exercise the right
as he shall see fit (SEC Opinion, Oct. 20, 1964).
In electing directors by cumulative voting,
the total number of votes cast by a
stockholder shall not exceed the number
of shares owned by him as shown in the
books of the corporation multiplied by the
whole number of directors to be elected.
Note: Members of non-stock corporations may
cast as many votes as there are trustees to be
elected but may cast not more than one vote for
one candidate. This is the manner of voting in
non-stock corporations unless otherwise provided
in the articles of incorporation.
Limitations on the Election of Directors/
Trustees:
1. At any meeting of stockholder or members
called for the election of directors or trustees,
there must be present either in person or by
representative authorized to act by written
proxy, the owners of the majority of the
outstanding capital stock or majority of the
members entitled to vote.
2. The election must be by ballot if requested by
any voting member or stockholder.
3. A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the methods
of voting in the election of directors.
4. No delinquent stock shall be voted.
5. The candidates receiving the highest number
of votes shall be declared elected. A majority
vote is not necessary. However, it is
necessary that there is a quorum. And in the
absence thereof, election shall be considered
invalid.
Limitations on the Stockholders Right to Vote:
1. Where the articles of incorporation provides
for classification of shares pursuant to Sec. 6,
non-voting shares are not entitled to vote
except as provided for in the last paragraph of
Sec. 6.
2. Preferred or redeemable shares may be
deprived of the right to vote unless otherwise
provided in the Code.
3. Fractional shares of stock cannot be voted.
4. Treasury shares have no voting rights as long
as they remain in the treasury.
5. Holders of stock declared delinquent by the
board of directors for unpaid subscription are
not entitled to vote or to representation at any
stockholders meeting.
6. A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
Section 25
Corporate Officers;
Quorum
QUORUM
Such number of the membership of a collective
body as is competent to transact its business or
do any other corporate act.
Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the
number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum
for the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate
act, except for the election of officers which shall
require the vote of a majority of all the members of
the board.
CORPORATE OFFICERS
1. President must be a director and he may
not be concurrently the treasurer or secretary
2. Vice-President in the absence of the
president or if the office of the president
becomes vacant, he has the authority to act in
his stead, or to perform any duty of the office
(SEC Opinion, April 18, 1985).
3. Treasurer may or may not be a director; as a
matter of sound corporate practice, must be a
resident
4. Secretary need not be a director unless
required by the by-laws; must be a resident
and citizen of the Philippines; and
5. Such other officers as may be provided in the
by-laws.
Corporation Law
CORPORATE
OFFICER
CORPORATE
EMPLOYEE
Basis
Position is provided for
in the by-laws or under
the Corporation Code
Employed by the action
of the managing officer
of the corporation
Jurisdiction
RTC has jurisdiction in
case of dispute
NLRC has jurisdiction in
case of labor disputes
Any two (2) or more positions may be held
concurrently by the same person, except that
NO one shall act as president and secretary
or as president and treasurer at the same
time.
Authority of Officers is generally derived from:
1. Law
2. By-laws
3. Authorization from the Board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business (Inter-Asia
Investment Industries v. CA, GR No. 125778, June 10,
2003).
Extent of Powers or Authority of Corporate
Officers:
1. The authority which he has by virtue of his
office;
2. The authority which is expressly conferred
upon him or is incidental to the effectualness
of such express authority;
3. As to third persons dealing with him without
notice of any restriction thereof, the authority
which the corporation holds the officer out as
possessing or is estopped to deny.
4. The nature of the corporate business must
also be taken into consideration; and
5. The personal act of an officer though originally
unauthorized may become binding upon the
corporation by a subsequent ratification (The
Corporation Code of the Philippines, De Leon & De Leon,
Jr., 2006ed).
DOCTRINE OF APPARENT AUTHORITY
It is a familiar doctrine that if a corporation
knowingly permits one of its officers, or any other
agent, to act within the scope of an apparent
authority, it holds him out to the public as
possessing the power to do those acts; and thus,
the 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. Court of Appeals, et al., GR No.
126006, January 29, 2004).
CLASSIFICATION OF POWERS OR
AUTHORITY
Inherent Express Implied
That authority to
act and bind the
corporation
which the officer
has by reason of
his office
although it may
not be
sanctioned by
express authority
Every
power or
authority
expressly
conferred
upon him
by law and
the by-laws
of the
corporation
Includes all such
incidental
authority as is
necessary,
usual, and
proper to
effectuate the
main authority
expressly
conferred
Apparent or Ostensible
Authority by
Estoppel
When in the usual course
of the business , an
officer or agent is held by
such corporation or has
been permitted to act for
it in such way as to justify
third persons who deal
with him in assuming that
he is doing an act or
making a contract within
the scope of his authority
When a corporation,
by its voluntary act,
places an officer or
agent in such a
position or situation
that persons of
ordinary prudence are
justified an assuming
that he has authority
to perform the act in
question
Section 26
Report of Election of
Directors, Trustees and
Officers
Section 27
Disqualification of
directors, trustees or
officers.
No person convicted by final judgment of an
offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code
committed within five (5) years prior to the date of
his election or appointment, shall qualify as a
director, trustee or officer.
Section 28
Removal of Directors or
Trustees
The law does not specify cases for removal of a
director or trustee nor even require that removal
should be for sufficient cause or reason. However,
the incumbent directors or trustees cannot be
removed merely by replacing them with a new set
of directors or trustees.
Requisites
1. The removal should take place at a regular or
special meeting duly called for the purpose;
4. The director or trustee can only be removed
by a vote of the stockholders representing at
least 2/3 of the outstanding capital stock or
2/3 of the members entitled to vote in case of
non-stock corporations;
5. There must be a previ ous not i ce t o
stockholders or members of the corporation of
the intention to propose such removal at the
meeting.
The removal without cause may NOT be used

to deprive minority stockholders or members
of the right to representation to which they
may be entitled under Sec. 24 of the Code.
There is no need to follow the procedure

under Section 28 if the director is disqualified.
By operation of law, such director is
disqualified to act as director thereby creating
vacancies in the Board. Mere declaration of
the disqualification as the cause of the
vacancy is sufficient (SEC Opinion, February 3,
1992).
The meeting must be called by the secretary

on order of the president or on the written
demand of the stockholders representing a
majority of the outstanding capital stock or
majority members entitled to vote.
The law also provides that should the
secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to
give the notice, or if there is no secretary, the
call for the meeting may be addressed directly
to the stockholders or members by any
stockholder or member of the corporation
signing the demand.
Section 29
Vacancies in the Office of
Director or Trustee
A vacancy in the office of director or trustee may
be filled as follows:
1. By the stockholders or members:
a. If the vacancy results from the removal by
the stockholders or members or the
expiration of term;
b. If the vacancy occurs OTHER than by
removal or by expiration of term, such as
death, resignation, abandonment, or
disqualification, if the remaining directors
or trustees do NOT constitute a quorum
for the purpose of filling the vacancy;
c. If the vacancy may be filled by the
remaining directors or trustees but the
board refers the matter to stockholders or
members; or
d. If the vacancy is created by reason of an
increase in the number of directors or
trustees.
2. By the members of the Board if still
constituting a quorum, at least a majority of
them are empowered to fill any vacancy
occurring in the board OTHER than by
removal by the stockholders or members or
by expiration of term.
Section 30
Compensation of Board
Members
GENERAL RULE
Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
EXCEPTIONS
1. When their compensation is fixed in the by-
laws;
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special meeting;
The only limitation in the granting of

compensation is that the amount to be given
shall NOT exceed 10% of the net income
before income tax of the corporation during
the preceding year.
Section 31
Liability of Directors,
trustees and Officers
THREE-FOLD DUTIES OF DIRECTORS (Philippine
Corporate Law, Cesar Villanueva, 2001ed)
1. Duty of Obedience
To direct the affairs of the corporation only in
accordance with the purposes for which it was
organized.
Basis: The directors or trustees and
officers to be elected shall perform the
duties enjoined on them by law and the by-
laws (Sec. 25).
2. Duty of Diligence
Directors and officers are required to exercise
due care in the performance of their functions.
Corporation Law
Basis: Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation shall
be liable jointly and severally for all
damages resulting therefrom suffered by
the corporati on, i ts stockhol ders or
members and other persons (Sec. 31).
3. Duty of Loyalty
The director or officer owes loyalty and
allegiance to the corporationa loyalty that is
undivided and an allegiance that is influenced
by no consideration other than the welfare of
the corporation.
Basis: Directors or trustees who acquire
any pecuniary or personal interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom (Sec. 31).
When a director or trustee attempts to acquire
or acquires in violation of his duty, any interest
adverse to the corporation in respect of any
matter which has been reposed in him in
confidence as to which equity imposes a
liability upon him to deal in his own behalf, he
shall be liable as trustee for the corporation
and must account for all the profits which
otherwise would have accrued to the
corporation (Sec. 31, par. 2)
NATURE OF POWERS OF BOARD OF
DIRECTORS OR TRUSTEES (The Corporation Code of
the Philippines Annotated, Hector de Leon, 2002ed)
1. Under the Theory of Original Power, the
powers of the board of directors or trustees
are ORIGINAL and UNDELEGATED. The
stockholders or members do not confer, nor
can they revoke those powers.
2. They are DERIVATIVE only in the sense of
being received from the State in the act of
incorporation.
BUSINESS JUDGMENT RULE
Courts cannot undertake to control the discretion
of the board of directors about administrative
matters as to which they have the legitimate
power of action, and contracts intra vires entered
into by the board of directors are binding upon the
corporation and courts will not interfere UNLESS
such contracts are so unconscionable and
oppressive as to amount to a wanton destruction
of the rights of the minority (Gamboa v. Victoriano, GR
No. 40620, May 5, 1979).
Questions of policy or management are left solely
to the honest decision of officers and directors of a
corporation, and the court is without authority to
substitute its judgment for that of the board of
directors; the board is the business manager of
the corporation, and so long as it acts in good faith
its orders are not reviewable by the courts
(Montelibano v. Bacolod-Murcia Milling Co., Inc., GR No.
15092, May 18, 1962).
Consequences:
1. Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders.
2. Directors and officers acting within such
business judgment cannot be held personally
liable for such acts (Philippine Corporate Law, Cesar
Villanueva, 2001ed).
SECTION 31, 2
nd
paragraph
SECTION 34
Applicable to directors,
trustees and officers
Only applicable to
directors
Does not allow
ratification of a
transaction by a self-
dealing directors,
trustees or officers
Allows the ratification of
a transaction by a self-
dealing director, i.e. by
the votes of
stockholders
representing 2/3 of the
outstanding capital stock
LIMITATIONS ON POWERS OF BOARD OF
DIRECTORS/ TRUSTEES
1. Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws.
2. It cannot perform constituent or those acts
which involve fundamental changes in the
corporation which require the approval of its
stockholders or members.
3. It cannot exercise powers not possessed by
the corporation (The Corporation Code of the
Philippines, De Leon & De Leon, Jr., 2006ed).
Note: The corporate powers conferred upon the
board of directors usually refer only to the ordinary
business transactions of the corporation and does
not extend beyond the management of ordinary
corporate affairs nor beyond the limits of its authority
(SEC Opinion, May 2, 1994).
PERSONAL LIABILITY OF DIRECTORS
GENERAL RULE
Directors and officers are NOT solidarily liable with
the corporation.
EXCEPTIONS
In the following cases, personal liability may be
incurred by directors and trustees, or in
appropriate cases, the officers of the corporation,
when they (VAGWAS)
1. Willfully and knowingly vote for and assent to
patently unlawful acts of the corporation (Sec.
31);
2. Are guilty of gross negligence or bad faith in
directing the affairs of the corporation (Sec. 31);
3. Acquire any personal or pecuniary interest in
conflict of their duty (Sec. 31);
4. Consent to the issuance of watered stocks,
or, having knowledge thereof, fails to file
objections with the secretary (Sec. 65);
5. Agree or stipulate in a contract to hold himself
personally liable with the corporation; or
6. By virtue of a specific provision of law
Note: A director is not liable for misconduct of co-
directors or other officers unless (1) he connives
or participates in it; or (2) he is negligent in not
discovering or acting to prevent it (Corporation Code of
the Philippines, Ruben C. Ladia, 2001ed).
When officers of a corporation exceeded their
authority, their actions are not binding upon the
corporation unless ratified by the corporation or is
estopped from disclaiming them (Reyes v. RCPI Credit
Employees Union, GR No.146535, August 18, 2006).
Remedies in case of mismanagement (D-RID)
1. Receivership;
2. Injunction, if the act has not yet been done;
3. Dissolution if the abuse amounts to a ground
for the i nsti tuti on of a quo warranto
proceeding but the Solicitor General refuses
to act; and
4. Derivative suit or complaint filed with SEC.
Section 32
Contracts of Self-dealing
Directors, Trustees or
Officers
Self-dealing directors, trustees or officers are
those who personally contract with the corporation
in which they are directors, trustees, or officers.
Such contracts are VOIDABLE, at the option of
the corporation UNLESS:
a. The presence of such director/trustee in the
board meeting approving the contract was
NOT necessary to constitute a quorum for
such meeting;
b. The vote of such director/trustee in the board
meeting approving the contract was NOT
necessary for the approval of the contract;
c. The contract is fair and reasonable under the
circumstances;
d. In the case of an officer, there was previous
authorization by the board of directors.
Although not all conditions are present, the
corporation may elect not to attack or question the
validity of the contract, without prejudice, however,
to the liability of the director/trustee for damages
under Sec. 31.
Where any of the first two conditions is
absent, said contract may be ratified by the vote
of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in
a meeting called for the purpose, provided that full
disclosure of the adverse interest of the director/
trustee involved is made at such meeting and the
contract is fair and reasonable.
Section 33
Contracts between
Corporations with Inter-
locking Directors
CORPORATI ON WI TH I NTERLOCKI NG
DIRECTORS
One, some or all of the directors in one
corporation is/are also a director in another
corporation.
Interlocking directorship by itself is not prohibited
under the Corporation Code. However, the by-
laws may contain provisions that disallow
interlocking directorship.
A contract between 2 or more corporations having
interlocking directors shall not be invalidated on
that ground alone.
These contracts are VALID, provided that:
a. The contract is NOT fraudulent; and
b. The contract is fair and reasonable under the
circumstances.
BUT if the interlocking directors interest in one
c o r p o r a t i o n o r c o r p o r a t i o n s i s
substantial (exceeding 20% of the outstanding
capital stock), then all the conditions prescribed in
Sec. 32 on self-dealing directors must be present
with respect to the corporation in which he has
nominal interest.
Section 34
Disloyalty of a Director
DOCTRINE OF CORPORATE OPPORTUNITY
A director who, by virtue of his office, acquires for
himself a business opportunity which should
belong to the corporation, thereby obtaining profits
Corporation Law
to the prejudice of such corporation, is guilty of
disloyalty and should therefore account to the
latter for all such profits by refunding the same.
Applicability
UNLESS his act is ratified, a director shall refund
to the corporation all the profits he realizes on a
business opportunity which:
1. the corporati on i s fi nanci al l y abl e to
undertake;
2. from its nature, is in line with corporations
business and is of practical advantage to it;
and
3. the corporati on has an i nterest or a
reasonable expectancy.
The rule shall be applied notwithstanding the fact
that the director risked his own funds in the
venture.
A business opportunity ceases to be corporate
opportunity and transforms to personal opportunity
where the corporation refuses or is definitely no
longer able to avail itself of the opportunity (SEC
Opinion, March 4, 1982).
Section 35
Executive Committee
EXECUTIVE COMMITTEE
A body created by the by-laws and composed of
not less than 3 members of the board which,
subject to the statutory limitations, has all the
authority of the board to the extent provided in the
board resolution or by-laws (The Corporation Code of the
Philippines, De Leon & De Leon, Jr., 2006ed).
The executive committee has all the authority of
the board to the extent provided for in the
resolution of the board or in the by laws.
May act by a majority vote of all of its members.
Its decisions are not subject to appeal to the
board. However, if the resolution of the Executive
Committee is invalid i.e. not one of the powers
conferred to it, it may be ratified by the board (SEC
Opinion, July 29, 1995).
If the executive committee is not validly
constituted, the members thereof may be
considered as de facto officers (SEC Opinion,
September 27, 1993, cited in Philippine Corporate Law
Compendium, Timoteo Aquino, 2006ed).
LIMITATIONS ON THE POWERS OF THE
EXECUTIVE COMMITTEE
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
5. Cash dividend declaration.
CODE OF CORPORATE GOVERNANCE
Applicability:
The Code of Corporate Governance shall be
applicable to:
1. Corporations whose securities are registered
or listed;
PUBLIC COMPANY -means any corporation
with a class of equity securities listed on an
exchange or with assets in excess of Fifty
Million Pesos (P50,000,000.00) and having
two hundred (200) or more holders, at least
two hundred (200) of which are holding at
least one hundred (100) shares of a class of
its equity securities (Rule 3 [1M], Amended SRC
Rules).
2. Corporations which are grantees of permits/
licenses and secondary franchise from the
Commission; and
3. Public companies.
CORPORATE GOVERNANCE
A system whereby shareholders, creditors and
other stakeholders of a corporation ensure that
management enhances t he val ue of t he
corporation as it competes in an increasingly
global market place.
Mandatory corporate governance rules are
necessary for 2 main reasons:
1. To overcome the collective action problem
resul t i ng f rom t he di spersi on among
stockholders, and
2. To ensure that the interests of all relevant
constituencies are represented.
Powers of The Corporation
Section 36
Corporate Powers and
Capacity
KINDS
1. EXPRESS those expressly authorized by
the Corporation Code and other laws, and its
Articles of Incorporation or Charter.
2. INCIDENTAL those that are incidental to the
existence of the corporation.
3. IMPLIED those that can be inferred from or
necessary for the exercise of the express
powers.
Classification of Implied Powers
a. Acts in the usual course of business;
b. Acts to protect debts owing to the
corporation;
c. Acts which involve embarking in a
different business usually to collect debts
out of profits;
d. Acts to protect or aid employees;
e. Acts to increase business (The Corporation
Code of the Philippines, De Leon & De Leon, Jr.,
2006ed).
GENERAL POWERS AND CAPACITY:
(SuSu CAB PIMP DOne)
1. To sue and be sued;
2. Of succession;
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its by-laws;
6. For stock corporations: issue and sell stocks
to subscribers and treasury stocks; for non-
stock corporations: admit members;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
deal with real and personal property,
securities and bonds;
8. To enter into merger or consolidation;
9. To make reasonable donations for public
wel fare, hospi tal , chari tabl e, cul tural ,
scientific, civic or similar purposes, provided
that NO donation is given to any (i) political
party, (ii) candidate and (iii) partisan political
activity;
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise other powers essential or
necessary to carry out its purposes.
OTHER POWERS (Ex CaDeSe MAID)
1. Extension /Shortening of Corporate Term (Sec.
37);
2. Power to Increase or Decrease Capital
Stock /Power to Incur, Create or Increase
Bonded Indebtedness (Sec. 38);
3. Power to Deny Pre-Emptive Right (Sec. 39);
4. Sel l , di spose, l ease, encumber al l or
substantially all of corporate assets (Sec. 40);
5. Power to acquire own shares (Sec. 41);
6. Invest corporate funds in another corporation
or business or for any other purpose other
than the primary purpose (Sec. 42);
7. Power to declare dividends out of unrestricted
retained earnings (Sec. 43); and
8. Power to enter into management contract (Sec.
44)
Section 37
Extension /Shortening of
Corporate Term
PROCEDURE
a. Approval by a majority vote of the board of
directors/trustees.
b. Written notice of the proposed action and the
time and place of meeting shall be served to
each stockholder or member either by mail or
personal service.
c. Ratification by the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3
of the members i n case of non-stock
corporations.
Note: A dissenting stockholder may exercise his
appraisal right.
Section 38
Power to Increase or
Decrease Capital Stock
WAYS OF I NCREASI NG AUTHORI ZED
CAPITAL STOCK
a. By increasing/ decreasing the number of
shares and retaining the par value;
Corporation Law
b. By increasing/ decreasing the par value of
existing shares without increasing/ decreasing
the number of shares;
c. By increasing/ decreasing the number of
shares and increasing/decreasing the par
value.
LIMITATIONS
a. A corporation cannot lawfully decrease its
capital stock if such decrease will have the
effect of relieving existing subscribers from the
obl i gat i on of payi ng f or t hei r unpai d
subscriptions without a valuable consideration
for such release.
b. Cannot issue stock in excess of the amount
limited by its AOI.
c. Must follow the manner and conditions
provided by the law.
Reasons for Increasing Capital Stock:
a. To generate more working capital;
b. To have more shares with which to pay for
acquisition of more assets;
c. To have extra shares to meet the requirement
for deduction of stock dividend (Bar Review
Materials in Commercial Law, Jorge Miravite, 2002ed).
Tools available to the Stockholders to
Replenish Capital:
a. Additional subscription to shares of stock of
the corporati on by stockhol ders or by
investors;
b. Advances by t he st ockhol ders t o t he
corporation;
c. Payment of unpaid subscription by the
stockholders; and
d. Loans from third persons.
Requirements:
a. Approval by the majority vote of the board of
directors;
b. Ratification by the stockholders holding or
capital stock at a meeting duly called for that
purpose;
c. Prior written notice of the proposed increase or
decrease of the capital stock indicating the
time and place of meeting addressed to each
stockholder must be made either by mail or
personal service;
d. A certificate in duplicate signed by a majority of
the directors of the corporation, countersigned
by the chairman and the secretary of the
stockholders meeting;
e. In case of increase in capital stock, 25% of
such increased capital must be subscribed and
that at least 25% of the amount subscribed
must be paid either in cash or property;
f. In case of decrease in capital stock, the same
must not prejudice the right of the creditors;
g. Filing of the certificate with the SEC; and
h. Approval thereof by the SEC.
POWER TO INCUR, CREATE OR INCREASE
BONDED INDEBTEDNESS (Section 38)
CORPORATE BOND
An obligation to pay a definite sum of money at a
future time at fixed rate of interest, whether
secured or unsecured, evidenced by a written
debt instrument called a bond or debenture.
Requirements
Same with the power to increase or decrease
capital stock
BONDED
INDEBTEDNESS
DEBENTURE
Secured by a
mortgage on
corporate property.
(Philippine Corporate Law,
Cesar Villanueva, 2001ed)
Serial obligations or notes
issued on the basis of the
general credit of the
corporation. Hence, they
are not bonded
indebtedness
TYPES OF BONDS
1. COMMON TYPES
A. Secured
i. Mortgage bonds- debt instruments of
fi nanci ng secured by a l i en on
specifically named property.
ii. Collateral Trust Bonds debt
instruments secured by a pledge of
either stocks or bonds or both which
are deposited with a trustee.
iii. Equi pment Obl i gati ons debt
instruments to secure financing loans
on locomotives, railway cars, buses,
large trucks and similar equipment.
B. Unsecured Bonds
i. Straight Debenture Bonds general
credit bonds not secured by any
specific property
ii. Guaranteed Bonds that type for
which one or more individuals or
corporation other than the issuer
guarantees the payment of interest or
principal or both
iii. Subordinated Debenture Bonds
debt instruments specifying that the
holders rights are inferior in the event
of liquidation or reorganization to any
existing and future debt defined in the
indenture as senior debt.
2. SPECIAL TYPES
A. Convertible Debentures bonds which
may be exchanged for the common stock
of the issuing corporation at a fixed price
by a predetermined redemption rate at the
option of the bondholder.
B. Income Bonds/ Adjustment bonds
debt instruments with a fixed rate of
interest payable only if earned and
declared by the board of directors.
C. Bonds with warrant or stock purchase
warrant option or a right exercisable by
its holder to purchase stock at a stated
price during a stipulated period of time.
Section 39
Power to Deny Pre-
Emptive Right
PRE-EMPTIVE RIGHT
The preferential right of shareholders to subscribe
to all issues or disposition of shares of any class
in proportion to their present shareholdings.
Note: Whenever the capital stock of a corporation
is increased and new shares of stock are issued,
the new issue must be offered first to the
stockholders who are such at the time the
increase was made in proportion to their existing
shareholdings
Purpose: To enable the shareholder to retain
his proportionate control in the corporation
and to retain his equity in the surplus.
The right may be denied by the articles of
incorporation or an amendment thereto. The
corporation can only deny pre-emptive right IF the
articles of incorporation or amendment thereto
DENIES such right.
Denial of pre-emptive right extends to shares
issued in good faith in exchange for property
needed for corporate purposes or in payment of
previously contracted debts.
PRE-EMPTIVE RIGHT
RIGHT OF FIRST
REFUSAL
May be exercised even
when there is no express
provision of law
Arises only by virtue of
contractual stipulations
but is also granted
under the provisions on
Close Corporation
Pertains to unsubscribed
portion of the authorized
capital stock. A right that
may be claimed against
the corporation
Exercisable against
another stockholder of
the corporation of his
shares of stock
Instances When Pre-emptive Right Is Not
Available (PREP DeW)
1. Shares to be issued to comply with laws
requiring stock offering or minimum stock
ownership by the public.
2. Shares issued in good faith in exchange for
property needed for corporate purposes
3. Shares issued in payment of previously
contracted debts
4. In case the right is denied in the Articles of
Incorporation.
5. Waiver of the right by the stockholder.
6. It does not apply to shares that are being
reoffered by the corporation after they were
initially offered together with all the shares.
Section 40
Sell, dispose, lease,
encumber all or
substantially all of
corporate assets
Requirements
a. Approval by the majority vote of the board of
directors;
b. Ratification by the stockholders holding or
capital stock at a meeting duly called for that
purpose;
c. Prior written notice of the proposed increase
or decrease of the capital stock indicating the
time and place of meeting addressed to each
stockholder must be made either by mail or
personal service;
d. The sale of the assets shall be subject to the
provi si ons of exi sti ng l aws on i l l egal
combinations and monopolies; and
e. Any dissenting stockholder shall have the
option to exercise his appraisal right.
f. The vote of the majority of the trustees in
office will be sufficient authorization for the
corporation to enter into any transaction
authorized by Sec. 40 in the case of non-
stock corporations where there are no
members with voting rights.
Sale or other disposition shall be deemed to
cover substantially all the corporate assets if:
a. t he cor por at i on woul d be r ender ed
INCAPABLE of continuing the business; or
b. accomplishing the purpose for which it was
incorporated.
Corporation Law
NO ratificatory vote from stockholders/
members is needed:
a. if it is necessary in the usual and regular
course of business; or
b. if the proceeds of the sale or other disposition
of such property and assets be appropriated
for the conduct of the remaining business
Section 41
Power to acquire own
shares
Instances:
a. To eliminate fractional shares out of stock
dividends;
b. To collect or compromise indebtedness to the
corporation, arising out of unpaid subscription,
in a delinquency sale and to purchase
delinquent shares sold during said sale;
c. To pay dissenting or withdrawing stockholders;
d. To acquire treasury shares;
e. Redeemable shares regardless of existence of
retained earnings;
f. To effect a decrease of capital stock; and
g. In close corporations, when there is a deadlock
in the management of the business
Conditions for the exercise of the power:
1. That its capital is not impaired;
2. That it be for a legitimate and proper corporate
purpose;
3. That there shall be unrestricted retained
earnings;
4. That the corporation acts in good faith and
without prejudice to the rights of creditors and
stockholders; and
5. That the conditions of corporate affairs warrant
it.
Section 42
Invest corporate funds in
another corporation or for
purposes other than the
primary purpose.
The other purposes for which the funds may be
invested must be among those enumerated as
secondary purposes and must further comply with
the requirements of Section 42.
Investment of funds includes not only investment
of money but also investment of property of the
corporation. However, the SEC imposes the
following requirements:
a. That the property is not presently used by the
company and the leasing is not made on a
regular basis;
b. That by leasing the property, it will make it
productive instead of allowing them to remain
idle;
c. There is no express restrictions in the articles
of incorporation or by-laws;
d. Leasing is not used as a scheme to prejudice
corporate creditors or result in the infringement
of the Trust Fund Doctrine; and
e. Compliance with the requirements of Section
42 (Philippine Corporate Law Compendium, Timoteo
Aquino, 2006ed).
Requirements
a. Resolution by the majority of the board of
directors or trustees;
b. Resolution by the stockholders representing
at least 2/3 of the outstanding capital stock or
2/3 of the members in case of non-stock
corporation;
c. The ratification must be made at a meeting
duly called for the purposes; and
d. Pri or wri t t en not i ce of t he proposed
investment and the time and place of the
meeting shall be made, addressed to each
stockholder or member by mail or by personal
service.
Any dissenting stockholder shall have appraisal
right.
A corporation is not allowed to engage in a
business distinct from those enumerated in the
articles of incorporation without amending the
purpose clause of said article.
Section 43
Power to declare
dividends out of
unrestricted retained
earnings
ASSETS
less LIABILITIES and LEGAL CAPITAL
RETAINED EARNINGS
UNRESTRICTED RETAINED EARNINGS
The retained earnings which have not been
reserved or set aside by the board of directors for
some corporate purpose.
DIVIDENDS
Corporate profits set aside, declared, and ordered
to be paid by the directors for distribution among
shareholders at a fixed time.
Forms:
a. Cash
b. Property
c. Stock
While cash dividends due on delinquent shares
can be applied to the payment of the unpaid
balance, stock dividends cannot be applied as
payment for unpaid subscription. Stock dividends
shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid.
The right to dividend is based on duly recorded
stockholdings, accordingly, the corporation is
prohibited from declaring dividends in favor of
non-stockholders.
As a rule, dividends among stockholders of the
same class must always be pro rata equal and
without discrimination and regardless of the time
when the shares were acquired.
Declaration of dividends is discretionary upon the
board. Dividends are payable only when there are
profits earned by the corporation and as a general
rule, even if there are existing profits, the Board of
Directors has the discretion to determine whether
or not dividends are declared (Republic Planters Bank v.
Agana, GR No. 93397, March 3, 1997), SUBJECT to the
rule on non-retention of retained earnings in
excess of 100% of paid-in-capital.
Dividends cannot be declared out of the capital
EXCEPT in the case of wasting assets corporation
or those corporations solely or principally engaged
in the exploitation of wasting assets to distribute
the net proceeds derived from exploitation of their
holdings such as mines, oil wells, patents and
leaseholds, without allowance or reduction for
depletion (Reviewer in Commercial Law, Jose R. Sundiang &
Timoteo Aquino, 2005ed).
Stockholders at the time of declaration are entitled
to dividends. Dividends declared before the
transfer of shares belong to the transferor and
those declared after the transfer belongs to the
transferee (SEC Opinion, July 15, 1994).
Requirements
a. Stock dividends - Approval of stockholders
capital stock at a regular or special meeting
duly called for the purpose.
b. Other dividends - Resolution by the majority
of the quorum of the board of directors or
trustees;

GENERAL RULE
Stock corporations are prohibited from retaining
surplus profits in excess of 100% of their paid-in
capital stock.
EXCEPTIONS (SLEx)
a. When justified by definite corporate expansion
projects approved by the board of directors.
b. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor from declaring dividends without
its/his consent and such consent has not yet
been secured.
c. When it can be clearly shown that such
ret ent i on i s necessary under speci al
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.
DISTRIBUTION OF DIVIDENDS
GENERAL RULE
Dividends can only be declared and paid out of
actual and bona fide unrestricted retained
earnings.
SPECIAL RULES
a. Gain from real property
Where a corporation sold its real property,
which is not being used for business, at a
gain, the income derived therefrom may be
availed of for dividend distribution.
b. Revaluation Surplus
Increase in the value of a fixed asset as a
result of its revaluation is not retained earning.
However, increase in the value of fixed assets
as a result of revaluation (Revaluation
surplus) may be declared as cash or stock
dividends provided that the company:
i. Has sufficient income from operations
from which the depreciation on the
appraisal increase was charged;
ii. Has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
iii. Such depreciation on appraisal increase
previously charged to operations has not
been impaired by losses (SEC Opinion, Oct.
2, 1981 and March 19, 1992).
c. Paid-in Surplus
Dividends can be declared out of the amount
received in excess of the par value of shares
(paid-in surplus) when:
i. They be decl ar ed onl y as st ock
dividends and not cash;
ii. No creditors are prejudiced; and
iii. There is no impairment of capital.
Corporation Law
Note: Unlike par value shares, when no par
value shares are sold at a premium, the entire
consideration paid is considered capital;
hence the same cannot be declared as
dividends.
d. Reduction surplus
There is such where surplus arises from the
reduction of the par value of the issued
shares of stock. They can be available for
dividend declaration provided that the rules on
paid-in surplus are complied with.
e.g. Such dividends can be declared out of
capital only in two instances:
1. liquidating dividends; and
2. dividends from investments in wasting
asset corporation.
It permits corporations solely or principally
engaged in the exploitation of wasting
assets to distribute the net proceeds derived
from exploitation of their holdings such as
mines, oil wells, patents and leaseholds,
without allowance or deduction for depletion.
e. Sale of Treasury Shares
Profits realized from sale of treasury shares
are part of capital and cannot be declared as
cash or stock dividend as purchase and sale
of such shares are regarded as contractions
and expansions of paid-in capital.
f. Indebtedness
Money cannot be borrowed for the payment of
dividends because indebtedness is not a
retained earning of the corporation.
g. Corporate earnings which have not yet been
received even though they consist in money
which is due cannot be included in the profits
out of which dividends may be paid.
h. Interim income
GENERAL RULE:
There can be no dividend declaration for profits in
a fiscal year that has not yet expired.
EXCEPTIONS
1. the amount of dividend involved would not be
impaired by losses during the remaining
period of the year;
2. the projected income for the remaining period
shall be submitted to the SEC; and
3. should the company sustain losses during the
remaining period, the dividends should be
refunded (SEC Opinion, Oct 22, 1974 and July 24,
1991).
CLASSES OF DIVIDENDS
1. Cash Dividend- dividend payable in cash.
2. Property Dividend dividend distributed to
the stockholders in the form of property, real
or personal.
3. Stock Dividend dividend payable in
unissued or increased or additional shares of
the corporation instead of in cash or in
property out of the unrestricted retained
earnings of the corporation.
4. Optional Dividend dividend which gives
the stockholder an option to receive cash or
stock dividend.
5. Composite Dividend It is dividend which is
partly in cash and partly in stocks.
6. Preferred or preferential dividend
dividend which is payable to one class of
stockholders in priority to that to be paid to
another class.
7. Cumulative dividend dividend which is
contracted to be paid at a certain rate at
stated times and if net earnings at any
dividend period are sufficient to pay the
contract dividend, it is to be made out of
subsequent net earnings.
8. Scrip dividend dividend in the form of a
writing or certificate issued to a stockholder
entitling him to the payment of money, stock
or other benefit at some future time inasmuch
as the corporation at the time such dividends
are declared has profits not in cash or has no
sufficient cash.
9. Bond dividend dividend distributed in
bonds of the corporation to the stockholders.
10. Liquidating dividends dividends which are
actually distributions of the assets of the
corporation upon dissolution or winding up of
the same.
CASH DIVIDENDS STOCK DIVIDENDS
Authority to declare
Declared only by the
board of directors at its
discretion
Declared by the board
with the concurrence of
the stockholders
representing at least
2/3 of the outstanding
capital stock at a
regular/special meeting
Disbursements of funds
Involves a disbursement
to the stockholders of
accumulated earnings
Does not involve any
disbursement of funds
Corporate capital
Does not increase the
corporate capital
Corporate capital is
increased
CASH DIVIDENDS STOCK DIVIDENDS
Creation of debts
Its declaration creates a
debt from the
corporation to each of
its stockholders
No debt is created by
its declaration
Liability to corporate creditors
When declared and paid
becomes the absolute
property of the
stockholder and cannot
be reached by creditors
of the corporation in the
absence of fraud
Since it is still part of
corporate property, may
be reached by
corporate creditors
TRUST FUND DOCTRINE (TFD)
The subscribed capital stock of the corporation is
a trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latters unpaid
subscription.
Application of the TFD:
a. Where the corporation has distributed its
capital among the stockholders without
providing for the payment of creditors;
b. Where it had released the subscribers to the
capital stock from their subscriptions;
c. Where it has transferred the corporate property
in fraud of its creditors; and
d. Where the corporation is insolvent.
Coverage of the TFD:
a. If the corporation is solvent, the TFD
extends to the capital stock represented by
the corporations legal capital.
b. If the corporation is insolvent, the TFD
extends to the capital stock of the corporation
as well as all of its property and assets.
Exceptions to the TFD:
The Code allows distribution of corporate capital
only in these instances:
a. Amendment of Articles of Incorporation to
reduce authorized capital stock;
b. Purchase of Redeemable shares by the
corporati on regardl ess of exi stence of
unrestricted retained earnings;
c. Dissolution and eventual liquidation of the
corporation;
d. In close corporation, when there should be a
deadlock and the SEC orders the payment of
the appraised value of the stockholders share
(Sec. 104).
Section 44
Power to enter into
management contract
MANAGEMENT CONTRACT
Any contract whereby a corporation undertakes to
manage or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts, operating
agreements or otherwise.
Note: Sec. 44 refers only to a management
contract with another corporation. Hence, it does
not apply to management contracts entered into
by a corporation with natural persons.
Requirements:
a. Approval by a majority of the quorum of the
board of directors;
b. Ratification by the stockholders owning at
least majority of the outstanding capital stock
or the members of BOTH the managing and
the managed corporations, at a meeting duly
called for the purpose;
c. Approval by t he st ockhol ders of t he
MANAGED corporation owning at least 2/3 of
the total outstanding capital stock entitled to
vote, or by at least 2/3 of the members in the
case of a non-stock corporation:
i. where a stockholder/s representing the
same interest of BOTH the managing and
the managed corporations own or control
more than 1/3 of the total outstanding
capital stock entitled to vote of the
managing corporation; OR
ii. where a majority of the members of the
board of directors of the managing
corporation ALSO constitute a majority of
the members of the board of directors of
the managed corporation.
The period must not be longer than 5 years for
any 1 term except those contracts which relate to
the exploration, development, exploitation or
utilization of natural resources that may be
entered into for such periods as may be provided
by pertinent laws or regulations.
A management contract cannot delegate entire
supervision and control over the officers and
business of a corporation to another as this will
contravene Sec. 23.
EXECUTIVE
COMMITTEE
MANAGEMENT
CONTRACT
Creation
Its creation must be
provided for in the
by-laws
Express power of a
corporation
Corporation Law
EXECUTIVE
COMMITTEE
MANAGEMENT
CONTRACT
Authority
A governing body
which functions as
the board itself.
Management company
must always be subject to
the superior power of the
board to give specific
directions from time to
time or to recall the
delegation of managerial
power (The Corporation Code of
the Philippines, De Leon & De
Leon, Jr., 2006ed).
Section 45
Ultra Vires Acts of
Corporation
DOCTRINE OF LIMITED CAPACITY
No corporation under the Corporation Code shall
possess or exercise any corporate powers, except
t hose conf er r ed by l aw, i t s ar t i cl es of
incorporation, those implied from express powers,
and those as are necessary or incidental to the
exercise of the powers so conferred.
DOCTRINE OF GENERAL CAPACITY
The corporation is said to hold such powers as are
not prohibited or withheld from it by general laws.
Note: In the Philippines, the 1
st
doctrine applies
(Bar Review Materials in Commercial Law, Miravite, 2007ed).
ULTRA VIRES ACT
An act committed outside the object for which a
corporation is created as defined by the law of its
organization and therefore beyond the powers
conferred upon it by law (Republic v. Acoje Mining Co.,
Inc., GR NO. 18062, February 28, 1963).
Also refers to acts done by a corporation outside
of the express and implied powers vested in it by
its charter and by the law (Bar Review Materials in
Commercial Law, Miravite, 2007ed).
TYPES OF ULTRA VIRES ACT (Philippine Corporate
Law, Cesar Villanueva, 2001ed):
1. Acts done BEYOND the powers of the
corporation as provided in the law or its
articles of incorporation;
2. Acts or contracts entered into in behalf of a
corporation by persons who have NO
corporate authority
Note: This is technically ultra vires acts of
officers and not of the corporation; and
3. Acts or contracts, which are PER SE
ILLEGAL as being contrary to law.
An ultra vires act may be that of:
a. The corporation;
b. The Board of Directors; and
c. The corporate officers.
EFFECTS OF ULTRA VIRES ACT ON:
1. Executed contract courts will not set aside
or interfere with such contracts;
2. Executory contracts no enforcement even
at the sui t of ei ther party (voi d and
unenforceable);
3. Part executed and part executory
principle of no unjust enrichment at expense
of another shall apply; and
4. Executory contracts apparently authorized
but ultra vires the principle of estoppel
shall apply.
Note: Ultra vires (beyond powers) refers only to
an act outside or beyond corporate powers,
including those that may ostensibly be within such
powers but are, by general or special laws, either
prohibited or declared illegal. It is in this context
that the Code has used the term.
ULTRA VIRES ACTS ILLEGAL ACTS
Nature
Not necessarily unlawful,
but outside the powers of
the corporation
Unlawful; against law,
morals, public policy,
and public order
Susceptibility of ratification
Cannot be ratified,
Reason: In Civil Law,
ratification is an act of
approving a contract
entered into by another
without authorization. It is
required that at the time of
the ratification, the cause
of nullity has already
ceased to exist. An ultra
vires act is not within the
power of the corporation;
hence, the ground for
being such cannot cease.
(Philippine Corporate Law
Compendium, Timoteo Aquino,
2006ed)
Cannot be ratified
Binding effect
Can bind the parties if
wholly or partly executed
Cannot bind the
parties
TEST WHETHER OR NOT A CORPORATION
MAY PERFORM AN ACT
Consider the logical and necessary relation
between the act questioned and the corporate
purpose expressed by law or in the charter. If the
act is lawful in itself and not prohibited, and is
done for the purpose of serving corporate ends,
and reasonably contributes to the promotion of
those ends in a substantial and not in a remote
and fanciful sense. The test to be applied is
whether the act in question is in direct and
immediate furtherance of the corporations
business, fairly incident to the express powers
and reasonably necessary to their exercise
(Montelibano v. Bacolod-Murcia Milling Co., Inc., GR No.
15092, May 18, 1962).
REMEDIES IN CASE OF ULTRA VIRES ACTS
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors
a. Nullification of contract in fraud of creditor
By-Laws
Section 46
Adoption of By-Laws
BY-LAWS
Rules of action adopted by a corporation for its
internal government and for the regulation of
conduct, and prescribe the rights and duties of its
stockholders or members towards itself and
among t hemsel ves i n r ef er ence t o t he
management of its affairs.
Functions
1. Supplement the articles of incorporation.
2. Provide for details not important enough to be
stated in the articles of incorporation.
3. Continuing rule for the government of the
corporation and the individuals composing it.
4. Define the rights and duties of corporate
offi cers and di rectors/trustees and of
st ockhol der s/ member s t owar ds t he
corporation and among themselves.
5. Source of authority for corporate officers and
agents of the corporation.
Requisites for the validity of the By-laws
1. Must not be contrary to law nor with the
Corporation Code;
2. Must not be contrary to morals and public
policy;
3. Must not impair obligations and contracts;
4. Amendments to the by-laws cannot impair the
obligation of existing contracts or any vested
right. The right of an employee to security of
tenure cannot be adversely affected by any
amendment in the by-laws. Hence, his
services can only be terminated for causes
provided for by law (Salafranca v. Philamlife Village
Homeowners Association, GR No. 121791, December 23,
1998);
5. Must be general and uniform;
6. Must be consistent with the charter or articles
of incorporation; and
7. Must be reasonabl e, not arbi trary or
oppressive.
ADOPTION OF BY-LAWS
Required votes:
1. If it is adopted PRIOR to incorporation
The by laws must be signed and approved by
all the incorporators and filed with the SEC
together with the articles of incorporation.
2. If it is adopted and filed AFTER incorporation
The affirmative vote of the stockholders
representing at least a majority of the
outstanding capital stock, or of at least a
majority of the members shall be necessary.
The by-l aws shal l be si gned by t he
stockholders or members voting for them.
Note: A copy thereof duly certified to by a majority
of the directors or trustees and counter-signed by
the secretary of the corporation shall be filed with
the SEC which shall be attached to the original
articles of incorporation.
Effectivity
Upon the approval of the SEC.
EFFECT OF NON-FILING WITHIN THE
REQUIRED PERIOD
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension
or revocation of its charter after proper notice and
Corporation Law
hearing. The corporation is, at the very least, a de
facto corporation whose existence may not be
collaterally attacked. (Sawadjaan v. Court of Appeals, GR
No. 142284, June 8, 2005).
Section 47
Contents of By-laws
(DSQP-QAM-PIO)
1. Time, place and manner of calling and
conducting regular or special meetings of the
2. Time and manner of calling and conducting
r egul ar or speci al meet i ngs of t he
3. The requi red quorum i n meet i ngs of
stockholders or members and the manner of
voting therein;
4. The form of proxies of stockholders and
members and the manner of voting them;
5. The qualification, duties and compensation of
directors, trustees, officers and employees;
6. The time for holding the annual election of
directors or trustees and the mode or manner
of giving notice;
7. The manner of election or appointment and
the term of office of all officers other than
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner
of issuing certificates; and
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business.
Section 48
Amendment of By-Laws
1. The majority of the board of directors or
trustees and the owners of at least a majority
of the outstanding capital stock, or at least a
majority of the members of a non-stock
corporation, at a regular or special meeting
duly called for the purpose, may amend or
repeal any by-law or adopt new by-laws; or
2. The owners of 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation may delegate to the board of
directors or trustees the power to amend or
repeal any by-laws or adopt new by-laws.
The delegated power shall be considered as
revoked whenever stockholders owning or
representing a majority of the outstanding
capital stock or a majority of the members in a
non-stock corporation shall so vote at a
regular or special meeting.
Note: The amended or new by-laws shall only be
effective upon the issuance by the SEC of a
certification that the same are not inconsistent
with the Code.
Binding Effects of amendments
1. As to members and corporation
a. They have the force of contract between
the members themselves.
b. They ar e bi ndi ng onl y upon t he
corporation and on its members and
those having direction, management and
control of its affairs.
2. As to third persons
They are not bound to know the by-laws
unless they have notice, actual or constructive
(China Banking Corporation v. CA, GR No. 117604,
March 26, 1997).
Reason: By-laws have no extra-corporate
force and are not in the nature of legislative
enactments so far as third persons are
concerned.
BY-LAWS IN RELATION TO ARTICLES OF
INCORPORATION (The Cor poration Code of the
Philippines, De Leon &. De Leon, Jr., 2006ed)
a. By-laws are subordinate to the charter of the
corporation and part of its charter is its articles
of incorporation.
b. A by-law which is not consistent with the
charter but is in conflict with it is void.
c. A by-law can neither enlarge the rights and
powers conferred by the charter nor restrict
the duties and liabilities imposed thereby, and
in case it attempts to do so, the charter will
prevail.
ARTICLES OF
INCORPORATION
BY-LAWS
Nature
Condition precedent in
the acquisition of
corporate existence
Condition subsequent; its
absence merely furnishes
a ground for the
revocation of the franchise
Purpose
Essentially a contract
between the corporation
and the stockholders/
members; between the
stockholders/ member
inter se, and between
the corporation and the
State
For the internal
government of the
corporation but has the
force of a contract
between the corporation
and the stockholders/
members, and between
the stockholders and
members
ARTICLES OF
INCORPORATION
BY-LAWS
Time of execution
Executed before
incorporation
May be executed after
incorporation. Sec. 46
allows the filing of the by-
laws simultaneously with
the Articles of
Incorporation
Amendment
Amended by a majority
of the directors/ trustees
and stockholders
representing 2/3 of the
outstanding capital
stock, or 2/3 of the
members in case of
non-stock corporations
May be amended by a
majority vote of the BOD
and majority vote of
outstanding capital stock
or a majority of the
member in non-stock
corporation
Delegation of power to amend
Power to amend/
repeal articles cannot
be delegated by the
stockholders/
members to the
board of directors/
trustees
Power to amend or repeal
by-laws or adopt new by-
laws may be delegated by
the 2/3 of the outstanding
capital stock or 2/3 of the
members in the case of
non-stock corporation
Meetings
Section 49
Kinds of Meetings
Section 50
Regular and Special
Meetings of Stockholders
or Members
KINDS OF CORPORATE MEETINGS
1. Meetings of stockholders or members:
a. Regular held annually on a date fixed
in the by-laws, or if not fixed, on any date
in April as determined by the board.
b. Special held at any time deemed
necessary or as provided in the by-laws.
2. Meetings of directors or trustees:
a. Regular - held by the board monthly,
unless the by-laws provide otherwise.
b. Special - held by the board at any time
upon the call of the president or as
provided in the by-laws.
Where: anywhere in or out of the
Philippines, unless the by-laws provide
otherwise
Whenever there is no person authorized to call a
meeting, the SEC, upon petition of a stockholder
or member, and on the showing of good cause,
may issue an order to the petitioning stockholder
or member directing him to call a meeting of the
corporation by giving proper notice.
Section 51
Place and time of
meetings of stockholders
or members
In the city or municipality where the principal office
of the corporation is located, and if practicable, in
the principal office of the corporation.
Even if the meeting be improperly held or called,
any business transacted at such meeting shall be
valid if within the powers or authority of the
corporation, and provided that all the stockholders
or members of the corporation are present or duly
represented at the meeting.
Section 52
Quorum of Meetings
Unless otherwise provided for in the Code or in
the by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock corporations.
A corporation may prescribe a greater voting
requirement in its articles of incorporation or by-
laws in order to protect the rights of the minority
stockholders or members. Such higher number is
also the number necessary to constitute a quorum
(The Corporation Code of the Philippines Annotated, De Leon
& De Leon, Jr., 2006ed).
Once a quorum is called, and the meeting was
called to order, even if some people walked out
and the people left are less than the majority, the
proceedings will be valid so long as there is a
quorum when the meeting was called to order.
Corporation Law
For stock corporations, the quorum referred to in
Section 52 of the Corporation Code is based on
the number of outstanding voting stocks. For non-
stock corporations, only those who are actual,
living members with voting rights shall be counted
in determining the existence of a quorum during
members meetings. Dead members shall not be
counted. (Tan v. Sycip, G.R. No. 153468, August 17, 2006)
Section 53
Regular and Special
Meetings of Directors or
Trustees
Section 54
Who shall Preside at
Meetings
REQUIREMENTS OF A VALID MEETING
1. It must be held at the proper place.
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter.
3. It must be called by the proper person:
a. The person or persons designated in the
by - l aws hav e aut hor i t y t o c al l
stockholders or members meeting.
b. In the absence of such provision in the
by-laws, it may be called by a director or
trustee or by an officer entrusted with the
management of the corporation.
c. A stockholder or member may make the
call on order of the SEC whenever for any
cause, there is no person authorized to
call a meeting.
d. The special meeting for the removal of
directors or trustees may be called by the
secretary or by a stockholder or member.
4. There must be a previous notice.
Regular Meeting written notice must be
sent to registered stockholders or members at
least 2 weeks before the meeting.
Special Meeting written notice must be
sent at least one (1) week
5. There must be a quorum.
Note: The president shall preside at all meetings
of the directors or trustees as well as of the
stockholders or members, unless the by-laws
provide otherwise (Sec. 54).
RULES ON MEETING/ VOTING APPLICABLE
TO CERTAIN KINDS OF SHARES
1. Delinquent shares shall not be entitled to
vote.
2. Treasury shares have no voting rights while
they remain in the treasury.
3. Fractional shares shall not be entitled to
vote.
4. Escrow shares shall not be entitled to vote
before the fulfillment of the condition imposed
thereon.
5. Unpaid shares, if not delinquent, are entitled
to all the rights of a stockholder including the
right to vote.
6. Sequestered shares: TWO TIERED TEST to
determine whether the PCGG may vote
sequestered shares:
a. whether there is prima facie evidence
showing that the said shares are ill-gotten
and thus belong to the state; and
b. whether there is an immediate danger of
dissipation thus necessitating their
continued sequestration and voting by the
PCGG while the main issue is pending
with the Sandiganbayan (Republic v.
Sandiganbayan, GR No. 107789, April 30, 2003).
Public Character Exception the two-tiered
test does NOT apply in cases involving funds
of public character. In such cases, the
government is granted the authority to vote
said shares, namely:
a. where the government shares are taken
over by private persons or entities who/
which registered them in their own
names; and
b. where the capitalization of shares that
were acquired with public funds somehow
landed in private hands (Ibid).
7. Pledgor, Mortgagor, or Administrator
Shares (Section 55); Pledgor/ mortgagor has the
right to attend and vote at meetings unless
pledgee/ mortgagee is expressly given such
right in writing, as recorded on the books.
Executors, administrators, receivers, and
other legal representatives may attend and
vote in behalf of the stockholders or members
without need of any written proxy. In Gochan
v. Young, (GR No. 131889, March 12, 2001), it was
held that heirs are not prohibited from
representing the deceased with regard to
shares of stock registered in the name of the
latter, especially when no administrator has
been appointed.
8. Shares Jointly Owned (Section 56); consent of
all the co-owners necessary, unless there is a
written proxy, signed by all the co-owners. If
shares are owned in an and/or capacity by
the holders thereof, any one of the joint
owners can vote or appoint a proxy thereof
MANNER OF VOTING
A stockholder or member may vote:
1. Directly (in person); or
2. Indirectly, through a representative
a. by means of a proxy;
b. by a trustee under a voti ng trust
agreement; or
c. by executors, administrators, receivers, or
other legal representatives duly appointed
by the court.
RULE ON TELECONFERENCING OR VIDEO-
CONFERENCING (RA 8792, as implemented by SEC
Memo Circular No. 15, 30 Nov. 2001)
Tel econf er enci ng i nt er act i ve gr oup
communication (3 or more people in 2 or more
locations) through an electronic medium.
Basic Types:
1. VIDEO CONFERENCING television-like
communication augmented with sound;
2. COMPUTER-CONFERENCING printed
communication through keyboard terminals;
and
3. AUDI O- CONFERENCI NG v e r b a l
communication via the telephone with optional
capacity for telewriting or telecopying.
Communication
between the home
office and field staff is
maximized
Technical failures with
equipments
People who would not
normally attend a
distant meeting can
participate
Unsatisfactory for
complex interpersonal
communication
Follow-up to earlier
meeting can be easily
done
Impersonal, less easy to
create an atmosphere
of group rapport
Meetings are shorter
and more oriented to
the primary purpose
Lack of participants
familiarity with the
equipment
Some routine meetings
are more effective
Acoustical problem
within the
teleconferencing rooms
Severe climate and/or
unreliable
transportation may
necessitate
teleconferencing
Difficulty in determining
the participant speaking
order, tendency for one
person to monopolize
the whole meeting
Participants are
generally better
prepared
Greater participant
preparation time
needed
Particularly satisfactory
for simple problem
solving, information,
exchange and
procedural tasks
Informal, one-on-one
interaction is not
possible (Philippine
Corporate Law Compendium,
Timoteo Aquino, 2006ed)
Group members
participate more equally
in well-moderated
teleconferences
Section 57
Voting Right for Treasury
Shares
No voting right as long as such stock remains in
the treasury
Section 58
Proxies
PROXY
A written authorization given by one person to
another so that the second person can act for the
first.
Requirements for validity: (VSW-F5)
1. Proxies shall be in writing;
2. It shall be signed by the stockholder or
member concerned;
3. It shall be filed before the scheduled meeting
with the corporate secretary;
4. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it
was intended.
5. No proxy shall be valid and effective for a
period longer than 5 years at any one time.
The right to vote by proxy may be exercised in
any of the following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Vot i ng by t rust ee under vot i ng t rust
agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Note: Stockholders or members may attend and
vote in their meetings by proxy (Sec. 58); BUT
directors cannot do so. Directors must always act
in person (Sec. 25).
Corporation Law
EXTENT OF AUTHORITY
1. General Proxy conf ers a general
discretionary power to attend and vote at
annual meeting.
2. Limited Proxy restricts the authority to vote
to specified matters only and may direct the
manner in which the vote shall be cast.
Note: Sec. 58 imposes no limitation as to who
may be a proxy. A stockholder/member may
appoint any person he sees fit to represent him,
and by-laws restricting his right in this respect are
likewise void.
In non-stock corporations the right to vote by
proxy, or even the right to vote itself may be
denied to members in the articles of incorporation
or the by-laws as long as the denial is not
discriminatory.
WHO MAY PROXY
A stockholder or member may appoint any person
he sees fit to represent him.
Since a proxy acts for another, he may act as

such although he himself is disqualified to
vote his hares.
The same person may act as proxy for one or

several stockholders or members
Directors or trustees cannot attend or vote by

proxy at board meetings but they may act as
proxies in stockholders meetings.
Section 59
Voting Trusts
VOTING TRUST AGREEMENT
An agreement whereby one or more stockholders
transfer their shares of stocks to a trustee, who
thereby acquires for a period of time the voting
rights (and/or any other rights) over such shares;
and in return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, however, to the trust
agreement.
Limitations:
1. Cannot be entered into for a period exceeding
5 years at any one time EXCEPT when it is a
condition in a loan agreement, however, said
contract shall automatically expire upon full
payment of the loan.
2. The agreement must not be used for
purposes of fraud.
3. It must be in writing and notarized and specify
the terms and conditions thereof.
4. A certified copy of the agreement must be
filed with the corporation and with the SEC.
5. The agreement shall be subject to examination
by any stockholder of the corporation.
6. Unless expressly renewed, all rights granted
in the agreement shall automatically expire at
the end of the agreed period.
VOTING TRUSTS PROXY
Nature
The trustee votes as
owner rather than as
mere agent
The proxy holder votes
as agent
Notarization
The agreement must be
notarized
Proxy need not be
notarized
Legal title
Trustee acquires legal
title to the shares of the
transferring stockholder
Proxy has no legal title
to the shares of the
principal
Manner of voting
The trustee may vote in
person or by proxy
unless the agreement
provides otherwise
The proxy must vote in
person
Actions allowed
Trustee is not limited to
act at any particular
meeting
Proxy can only act at a
specified stockholders
meeting (if not
continuing)
Restrictions on voting
A trustee can vote and
exercise all the rights of
the stockholder even
when the latter is
present
A proxy can only vote in
the absence of the
owners of the stock
Period
An agreement must not
exceed 5 years at any
one time except when
the same is made a
condition of a loan.
A proxy is usually of
shorter duration
although under Sec. 58
it cannot exceed 5
years at any one time
Separability of ownership and voting right
The voting right is
divorced from the
ownership of stocks
The right to vote is
inherent in or
inseparable from the
right to ownership of
stock
Revocability
The agreement is
irrevocable
Revocable anytime
except one coupled
with interest

POWERS OR RIGHTS OF VOTING TRUSTEES
1. Shall possess the right to vote and other
rights pertaining to the shares so transferred
and registered in his or their names subject to
the terms and conditions of and for the period
specified in the agreement.
2. May vote in person or by proxy unless the
agreement provides otherwise.
3. May exercise the rights of inspection of all
corporate books and records.
4. The trustee is the legal title holder or owner of
t he shares so t ransf erred under t he
agreement. He is therefore qualified to be a
director.
Stocks and Stockholders
Ways to Become a Stockholder of a
Corporation
1. Subscription contract with the corporation;
2. Purchase or acquisition of shares from
existing stockholders; and
3. Purchase of treasury shares from the
corporation.
SUBSCRIPTION PURCHASE
Period
Can be made before
or after incorporation
Can only be made after
incorporation
Payment
Generally, the
subscriber need not
pay unless there is a
call
The purchaser under a
deed of assignment or
sale must fully pay the
purchase price at the time
the shares are transferred
Release from obligation to pay
Subscriber cannot be
released from his
obligation to pay the
subscription price
The stockholders who
sells his shares can
condone the obligation to
pay the purchase price
Statute of Frauds
The Statute of Frauds
does not apply to
subscription contracts
The Statute of Frauds
applies if the purchase
price is not less than
P500.00.
Section 60
Subscription Contract
SUBSCRIPTION CONTRACT
Any contract for the acquisition of UNISSUED
stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription
(Sec. 60).
The subscribed shares need not be paid in full in
order that the subscription may be valid. The
subscription contract is a CONSENSUAL contract
that is perfected upon the meeting of the minds of
the parties. The name of the subscriber is
recorded in the stock and transfer book, and from
that time, such subscriber becomes a stockholder
of record entitled to all the rights of a stockholder.
Until the stocks are fully paid, it continues to be a
subsisting liability that is legally enforceable.
The parties in a subscription contract are the
subscriber and the Corporation itself, since the
subject matter of the contract, i.e. shares of stocks
to be subscribed, is owned by the latter.
It is not a contract between the subscribers even if
the other subscribers entered into the agreement
pri or to i ncorporati on. Consequentl y, the
subscribers are not real parties in interest in a
case for rescission of the subscription contract of
another subscriber because they are not parties
thereto (Ong Yong v. Tiu, GR No. 144626, April 6, 2003).
KINDS OF SUBSCRIPTION CONTRACT
1. Pre-incorporation subscription (Sec 61)
2. Post incorporation subscription - entered
into after the incorporation for the acquisition
of unissued stock.
The subscriber becomes a stockholder
upon acceptance by the corporation of the
subscribers offer or by the subscriber of
the corporations offer even though he has
not paid for his shares unless the
subscri pt i on agreement or chart er
otherwise provides.
3. Conditional Subscription one which is
subject to a condition, which may be a past
event unknown to the parties or a future,
uncertain event. The subscriber does not
become a stockholder until the condition is
fulfilled.
4. Absolute Subscription one which is not
subject to any condition and the subscriber
becomes liable on the subscription and
acquires the rights of a stockholder from the
time it is accepted.
5. Subscription with a special term one
where t he corporat i on agrees t o do
something, the fulfillment of which not being a
condition precedent to the accrual of a liability
of the subscriber or the acquisition of the
rights of a stockholder.
Corporation Law
Section 61
Pre-incorporation
subscription
One entered into before incorporation. Pre-
incorporation subscription constitutes a binding
contract among the subscribers.
It shall be irrevocable for a period of at least 6
months from the date of subscription,
UNLESS:
e. all of the other subscribers consent to the
revocation, or
f. the incorporation fails to materialize.
It shal l l i kewi se be i rrevocabl e after the
submission of the articles of incorporation to the
SEC.
STOCK OPTIONS
A privilege granted to a party to subscribe to a
certain portion of the unissued capital stock of a
corporation within a certain period and under the
terms and conditions of the grant exercisable by
the grantee at any time within the period granted
(SEC Rule BED No. 902-A-3).
The corporation must first secure the approval of
the SEC.
The application for authority to issue any stock
option shall be in the form of a petition under oath
signed by the President of the corporation or any
other official authorized by the board of directors.
Rules Governing Grant of Stock Options:
1. Stock Options granted to stockholders ratably
in proportion to their shareholdings may be
allowed;
2. Stock options granted to employees or officials
who are not members of the board may also
be allowed after a review of the scheme.
3. Stock options granted to persons who are not
stockholders may be granted only upon
showing that the board has been duly
authorized to grant the same by its charter or
by a resolution of the stockholders owning at
least two-thirds of all the outstanding capital
stock, voting or non-voting, excluding treasury
stock.
4. Directors or managing groups and officers
must be approved in a stockholders meeting
by stockholders owning at least two-thirds of
all the outstanding capital stock, voting or non-
voting, excluding treasury stock.
5. Exercise of options must be done within a
period of three (3) years from approval thereof
unless sooner terminated by the Commission.
6. No transfer of the right to an option shall be
made without the approval of the Commission.
7. In cases under 2, 3, 4, the Commission shall
determine the reasonableness of the plan,
scheme, compensation or consideration (SEC
Rule BED No.902-A-3, Sec. 3).
UNDERWRITING AGREEMENT
An agreement between a corporation and a third
person, termed the underwriter, by which the
latter agrees, for a certain compensation, to
purchase a stipulated amount of stocks or bonds,
specified in the underwriting agreement, if such
securities are not purchased by those to whom
they are first offered.
UNDERWRITING
AGREEMENT
STOCK SUBSCRIPTION
AGREEMENT
Obligation
The signers obligate
themselves to
purchase the shares
of stock which
cannot be sold.
The obligation of the
signer to the purchasers
and to the public is
absolute.
Commission
Underwriters are
given commission.
There is no commission.
Becoming a stockholder
The signer can
refuse to become a
stockholder/ member
of the company.
He becomes a stockholder
of the company and is
liable to pay the amount
due on the stock.
Section 62
Consideration for stocks
VALID CONSIDERATIONS IN SUBSCRIPTION
AGREEMENTS (CaPAL-PO)
1. Cash actually received;
2. Property, tangible or intangible, actually
received AND necessary or convenient for its
use and lawful purposes;
Requisites:
a. The property is actually received by the
corporation;
b. The property is necessary or convenient
for its use and lawful purposes;
c. It must be subject to a fair valuation equal
to the par or issued value of the stock
issued;
d. The valuation thereof shall initially be
determined by the incorporators or the
board of directors; and
e. The valuation is subject to the approval
by the SEC.
Note: Where the consideration is other than
actual cash, OR consists of intangible
property, the valuation thereof shall initially be
determined by the incorporators or the board
of directors, subject to approval by the SEC.
Intangible properties that may be used as
consideration include patents or copyrights
and if intellectual property will serve as a
consideration, the corporation must submit to
the SEC a copy of the Certificate of
Registration of the intellectual property right
together with an appraisal report and a Deed
of Assi gnment ( Phi l i ppi ne Cor porat e Law
3. Labor or services actually rendered to the
corporation;
4. Previously incurred corporate indebtedness;
Note: The indebtedness involved is one that
is acknowledged by the board.
5. Amounts transferred from unrestricted
retained earning to stated capital ,
6. Outstanding shares in exchange for stocks in
the event of reclassification or conversion.
Note: Shares of stock shall not be issued in
exchange for promissory notes or future services.
However, there is no prohibition on the use of
checks, bills or notes in payment of the cash
consideration.
SOURCES OF CORPORATE CAPITAL
1. Funds furnished by shareholders;
2. Borrowings; and
3. Profits and stock dividends
Section 63
Certificate of Stock and
Transfer of Shares
SHARES OF STOCK
Interest or right which owner has in the
management of the corporation, and its surplus
profits, and, on dissolution, in all of its assets
remaining after the payment of its debt.
The ownership of share of stock confers no
immediate legal right or title to any of the
property of the corporation. Each share
merely represents a distinct undivided share
or interest in the common property of the
corporation (18 Am. Jur. 2d 737).
Shares of stock constitute property distinct
from the capital or tangible property of the
corporation and belong to the different
owners.
They do not constitute an indebtedness of the
corporation to the shareholder and are,
therefore, not credits as to make the
stockholder a creditor of the corporation
(Garcia v. Lim Chu Sing, GR No. L-39427, February 24,
1934).
A share of stock only typifies a proportionate
or aliquot part of the corporations property, or
the right to share in its proceeds to that extent
when distributed according to law.
MODES OF ISSUANCE OF SHARES
1. By subscription before and after incorporation
to original, unissued stock;
2. By sale of treasury stock after incorporation
for money, property or service;
3. By subscription to new issues of stock in case
of an increase in the capital stock;
4. By declaring stock dividend.
CERTIFICATE OF STOCK
It is the paper representation or tangible evidence
of the stock itself and of the various interests
therein.
It is not essential to the ownership and/ or
existence of the share of stock.
Where the certificate of stock reflects a greater
volume of shares than the actual number of
shares issued or to be issued, the following
rules may be considered:
1. To the extent that there is an OVER ISSUE,
the excess issuance (over the authorized
capital stock or the stated capital) shall be
VOID as being ultra vires.
2. If there is NO over issue, but NO payment has
been made to cover the par or stated value of
the excess shares, the latter would constitute
watered stocks.
3. If there is NO over issue and WATERING of
stocks, the corporation may be bound to
honor the certificate (if duly signed and
released by its authorized officers) in the
hands of a holder in good faith, reserving a
right of recourse that an aggrieved party may
pursue against the culpable or unjustly
enriched party.
REMEDIES WHERE CORPORATION REFUSES
TO ISSUE CERTIFICATE (MS-DR)
1. A suit for specific performance of an express
or implied contract.
2. A petition for mandamus
Corporation Law
3. May sue for damages where speci fi c
performance cannot be granted
4. Rescind contract of subscription and recover
the consideration paid
Section 64
Issuance of the Certificate
of Stock
Requisites:
1. The certificate must be signed by the
president or vice-president, countersigned by
the secretary or assistant secretary;
2. The Certificate must be sealed with the seal
of the corporation;
3. The certificate must be delivered;
4. The par value, as to par value shares or full
subscription as to no par value shares must
first be fully paid;
Basis: DOCTRINE OF INDIVISIBILITY OF
SUBSCRIPTION which espouses that the
subscription is one, entire, indivisible, and
whole contract, which cannot be divided into
portions.
5. The original certificate must be surrendered
where the person requesting the issuance of
a certificate is a transferee from the
stockholder (Bitong v. CA, et al., GR No. 123553, July
13, 1998).
SHARES OF STOCK
CERTIFICATE OF
STOCK
Nature
Unit of interest in a
corporation
Evidence of the holders
ownership of the stock
and of his right as a
shareholder
Classification
Incorporeal or
intangible property
Concrete and tangible
Condition for issuance
May be issued by the
corporation even if
the subscription is not
fully paid.
May be issued only if the
subscription is fully paid.
Quasi-negotiable Character of Stock
Certificate
The endorsement of the certificate of stock by the
owner or his attorney-in-fact or any other person
legally authorized to make the transfer, shall be
sufficient to effect the transfer of shares if coupled
with delivery. The delivery is the operative act of
transfer of shares from the lawful owner to the
new transferee (Bitong v. Court of Appeals, Ibid).
TRANSFER OF STOCK
Requirements for its validity:
1. In case of shares represented by a certificate,
the transfer must strictly comply with the
following conditions:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner
or his agent; and
c. To be valid to the corporation and third
persons, the transfer must be duly
recorded in the books of the corporation
(Rural Bank of Lipa v. CA, GR No. 124535,
2. Where no certificate has been issued or for
some reason it is not in the possession of the
stockholder, it may be transferred by means
of a deed of assignment but the same must
be duly recorded in the books of the
corporation.
Note: However, as required in the case of
Ponce v. Alsons Cement (GR No. 139802,
December 10, 2002), there must be a special
power of attorney executed by the registered
owner of the share authorizing transferor to
demand transfer in the stock and transfer
book.
The transferee must present the indorsed
certificate to the corporate secretary who
shall effect the transfer in the corporate
books, issue a new stock certificate in
favor of the transferee and cancel the
former certificate.
If there is no indorsement in favor of the
transferee, the transferee may file an
action to compel the transferor to make
such indorsement. However, the same
cannot be consi dered as an i ntra-
corporate controversy because the
transferee is not yet a shareholder (Rivera, et
al. v. Florendo, et al., GR No. L-57586, October 8,
1996).
Onl y absol ut e t r ansf er s need be
registered. The pledge or mortgage itself
need not be recorded in the stock and
transfer book, but a chattel mortgage must
comply with the Chattel Mortgage Law,
and a pledge would require the shares to
be placed in the possession of the
creditor/pledgee. The agreement must
appear in a public instrument to take effect
against third persons (Chemphil v. CA, GR
Nos. 112438-39, December 12, 1995).
EFFECTS OF UNREGISTERED TRANSFER OF
SHARES
1. It is valid and binding as between the
transferor and the transferee.
2. It is invalid as to the corporation EXCEPT
when notice is given to the corporation for
purposes of registration.
3. It is invalid as against corporate creditors and
the transferor is still liable to the corporation.
4. It is invalid as to the attaching or executing
creditors of the transferor, as well as
subsequent purchasers in good faith without
notice of the transfer.
MODES OF STOCK TRANSFER
1. Indorsement and delivery of stock certificate
and to issue a new certificate unless the
ori gi nal certi fi cate i s surrendered for
cancellation or is clearly shown to have been
lost, stolen or destroyed.
2. Transfer made in a separate instrument
while an assignment may be valid and binding
between the parties despite non-compliance
with the requisite endorsement and delivery, it
does not necessarily make the transfer
effective for the assignee cannot enjoy the
status of a stockholder until and unless the
issue of ownership is resolved with finality
3. Judicial or extra judicial settlement of
estate upon the death of the stockholder,
his administrator or executor becomes vested
with the legal title of the stock until the
settlement and division of the estate is made.
ACTIONS BY STOCKHOLDERS OR MEMBERS
1. DERIVATIVE SUIT one brought by one or
more stockholders or members in the name
and on behalf of the corporation to redress
wrongs committed against it or to protect or
vindicate corporate rights, whenever the
officials of the corporation refuse to sue or are
the ones to be sued or hold control of the
corporation.
2. INDIVIDUAL SUIT an action brought by a
stockholder against the corporation for direct
violation of his contractual rights.
3. REPRESENTATIVE SUIT one brought by a
person in his own behalf and on behalf of all
similarly situated.
Section 65
Liability of Directors for
Watered Stocks
WATERED STOCK
Stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or
services.
It includes:
1. Issued without consideration (bonus share);
2. Issued as fully paid when the corporation has
received a lesser sum of money than its par
or issued value (discount share);
3. Issued for a consideration other than actual
cash such as property or services the fair
evaluation of which is less than its par or
issued value; and
4. Issued as stock dividend when there are no
sufficient retained earnings or surplus to
justify it.
Note: Refers only to original issue of stocks but
not to a subsequent transfer of such stocks by the
corporation.
Section 66
Interest on Unpaid
Subscriptions
Section 67
Payment of Balance of
Subscription
PRESCRIPTION OF RIGHT
Considering that the law does not prescribe a
period within which the registration of the transfer
of shares should be effected, the action to enforce
the right does not accrue until there has been a
demand and a refusal concerning the transfer
(Ponce v. Alson Cement Corp., GR No. 139802, Dec. 1. 2002).
COLLECTION OF UNPAID SUBSCRIPTION
1. VOLUNTARY PAYMENT
a. Upon t he dat e speci f i ed i n t he
subscription contract; or
b. Upon call by the Board of Directors
2. INVOLUNTARY PAYMENT
a. Extra-judicial
i. Delinquency sale; or
ii. Application of dividends
b. Judicial action
Corporation Law
Note: The prescriptive period in case of
subscription of shares begins to run only from the
time the board of directors declare that the
balance is due and payable. It does not begin to
run from the date of the subscription (Garcia v.
Suarez, GR No. 45493, April 21, 1939).
Section 68
Delinquency Sale
DELINQUENCY
1. If the subscription contract fixes the date for
payment, failure to pay on such date shall
render the entire balance due and payable
with interest. Thirty days therefrom, if still
unpaid, the shares become delinquent, as of
the due date, and subject to sale, unless the
board declares otherwise.
2. If no date is fixed in the subscription contract,
the board of directors can make the call for
payment, and specify the due date. The
notice of call is mandatory. A mere demand is
insufficient. The failure to pay on such date
shall render the entire balance due and
payable with interest. Thirty days therefrom, if
still unpaid, the shares become delinquent, as
of the date of call, and subject to sale, unless
the board declares otherwise (Sec. 67).
Note: A call is the resolution or formal
declaration of the board that the unpaid
subscriptions are due and payable.
Procedure for the Sale of Delinquent Stocks
1. Resolution. The board shall issue resolution
ordering the sale of delinquent stock.
2. Notice. Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail;
3. Publication. The notice shall furthermore be
published once a week for 2 consecutive
weeks in a newspaper of general circulation in
the province or city where the principal office
of the corporation is located;
4. Sale. The delinquent stock shall be sold at the
public auction to be held not less than 30
days nor more than 60 days from the date the
stocks become delinquent;
5. Transfer. The stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such stock
shall be issued in his favor; and
6. Credit Remainder. The remaining shares, if
any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering the same (Philippine Corporate Law
HIGHEST BIDDER IN A DELINQUENCY SALE
1. The person participating in the delinquency
sale who offers to pay the full amount of the
balance of the subscription together with the
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of
shares. In other words, the amount of the bid
does not vary but only the number of shares to
be bought changes and determines the highest
bidder.
2. If there is no bidder as mentioned above, the
corporation may bid for the same, and the total
amount due shall be credited as paid in full in
the books of the corporation. Such shares shall
be considered as treasury shares.
Note: The board is not bound to accept the
highest bid unless the contrary appears.
Reason: In a public sale, the corporation is not
making the offer to sell. In reality, the bidder is
the one making the offer to purchase which the
corporation is free to accept or reject.
Section 69
When Sale may be
Questioned
CANCELLATION OF SALE
1. When delinquent shareholder pays to the
corporation, on or before the date specified
for the sale of the delinquent stock, the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of sale; or
2. Upon order of the board.
Section 70
Court Action to Recover
Unpaid Subscription.
Section 71
Effects of Delinquency
1. Upon the stockholder
a. Accelerates the entire amount of the
unpaid subscription;
b. Subjects the shares to interest, expenses
and costs;
c. Disenfranchises the shares from any right
that inheres to a shareholder, except the
right to dividends (but which shall be
applied to any amount due on said shares
or, in the case of stock dividends, to be
withheld by the corporation until full
payment of the delinquent shares (Sec. 43).
2. Upon the director owning delinquent
shares
a. if the delinquent stockholder is a director,
the director shall continue to be a director
but he cannot run for re-election (Reviewer in
Commercial Law, Sundiang & Aquino, 2006ed).
b. A delinquent stockholder seeking to be
elected as director may not be a
candidate for, nor be duly elected to, the
board.
Note: No delinquency stock shall be voted for or
be entitled to vote or representation at any
stockholders meeting, nor shall the holder be
entitled to any of the rights of a stockholder except
the right to dividends in accordance with the
provisions of this Code until and unless he pays
the amount due on his subscription with accrued
i nt erest , and t he cost and expenses of
advertisement, if any (Sec. 71).
Delinquent stock shall not be included in
determining the existence of quorum.
Quo warranto proceedings may be instituted
agai nst di r ect or s el ect ed by del i nquent
stockholders.
Section 72
Rights of Unpaid Shares
Section 73
Lost or Destroyed
Certificates
PROCEDURE FOR I SSUANCE OF NEW
CERTIFICATE OF STOCK IN LIEU OF LOST,
STOLEN OR DESTROYED ONES
1. Affidavit. The registered owner shall execute
and file an affidavit regarding the share and
the circumstances regarding its loss;
2. Verification. The corporation shall verify the
affidavit and other information and evidence
with the books of the corporation;
3. Publication. The corporation shall publish a
notice in a newspaper of general circulation
published the place where the 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;
4. One Year Waiting Period. There shall be a
waiting period of 1 year from the date of the
last publication during which a contest can be
interposed;
5. Contest. If the contest has been presented to
said corporation or if an action is pending in
court regarding the ownership of said
certificate of stock which has been lost, stolen
or destroyed, the issuance of the new
certificate of stock shall be suspended until
the final decision of the court regarding the
ownership of said certificate of stock which
has been lost, stolen or destroyed; and
6. Replacement. If there is no contest within the
1 year period, the corporation shall then
replace the certificate. The replacement of
share can only be made before the expiration
of the 1 year period if a bond is posted
(Philippine Corporate Law Compendium, Aquino, 2006ed).
Note: In an opinion, the SEC held that the
requirements under Section 73 of the Corporation
Code are not mandatory for the same admits of
certai n excepti ons. The corporati on may
voluntarily issue new certificates in lieu of the
originals provided that the corporation is certain as
to the real owner of the shares. This is because of
the fact that, unless proven otherwise, the stock
and transfer book of the corporation is the best
evidence to establish stock ownership (Philippine
Corporate Law, Villanueva, 2001ed).
The prescribed procedure does not apply to a
case where the certificates are in the companys
possession when mislaid which thereby obligates
the corporation, not the stockholder, to suffer the
consequences.
RIGHTS and REMEDIES OF STOCKHOLDERS
(The Corporation Code of the Philippines Annotated, De Leon
& De Leon, Jr., 2006ed)
1. RIGHTS AS TO CONTROL AND
MANAGEMENT (MEA-C-VEA)
a. To attend and vote in person/ proxy at
stockholders meetings (Secs. 50, 58);
b. To elect & remove directors (Secs. 24, 28);
c. To approve certain corporate acts (Sec. 52);
d. To compel the calling of meetings (Sec. 50);
e. To have the corporation voluntarily
dissolved (Secs. 118, 119);
f. To enter into a voting trust agreement (Sec.
59); and
g. To adopt/ amend/ repeal the by-laws or
adopt new by-laws (Secs. 46,48).
2. PROPRIETARY RIGHTS (TRIP-Pre)
a. To transfer of stock in the corporate book
(Sec. 63);
b. To receive dividends when declared (Sec.
43);
Corporation Law
c. To issuance of certificate of stock/ other
evidence of stock ownership (Sec. 63);
d. To participate in distribution of corporate
assets upon dissolution (Sec. 118, 119); and
e. To pre-emption in the issue of shares (Sec.
39)
Note: Right of pre-emption extends to
t r easur y shar es i n case of t hei r
reissuance.
A stockholder who neither desires nor
intends to buy any of the stocks being
offered may waive such right. The right,
however, to waive pre-emptive right is a
personal right which should be exercised
personally by the stockholder concerned
or by an authorized person in his behalf
by way of a special power of attorney.
If the shares of a corporation are offered
and not subscribed or purchased by the
stockholders and the shares are being
offered again, there is no pre-emptive
right with respect to the latter offer of
shares (Benito v. SEC, G.R. No. L-56655, July
25, 1983).
Additional Issues of Originally Authorized
Shares
GENERAL RULE
There is no preemptive right. This is on the
theory that when a corporation at its inception
offers its first shares, it is presumed to have
offered all of those which it is authorized to
issue.
EXCEPTION
When a corporation at its inception offers only
a specified portion of its authorized capital
stock for subscription. If subsequently, it offers
the remaining unsubscribed portion, there
would be preemptive right as to the remaining
portion thus offered for subscription.
Unless there is an express restriction in the
Articles of Incorporation, the pre-emptive right
of the stockholder is transferable.
Instances when pre-emptive right is NOT
available:
a. When deni ed i n t he Ar t i cl es of
Incorporation;
b. When shares are used in compliance with
law requiring stock offerings or minimum
stock ownership by the public; and
c. When shares are issued in good faith with
t he approval of t he st ockhol ders
representing 2/3 of the outstanding
capital stock in exchange for property
needed for corporate purposes or in
payment of previously contracted debt.
3. REMEDIAL RIGHTS (BIRD Fur)
a. To inspect corporate books (Sec. 74);
b. To recover stock unlawfully sold for
delinquency (Sec. 69);
c. To demand payment in the exercise of
appraisal right (Secs. 41, 81);
d. To be f urni shed r ecent f i nanci al
statements/ reports of the corporations
operations (Sec. 75); and
e. To bring suits
Individual suit a suit instituted by a

shareholder for his own behalf against
the corporation;
Representative suit a suit filed by a

shareholder in his behalf and in behalf
likewise of other stockholders similarly
situated and with a common cause
against the corporation; and
Derivative suit supra.

Requisites:
ii. existing cause of action in favor of
the corporation;
iii. stockholder/member must first
mak e a demand upon t he
corporation or the management to
sue unless such a demand would
be futile;
iv. stockholder/ member must be such
at the time of the objectionable acts
or t r ansact i ons unl ess t he
transacti ons are conti nuousl y
injurious; and
v. action must be brought in the name
of the corporation which must be
alleged (The Corporation Code of the
Philippines Annotated, De Leon & De Leon,
Jr., 2006ed).
The Interim Rules of Procedure
Go v e r n i n g I n t r a - Co r p o r a t e
Co n t r o v e r s i e s p r o v i d e s : A
stockholder or member may bring an
action in the name of the corporation or
association as the case may be,
provided that:
1. That he was a stockholder or
member at the time the acts or
transactions subject of the action
occurred and at the time the action
was filed;
2. He exerted all reasonable efforts,
and al l eges t he same wi t h
particularity in the complaint, to
exhaust all remedies available
under the articles of incorporation,
by-laws, laws or rules governing the
corporation or partnership to obtain
the relief he desires;
3. No appraisal rights are available for
the acts complained of; and
4. The suit is not a nuisance or
harassment suit (Section 1, Rule 8, Ibid).
Note: The stockholder is only a
NOMINAL party in a derivative suit.
The real party in interest is the
Corporation.
The number of shar es of t he
stockholder is immaterial since he is
not suing in his own behalf.
The mere trustee of shares registered
in his name cannot file a derivative suit
for he is not a stockholder in his own
right (Bitong v. CA, Ibid).
LIABILITIES OF STOCKHOLDERS
1. Liability to the corporation for unpaid
subscription;
2. Liability to the corporation for interest on
unpaid subscription;
3. Liability to creditors of the corporation on the
unpaid subscription
4. Liability for watered stock
5. Liability for dividends unlawfully paid
6. Liability for failure to create corporation
Corporate Books and Records
Section 74
Books to be Kept; Stock
Transfer Agent
1. Book of all business transactions;
2. Book of Mi nut es of al l meet i ngs of
3. Book of Minutes of all meetings of directors or
trustees; and
4. Stock and transfer book, in case of stock
corporations.
Corporate records required by the SEC to be
kept and/or registered:
1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.
PERSONS GIVEN THE RIGHT TO INSPECT
CORPORATE BOOKS
1. Any director, trustee, stockholder or member;
2. Voting trust certificate holder;
3. Stockholder of a sequestered company; and
4. Beneficial owner of shares.
Requirements
1. The records must be kept at the principal
office of the corporation;
2. Any director, trustee, stockholder or member
shall have the right to inspect the records of
all business transactions and the minutes of
any meetings;
3. The stockholder may demand a copy of the
excerpts of the records or minutes; and
4. The refusal to allow such right to inspect and
to demand such copy shall subject the erring
officer or agent to civil and criminal liabilities
and if such refusal is by virtue of a resolution
or order of the board of directors or trustees,
the liability shall be imposed upon the
directors or trustees who voted therefor.
RIGHTS OF STOCKHOLDERS TO CORPORATE
BOOKS AND RECORDS
1. Right of Inspection;
2. Right to demand a list of stockholders;
3. Right to Demand a detailed auditing of
business expenditures;
4. To examine books of the corporations
subsidiary;
5. Rights to financial Statements (Sec. 75).
Basis of the Right to Inspection:
1. The right of stockholders to inspect the books
of the corporation rests on the fact of
beneficial ownership of the corporate property
and assets through ownership of shares;
2. The stockholders are entitled to inspect the
books and records of a corporation in order to
investigate the conduct of the management,
determine the financial condition of the
corporation, and generally take an account of
the stewardship of the officers and directors;
3. The evident purpose of the law in granting
stockholders the right is to protect small and
minority stockholders from the power of the
majority and from mismanagement by its
officers as well as to ascertain, establish and
maintain their rights and intelligently perform
their corporate duties; and
4. In the exercise of its power of supervision and
control over all corporations, the SEC motu
Corporation Law
proprio or upon complaint by any aggrieved
party, may undertake an inspection and
examination of books and records of any
corporation.
Extent of the Right of Inspection:
1. The right to inspect the books and records of
the corporation includes, as an INCIDENT
thereof, the right to make copies, abstracts
and memoranda of their contents.
2. The right of inspection is PERSONAL in the
sense that it may be exercised by the director,
et c. hi msel f but t he i nspect i on and
examination may be made by any proper
representative or attorney-in-fact and either
with or without the attendance of the director,
etc.
Limitations on the Right of Inspection:
1. The r i ght must be exer ci sed dur i ng
reasonable hours on business days;
2. The person demanding the right has NOT
improperly used any information obtained
through any previous examination of the
books and records of the corporation; and
3. The demand is made in good faith or for a
legitimate purpose (Sec. 74).
Note: The right extends, in consonance with
equity, good faith, and fair dealing, to a foreign
subsidiary wholly-owned by the corporation.
Remedies if Inspection Denied:
1. Mandamus;
2. Damages;
3. Criminal Suit
Defenses Available to Director, Trustee or
Officer Held Liable:
1. The person demanding to examine has
improperly used any information secured
through any prior examination of the records
or minutes of such corporation or for any
other corporation; or
2. The one requesting to inspect was not acting
in good faith or the demand is not for a
legitimate purpose.
Merger and Consolidation
Section 76
Plan of Merger or
Consolidation
COMMON FORMS OF CORPORATE
COMBINATIONS
1. Sale of Assets
2. Lease of Assets
3. Sale of Stock
4. Merger
5. Consolidation
MERGER CONSOLIDATION
A union whereby one or
more existing
corporations are absorbed
by another corporation
which survives and
continues the combined
business.
The union of two or
more existing
corporations to form a
new corporation
called the
consolidated
corporation.
Section 77
Stockholders or
members approval
PROCEDURE FOR MERGER AND
CONSOLIDATION
1. Approval of Plan The Board of each
corporation shall draw up a plan of merger or
consolidation;
2. Submission to stockholders or members
for approval The plan of merger or
consolidation shall be approved by vote of
stockholders representing at least 2/3 of the
outstanding capital stock, or members in case
of non-stock corporation
3. Execution of formal contract Articles of
Merger or Consolidation shall be executed by
each of the constituent corporations, signed by
the President or Vice-President and certified
by the secretary or assistant secretary;
4. Submission to SEC for approval Four
copi es of t he Ar t i cl es of mer ger or
Consol i dati on (together wi th favorabl e
recommendation of a pertinent government
agency in certain cases) shall be submitted to
the SEC for approval; and
5. Conduct of hearing by SEC If, upon
investigation, the SEC has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions
of this Code or existing laws, it shall set a
hearing to give the corporations concerned the
opportunity to be heard.
6. Issuance of certificate by SEC The SEC
shall issue a certificate of merger if it is
satisfied that the merger or consolidation of
the corporations concerned is not inconsistent
with the provisions of this Code and existing
laws (The Corporation Code of the Philippines Annotated,
De Leon & De Leon, Jr., 2006ed).
Note: The plan may still be amended before the
same is filed with the SEC, however, any
amendment thereto must be approved by the
majority vote of the board members or trustees of
the constituent corporations and affirmed by the
vote of 2/3 of the outstanding capital stockholders
or members.
Section 78
Articles of Merger or
Consolidation
Section 79
SECs approval and
effectivity of Merger or
Consolidation
GENERAL RULE
When one corporation buys all the shares of
another corporation, this will not operate to
dissolve the other corporation and as the two
corporations still maintaining their separate
corporate entities, one will not answer for the debts
of the other.
EXCEPTIONS AS TO NON-ASSUMPTION OF
LIABILITIES (FEC
2
)
1. If there is an express assumption of liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser is merely a continuation of the
seller.
DE FACTO MERGER
One corporation acquiring all or substantially all of
the properties of another corporation in exchange
for shares of stock of the acquiring corporation.
The acquiring corporation would end-up with the
business enterprise of the selling corporation
whereas the latter would end up with basically its
remaining assets being the shares of stock of the
acquiring corporation and may then distribute it as
liquidating dividend to its stockholders (Philippine
Corporate Law, Villanueva, 2001ed).
MERGER and
CONSOLIDATION
SALE OF ASSETS
Acts involved
Sale of assets is
always involved
Merger/ consolidation is
not always involved
Transfer of title
Title to the assets
are transferred by
operation of law
Transfer of title is by virtue
of contract
Assumption of liabilities
There is automatic
assumption of
liabilities
Purchasing corporation is
not generally liable for the
debts and liabilities of the
selling corporation
Dissolution
The constituent
corporations are
automatically
dissolved
The selling corporation is
not dissolved by the mere
transfer of all its property
Liquidation
There is continuance
of the enterprise and
of the stockholders
The selling corporation
ordinarily contemplates a
liquidation of the enterprise
TYPES OF ACQUISITIONS (Philippine Corporate Law,
Villanueva, 2001ed)
1. ASSETS-ONLY LEVEL (Property Only
Purchase)
The purchaser is interested only in the raw
assets and properties of the business. He is
not interested in the entity of the corporate
owner of the assets or on the goodwill and
other factors relating to the business itself.
The transferee would not be liable for the
debts and liabilities of his transferor since
there is no privity of contract over debt
obligations between the transferee and the
transferors creditors.
2. BUSI NESS- ENTERPRI SE LEVEL
(Purchase as On-Going Concern)
The transferee merely continues the same
business of the transferor since he obtains the
earning capability of the venture.
The transferee is liable for the debts and
liabilities of the transferor.
3. EQUITY LEVEL (Share Purchase)
The purchaser takes control and ownership of
the business by purchasing the shareholdings
of the corporate owner. What the purchaser
actually purchased is the ability to elect the
members of the board of the corporation who
run the business.
Corporation Law
Section 80
Legal Effects of Merger
and Consolidation
1. There is automatic assumption of the liabilities
of the absorbed corporation or constituent
corporations which are dissolved.
2. 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
asset s f or t he sur vi vi ng cor por at i on
automatically acquires all the liabilities of the
constituent corporation.
3. Permits the transfer of the assets to the
purchaser and the di stri buti on of the
consideration received in a single operation.
4. Involve exchanges of properties, a transfer of
the assets of the constituent corporations in
exchange for securities in the new or surviving
corporation but neither involves winding up of
the affairs of the constituent corporations in
the sense that their assets are distributed to
the stockholders.
5. Dissolution of the constituent corporations
cannot be made to retroact to a date prior to
the ratification of the stockholders but the
transfer of the assets and liabilities of the
constituent corporations could be made
effective retroactively as of the date the said
board of directors so resolved.
6. Consent of the creditors not necessary.
Appraisal Right
APPRAISAL RIGHT
The right to demand payment of the fair value of
his shares, after dissenting from a proposed
corporate action involving a fundamental change
in the corporation in the cases provided by law.
Section 81
Instances of Appraisal
Right (ASIMA)
1. An amendment to the articles that has the
effect of
a. changing or restricting the rights of
s har ehol der s or of aut hor i z i ng
preferences over those of outstanding
shares; or
b. changing the term of corporate existence;
2. Sale, encumbrance or other dispositions of all
or substantially all of the corporate property or
assets;
3. Merger or consolidations (Sec. 81);
4. Investment of corporate funds in another
corporation or in a purpose other than the
primary purpose (Sec. 42);
5. In a close corporation, a stockholder may, for
any reason, compel the corporation to
purchase his shares when the corporation has
sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock (Sec.
105).
Section 82
How right is exercised
1. The dissenting stockholder shall make a
written demand on the corporation within 30
days after the date on which the vote was
taken for the payment of the fair value of his
shares;
2. I f t he pr oposed cor por at e act i on i s
implemented or effected, the corporation shall
pay such stockholder, upon surrender of the
corresponding certificate of stock within 10
days after demanding payment of his shares;
3. Upon payment of the agreed or awarded
price, the stockholder shall transfer his shares
to the corporation.
Conditions for Exercise of Appraisal Right
1. Any of the instances set forth by law must be
present.
2. Dissenting stockholder must have voted
against the proposed action.
3. Demand for payment must be made within 30
days from the date vote is taken thereon.
Failure to make demand shall be deemed a
waiver.
4. Price must be based on fair value as of day
prior to date on which vote was taken.
5. Submission by withdrawing stockholder of his
shares to the corporation for notation of being
dissenting stockholder within 10 days from
written demand.
6. Payment must be made only when the
corporation has unrestricted retained earnings
in its books.
7. Stockholder must transfer his shares to the
corporation upon payment by the corporation.
Note: If the corporation unjustifiably refuses to
pay the dissenting stockholder despite the full
compliance with all the requirements for a valid
exercise of appraisal right and despite the fact that
the corporation has sufficient unrestricted retained
earnings, the aggrieved stockholder may file the
appropriate action before the proper Regional Trial
Court to compel the corporation to allow him to
exercise his appraisal right (SEC Opinion, October 1,
2001).
Section 83
Effect of Demand and
Termination of Right
1. All rights accruing to such shares shall be
suspended from the time of demand for
payment of the fair value of the shares until
either the abandonment of the corporate
action.
2. The dissenting stockholder shall be entitled to
receive payment of the fair value of his shares
as agreed upon between him and the
corporati on or as determi ned by the
appraisers chosen by them.
If not paid within 30 days after the award,
his voting and dividend rights shall be
immediately restored.
PAYMENT
Made only if the corporation has unrestricted
retained earnings in its books to cover the same.
Section 84
When right to Payment
ceases
GENERAL RULE
A dissenting stockholder who demands payment
of his shares is no longer allowed to withdraw
from his decision.
EXCEPTIONS (C-DAN)
1. The corporation consents to the withdrawal;
2. The proposed corporate action is abandoned
or rescinded by the corporation;
3. The proposed corporate action is disapproved
by the SEC where its approval is necessary;
and
4. The Commission determines that such
stockholder is not entitled to appraisal right
(Sec. 84).
VALUATION DATE
The fair value of the shares of the dissenting
stockholder is determined as of the day PRIOR to
t he dat e on whi ch t he vot e was t aken
notwithstanding any appreciation or depreciation
in value of the shares in anticipation of such
corporate action.
Section 85
Who Bears cost of
Appraisal
Section 86
Notation on certificate (s);
right of transferee
Non-Stock Corporations
Section 87
Concept
A non- stock corporation is one where no part of
its income is distributable as dividends to its
members.
Even if there is a statement of capital stock, for as
long as there is no distribution of retained
earnings to its members, the corporation is non-
stock.
Any profit which it may obtain as an incident to its
operations shall, whenever necessary or proper,
be used in furtherance of the purpose or purposes
for which it was organized.
Requisites:
1. It does NOT have capital stock divided into
shares;
2. NO part of whose income is, during its
existence, distributable as dividends to its
members, trustees, or officers; and
Section 88
Purposes (CREPS-CFL-
SCS-TIA_Like _Combi.)
Non-stock corporations may be formed or
organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific,
Corporation Law
social, civic service, or similar purposes like trade,
industry, agricultural and like chambers, or any
combination thereof.
They are governed by the same rules established
for stock corporations, whenever pertinent,
subject, however, to a number of special features.
RULES ON CONVERSION
1. Stock to non-stock corporation
Conver si on may be made by mer e
amendment of the articles of incorporation.
The effect of this is that after the conversion,
the stockholders now become the members of
the non-stock corporation and thus will no
longer have any pecuniary interest in the
corporation. Neither are they entitled to any
share in the profit that may be obtained out of
the operations or activities of the non-stock
corporation. Hence, there is in fact no
distribution by the stock corporation, by
conversion, of its assets to its stockholders.
2. Non-stock to stock corporation
A non-stock corporation cannot be converted
into a stock corporation by mere amendment
of its articles of incorporation because the
conversion would change the corporate
nature from non-profit to monetary gain.
What the corporation should do is to dissolve
itself and its members may decide to organize
a stock corporation.
The conversion without dissolving it first
would be tantamount to distribution of its
assets or income to its members inasmuch as
after its conversion, the asset of the non-stock
corporation would now be treated as payment
to the subscriptions of the members who will
now become stockholders of the corporation.
STOCK NON-STOCK
Nature
Has capital stock
divided into shares and
with authority to
distribute dividends to
its stockholders.
Does not have shares and
may not distribute profits to
its members.
Meeting / voting of members/ stockholders
Stockholders and
directors must act in a
meeting, except where
a mere written assent
is sufficient or a formal
meeting unnecessary.
Members may be allowed
by the by-laws to vote by
mail or other similar means.
Manner of voting
available in the
election of directors
Cumulative voting not
available unless otherwise
provided in the articles or
by-laws
Proxy
Stockholders may vote
by proxy
Members may be deprived
of the right to vote by proxy
in the articles or by-laws
Non-transferability of Membership
Stockholders may
transfer their shares
Members cannot transfer
their membership unless
allowed by the articles or
by-laws
Directors / Trustees
Directors cannot
exceed 15 in number
Trustees may exceed 15 in
number
Term of director/ trustee
The term of a director
is 1 year
The term of a trustee is 3
years; 1/3 of the Board
shall be elected annually
Election of officers
Officers are elected by
the Board of Directors
Officers may be directly
elected by the members
unless otherwise provided
in the articles or by-laws
Place of meeting
Stockholders meetings
shall be held in the city
or municipality where
principal office of
corporation is located,
and if practicable in the
principal office.
The by-laws may provide
that members of a non-
stock corporation may hold
their meetings at any place
within the Philippines.
Close Corporations
Section 96
CLOSE CORPORATIONS
A special kind of stock corporation:
1. whose articles of incorporation should provide
that:
a. the number of stockholders shall not
exceed 20;
b. issued stocks are subject to transfer
restrictions, with a right of preemption in
f avor of t he st ockhol der s or t he
corporation; and
c. the corporation shall not be listed in the
stock exchange or its stocks should not
be publicly offered; or
2. whose stocks, at least 2/3 of the voting stocks
or voting rights of which are not owned or
controlled by another corporation which is not
a close corporation
Not e: Non- compl i ance wi t h any of t he
requirements shall not make the corporation a
close corporation within the meaning of the
Corporation Code.
CHARACTERISTICS
1. Stockholders may act as directors without
need of election and therefore are liable as
directors;
2. Stockhol ders who are i nvol ved i n the
management of the corporation are liable in
the same manner as directors are;
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would
increase the number of stockholders to more
than the maximum are invalid;
5. Corporate actuations may be binding even
without a formal board meeting, if the
stockholder had knowledge or ratified the
informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on
the written petition by any stockholder; and
8. Stockholder may withdraw and avail of his right
of appraisal.
Note: Special rules are provided for close
corporati ons because i t i s essenti al l y an
incorporated partnership (The Corporation Code of the
Section 97
Articles of Incorporation.
ORDINARY STOCK
CORPORATION
CLOSE CORPORATION
Articles of incorporation
Its articles of
incorporation need
only contain the
general matters
enumerated in Sec.
14 of the Code.
Its articles must contain the
special matters prescribed
by Sec. 97, aside from the
general matters in Sec. 14.
Failure to do so precludes
a de jure close corporation
status.
Ownership of stocks
Its status as an
ordinary stock
corporation is not
affected by the
ownership of its
voting stock or
voting rights.
2/3 of its voting stock or
voting rights must not be
owned or controlled by
another corporation which
is not a close corporation.
Classification of directors
Its articles cannot
classify its directors.
Its articles may classify its
directors.
Election/ appointment of officers
The corporate
officers and
employees are
elected by a majority
vote of all the
members of the
board of directors.
Its articles may provide that
any or all of the corporate
officers or employees may
be elected or appointed by
the stockholders.
Management
Business of the
corporation is
managed by the
board of directors.
Business of the corporation
may be managed by the
stockholders if the articles
so provide, but they are
liable as directors.
Pre- emptive right
The pre-emptive
right is subject to the
exceptions found in
Sec. 39.
The pre-emptive right is
subject to no exceptions
unless denied in the
articles
Appraisal right
The appraisal right
may be exercised by
a stockholder only in
the cases provided
in Secs. 81 and 42
of the Code.
The appraisal right may be
exercised and compelled
against the corporation by
a stockholder for any
reason.
Corporation Law
ORDINARY STOCK
CORPORATION
CLOSE CORPORATION
Purchase of its own shares
Except as regards
redeemable shares,
the purchase by the
corporation of its
own stock must
always be made
from the unrestricted
retained earnings.
In case of an arbitration of
an intra-corporate deadlock
by the SEC, the
corporation may be
ordered to purchase its
own shares from the
stockholders regardless of
the availability of
earnings.
Remedy of arbitration
Arbitration of intra-
corporate deadlock
by the SEC is not a
remedy in case the
directors or
stockholders are so
divided respecting
the management of
the corporation.
Arbitration of intra-
corporate deadlock by the
SEC is an available
remedy in case the
directors or stockholders
are so divided respecting
the management of the
corporation.
The following cannot be a close corporation:
a. mining companies;
b. oil companies;
c. stock exchanges;
d. banks;
e. insurance companies;
f. public utilities;
g. educational institutions; and
h. other corporations declared to be vested with
public interest. (Sec. 96)
Note: A close corporation is different from a
cl osed corporati on and a cl osel y hel d
corporation.
Section 98
Validity of Restrictions on
Transfer of Shares
RESTRICTIONS ON TRANSFER
It is mandatory for the Articles of Incorporation of a
close corporation to provide that all of the issued
stocks of all classes be subject to one or more
restriction.
The restriction on transfer is in the nature of a
right of first refusal in favor of the stockholders
which can be waived by the stockholder, if the
latter fails to exercise the option to purchase
within the period stated in the articles and by-
laws.
Any transfer made should not result in
exceeding the number of stockholders as
allowed by the Code.
Section 99
Issuance in breach of
Qualifying Conditions
It is clear under Section 99 that good faith is not a
def ense because t her e i s a concl usi ve
presumption of knowledge of the restriction.
Section 100
Agreements by
Stockholders
EFFECTS WHERE STOCKHOLDERS ARE
MANAGERS
1. No longer necessary to elect directors;
2. Stockholders concerned shall be deemed the
directors;
3. The stockholders shall have the same
liabilities as directors;
4. To the extent that the stockholders are
actively engaged in the management or
operation of the business and affairs of a
close corporation, the stockholders shall be
held to strict fiduciary duties to each other and
among themselves; and
5. The stockholders shall be personally liable for
corporate torts unless the corporation has
obtai ned reasonabl y adequate l i abi l i ty
insurance.
Section 101
When board meeting is
unnecessary or
improperly held
Any action by the directors of a close corporation
without a meeting shall be valid if:
1. Before or after such action is taken, written
consent is signed by all the directors;
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection;
3. The directors are accustomed to take informal
act i on wi t h t he expr ess or i mpl i ed
acquiescence of all the stockholders;
4. All the directors have express or implied
knowledge of the action in question and make
no prompt objection thereto.
Section 102
Pre-emptive right in Close
Corporations
Section 103
Amendment of Articles of
Incorporation
Section 104
Deadlocks
DEADLOCK IN A CLOSE CORPORATION
DEADLOCK i s when t he di r ect or s or
stockholders are so divided respecting the
management of the business and affairs of the
corporation that the votes required for any
corporate action cannot be obtained and as a
result, business and affairs can no longer be
conducted to the advantage of the stockholders
generally.
In this case, the SEC shall have the power to
arbitrate the dispute and in the exercise of
such power, the SEC shall have authority to
1. Cancel or alter any provision in the articles of
incorporation or by-laws;
2. Cancel, alter or enjoin any resolution of the
corporation;
3. Direct or prohibit any act of the corporation;
4. Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation regardless of
the availability of unrestricted retained
earnings;
5. Appoint a provisional director;
6. Dissolve the corporation; or
7. Grant such other relief as the circumstances
may warrant.
Special Corporations
Section 106-108
EDUCATIONAL CORPORATION
It is a stock or non-stock corporation organized to
provide facilities for teaching or instruction.
A favorable recommendation of the DECS is
essential for the approval of its articles of
incorporation and by-laws.
It is primarily governed by special laws and
suppletorily governed by the provisions of the
Code.
Section 4(2), Article XIV of the 1987 Constitution
provi des for rul es governi ng the control ,
administration and establishment of educational
institutions.
NON-STOCK
EDUCATIONAL
CORPORATION
EDUCATIONAL
CORPORATION
Governing law
Governed by the
provisions on non-
stock corporations
and suppletorily by
the provisions on
stock corporations
Governed by special laws
and by the general
provisions of the
Corporation Code
Nature
A non-stock
corporation
A special corporation which
may be stock or non-stock
Number of trustees
The number of
board of trustees
may be more than
15
The number of the board of
trustees should not be less
than 5 but not more than
15.
Term of office
The term of office of
the board of trustees
shall be 3 years
The term of office of the
board of trustees shall be 5
years
Section 109-116
RELIGIOUS CORPORATIONS
A corporation composed entirely of spiritual
persons and whi ch i s organi zed for the
furtherance of a religion or for perpetuating the
rights of the church or for the administration of
church or religious work or property. It is different
from an ordinary non-stock corporation organized
for religious purposes.
The Corporation Code does not require any
religious group to be registered as a corporation
BUT if it wants to acquire legal personality, its
member s shoul d i ncor por at e under t he
corporation Code.
Kinds
1. Corporation sole - A special form of
corporation, usually associated with the clergy,
consisting of one person only and his
successors, who is incorporated by law to give
some legal capacities and advantages (Section
110);
Corporation Law
2. Religious societies/ Corporate aggregate -
A non-stock corporation governed by a board
but with religious purposes. It is incorporated
by an aggregate of persons, e.g. religious
order, diocese, synod, sect, etc. (Section 116);
and
3. Ordinary Non-Stock Religious Corporation
(Section 88)
Dissolution and Winding Up
DISSOLUTION
The extinguishment of the corporate franchise and
the termination of corporate existence.
The complete destruction of the corporation and
within contemplation of the law, is equivalent to its
death, being sometimes likened to the death of a
natural person (The Corporation Code of the Philippines
Annotated, De Leon & De Leon, Jr., 2006ed).
Section 117
Methods of Dissolution
1. VOLUNTARY
a. Application for dissolution with the SEC:
i. Where no creditors are affected;
ii. Where creditors are affected;
b. Shortening of the corporate term by
amending the articles of incorporation.
(Section 120)
2. INVOLUNTARY
a. Expiration of the corporate term;
b. Failure to organize and commence
business within 2 years from the date of
issuance of the certificate of incorporation
(Section 121)
Note: However, the SEC has opined that
the dissolution in this case is not
automatic. The corporation continues to
exist as such, notwithstanding its non-
operational status until the SEC orders its
dissolution after notice and hearing.
c. Legislative dissolution;
d. Quo warranto suit against a de facto
corporation;
e. Minority stockholders suit for dissolution
on justifiable grounds; or
f. SEC dissolution, upon complaint and
after notice and hearing, on the following
grounds:
i. The cor por at i on was i l l egal l y
organized;
ii. Continuous inactivity (subsequent to
i ncorporati on, organi zati on and
commencement of business) for at
least 5 years;
iii. Serious dissension in the corporation;
or
iv. Commission by the corporation of
illegal or ultra vires acts or violations
of the Code.
EFFECTS
1. Transfer of legal title to corporate property to
the stockholders who become co-owners
thereof;
2. Continuation of corporate business merely as
an association without juridical personality;
3. Conveyance by the stockholders of their
respective shareholdings toward the creation
of a new corporation to continue the business
of the old;
4. Reincorporation of the dissolved corporation
by re-filing new articles of incorporation and
by-laws;
5. The corporati on conti nues as a body
corporate for 3 years for purposes of winding
up; and
6. Cessation of corporate existence for all
purposes upon the expiration of the winding
up period of 3 years (The Corporation Code of the
Section 118
Voluntary Dissolution
Where no Creditors are
Affected
Dissolution may be effected by majority vote of the
board of directors or trustees and by a resolution
adopted by the affirmative vote of the stockholders
owning at least 2/3 of the outstanding capital
stock or of at least 2/3 of the members at a
meeting called for such purpose.
Section 119
Voluntary Dissolution
Where Creditors are
Affected
1. A petition shall be filed with the SEC;
2. Signed by a majority of its board of directors or
trustees or other officers having management
of its affairs;
3. Verified by its president or secretary or one of
its directors or trustees;
4. Shall set forth all claims and demands against
it;
5. Resolved upon by the affirmative vote of the
stockholders representing at least 2/3 of the
outstanding capital stock or by at least 2/3 of
the members at a meeting called for that
purpose.
Section 122
Corporate Liquidation
LIQUIDATION
The process by which all the assets of the
corporation are converted into liquid assets (cash)
in order to facilitate the payment of obligations to
creditors, and the remaining balance, if any, is to
be distributed to the stockholders or members.
Note: A dissolved corporation continues to be a
body corporate for 3 years from the time it is
dissolved for the purpose of liquidation or winding
up its corporate affairs.
The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of
the rights and liabilities of such entity nor those of
its owners and creditors alike (see Sec. 145).
METHODS
1. By the corporation itself through its board of
directors/ trustees;
2. By a trustee to whom the corporate assets
have been conveyed; and
3. By a management commi t t ee or
rehabilitation receiver appointed by the
SEC.
Note: The 3-year period of liquidation does not
apply to Methods 2 and 3 as long as the trustee or
the receiver is appointed within the said period.
BUT the word trustee as used in the corporation
statute must be understood in its general concept
which could include the counsel to whom was
entrusted the prosecution of the suit filed by the
corporation (Spouses Gelano v. CA, GR No. L-41537,
February 24, 1981).
The board of directors may also be permitted to
complete the corporate liquidation by continuing
as trustees by legal implication (Clemente v. CA, GR
No. 82407, March 27, 1995).
Indeed, if the trustee may commence a suit which
can proceed to final judgment beyond the 3-year
period, there is no reason why a suit commenced
by the corporation itself during its existence
should not be afforded similar treatment and
allowed to proceed to final judgment and
execution thereof (Reburiano v. CA, GR No. 109840,
January 21, 1999).
The question as to the right of priority of a
claimant against the assets of a corporation that is
being dissolved and liquidated becomes of
i mportance onl y when the assets of the
corporation are not sufficient to pay all claims (19
Am. Jur. 2d).
LIQUIDATION REHABILITATION
Nature
Connotes a winding
up or settling with
creditors and debtors
Connotes a reopening or
reorganization
Continuity of corporate life
Winding up process
so that assets may
be distributed to
those entitled
Contemplates a
continuance of corporate
life in an effort to restore
the corporation to its
former successful
operation
Corporation Law
Foreign Corporations
Section 123
Definition and Rights of
Foreign Corporations
FOREIGN CORPORATION
A foreign corporation is one formed, organized or
existing under any law other than those of the
Philippines and whose laws allow Filipino citizens
and corporation to do business in its own country
or state (Sec. 123; Reviewer in Commercial Law, Sundiang &
Aquino, 2006ed).
The definition espouses the incorporation test and
the reciprocity rule and is significant for licensing
purposes.
The rule that requires reciprocity before a foreign
corporation can be recognized is a reflection of
the basic rule that a foreign corporation is one
which owes its existence to the laws of another
State and generally, it has no existence within a
State in which it is foreign.
Section 124
Application to existing
Foreign Corporation
It is NOT permitted to transact or do business in
the Philippines until it has secured a license for
that purpose from the SEC and a certificate of
authority from the appropriate government
agency.
Section 125
Application for a License
REASONS WHY A LICENSE IS NECESSARY
1. To place them under the jurisdiction of the
courts;
2. To place them in the same footing as
domestic corporations; and
3. Protection for the public in dealing with said
corporations.
Section 127-128
Resident Agent
RESIDENT AGENT
An individual, who must be of good moral
character and of sound financial standing, residing
in the Philippines, OR a domestic corporation
lawfully transacting business in the Philippines,
designated in a written power of attorney by a
foreign corporation authorized to do business in
the Philippines, on whom any summons and other
legal processes may be served in all actions or
other legal proceedings against the foreign
corporation (Sec. 127-128).
A resident agent cannot sign the certificate of non-
forum shopping that is a requirement for the filing
of an initiatory pleading in court because while a
resident agent may be aware of actions filed
against the principal, he may not be aware of the
actions initiated by the principal (Expert Travel &
Tours Inc. v. CA, G.R. No. 152392, May 26,2005).
GROUNDS FOR REVOCATION OF LICENSE
1. Failure to file annual reports required by the
Code;
2. Failure to appoint and maintain a resident
agent;
3. Failure to inform the SEC of the change of
residence of the resident agent;
4. Failure to submit copy of amended articles or
by-laws or articles of merger or consolidation;
5. A misrepresentation in material matters in
reports;
6. Fai l ur e t o pay t axes, i mpost s and
assessments;
7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation; and
9. Not licensed to do business in the Philippines
(Sec. 134).
TEST OF DOI NG OR TRANSACTI NG
BUSINESS IN THE PHILIPPINES
The Corporation Code does not define the phrase
doing or transacting business.
1. JURISPRUDENTIAL TESTS (Philippine Corporate
Law, Villanueva, 2001ed)
a. Twin characterization test
i. Whether the foreign corporation is
mai ntai ni ng or conti nui ng i n the
Philippines the body or substance of the
business for which it was organized or
whether it has substantially retired from
it and turned it over another (Substance
Test); and
ii. Whet her t her e i s cont i nui t y of
commercial dealings and arrangements,
contemplating to some extent the
performance of acts or works or the
exercise of some functions normally
i nci dent t o and i n pr ogr essi ve
prosecution of, the purpose and object
of its organization (Continuity Test).
b. Contract Test
Whether the contracts entered into by the
foreign corporation, or by an agent acting
under the control and direction of the
foreign corporation, are consummated in
the Philippines. To be doing or transacting
business in the Philippines for purposes of
Section 133 of the Corporation Code, the
foreign corporation must actually transact
business in the Philippines, that is, perform
specific business transactions within the
Philippine territory on a continuing basis in
its own name and for its own account.
Actual transaction of business within the
Philippine territory is an essential requisite
for the Philippines to acquire jurisdiction
over a foreign corporation and thus require
the foreign corporation to secure a
Philippine business license (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing Industries, Inc.,
GR No. 147905, May 28, 2007).
2. STATUTORY TESTS
a. Foreign Investment Act of 1991 (R.A. No.
7042)
Acts constituting doing business:
i. Soliciting orders, service contracts,
opening offices, whether called liaison
offices or branches;
ii. Appoi nt i ng r epr es ent at i v es or
distributors domiciled in the Philippines
or who in any calendar year stay in the
country for a period or periods totaling
180 days or more;
iii. Parti ci pati ng i n the management,
supervision or control of any domestic
business, firm or entity or corporation in
the Philippines; and
iv. Any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to that
extent the performance of acts or works,
or the exercise of some of the functions
normally incident to, and in progressive
prosecution of, commercial gain or of
t h e p u r p o s e o f t h e b u s i n e s s
organization.
b. Implementing Rules of R.A. No. 7042
Acts NOT constituting doing business:
i. Mere investment as a shareholder in a
domest i c corporat i on and/ or t he
exercise of rights as such investor;
ii. Appoi nt i ng a r epr esent at i ve or
distributor domiciled in the Philippines
which transacts business in its own
name and for its own account;
iii. Publication of a general advertisement
through any print or broadcast media;
iv. Maintaining a stock of goods in the
Philippines solely for the purpose of
having the same processed by another
entity in the Philippines;
v. Consignment by the foreign corporation
of equipment with a local company to be
used in the processing of products for
export;
vi. Collecting information in the Philippines;
and
vii. Performing services auxiliary to an
existing isolated contract of sale which
are not on a continuing basis.
3. JURISPRUDENTIAL RULES
a. Doctrine of Isolated Transactions
Foreign corporations, even unlicensed
ones, can sue or be sued on a transaction
or series of transactions set apart from their
common business in the sense that there is
no intention to engage in a progressive
pursuit of the purpose and object of
business transaction (Eriks Pte. Ltd v. CA, GR
No. 118843, February 6, 1997).
b. In Pari Delicto Rule
In the case of Top-Weld Manufacturing vs.
ECED, S.A. (GR L-44944, August, 9, 1985), the
Court denied the relief prayed for by
petitioner when it ruled that the very
purpose of the law was circumvented and
evaded when the petitioner entered into the
said agreements despite the prohibition
contained in the questioned law. The
parties were considered as being in pari
delicto because they equally violated R.A.
5455.
c. Estoppel Rule
A party is estopped from questioning the
capacity of a foreign corporation to institute
an action in our courts where it had
obtained benefits from its dealings with
such foreign corporations and thereafter
committed a breach or sought to renege on
its obligations (Merrill Lynch v. CA, G.R. No.
978160, July 24, 1992).
EFFECTS OF LACK OF LICENSE
1. ON SUITS
a. Foreign corporation doing business in the
Philippines:
i. may not sue or intervene in any
action in any court or administrative
agency of the Philippines; but
Corporation Law
ii. may be sued on any valid cause of
a c t i o n r e c o g n i z e d i n t h e
Philippines (under the doctrine of
quasi-estoppel by acceptance of
benefits) (Sec. 133).
b. Foreign corporation NOT doing business
in the Philippines:
i. Generally, it may not sue and be
sued in any court or administrative
agency of the Philippines;
ii. However, it may sue and be sued
for isolated transactions, as well
as for those which are casual or
incidental thereto.
2. ON CONTRACTS
The contracts contemplated are those that
satisfy the contract test or those that make a
foreign corporation as one doing business in
the Philippines.
GENERAL RULE
The contracts are unenforceable. They are
enforceable only upon securing a license.
EXCEPTION
However, the contracts are null and void if
they are contrary to law, morals, good
customs, public order and public policy.
I N S T A N C E S W H E N A F O R E I G N
CORPORATION MAY SUE IN THE PHILIPPINES
WHETHER OR NOT LI CENSED TO DO
BUSINESS
1. To seek redress for an isolated business
transaction;
2. To protect its corporate reputation, name, and
goodwill;
3. To enforce a right not arising out of a business
transaction, e.g. tort that occurred in the
Philippines;
4. When the parties have contractually stipulated
that Philippines is the venue of actions; and
5. When the party sued is barred by the principle
of estoppel and/or principle of unjust
enrichment from questioning the capacity of
the foreign corporation; and
6. Recovery of misdelivered property.
G R O U N D S F O R R E V O C AT I O N O R
SUSPENSION OF LICENSE BY SEC
1. Failure to file its annual report or pay any fees
as required by the Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by the
Code;
3. Failure, after change of its resident agent or
his address, to submit to the SEC a statement
of such change as required by the Code;
4. Failure to submit to the SEC an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by the Code;
5. A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to the provisions of the Code;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivision;
7. Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines (Sec. 34).
Procedure
1. The SEC shall issue a corresponding
certificate of revocation, furnishing a copy
thereof to the appropriate government agency
in the proper case;
2. The SEC shall also mail to the corporation at
its registered office in the Philippines a notice
of such revocation accompanied by a copy of
the certificate of revocation.
WITHDRAWAL PROCEDURE
By filing a petition for withdrawal of license
Requisites
1. All claims which have accrued in the
Philippines have been paid, compromised or
settled;
2. All taxes, imposts, assessment, and penalties,
i f any, l awful l y due to the Phi l i ppi ne
Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has
been published once a week for three
consecutive weeks in a newspaper of general
circulation in the Philippines.
Securities and Exchange Commission Reorganization
Decree (P.D. No. 902-A)
ORIGINAL AND EXCLUSIVE JURISDICTION OF
THE RTC (Sec. 5 in relation to Sec. 5.2 of RA 8799):
1. Fraudulent devices and schemes employed
by directors detrimental to the public interest
and to other firms;
2. Intra-corporate disputes;
3. Disputes with the state in relation to their
franchise and right to exist as such;
4. Controversies in election, appointment of
5. Petition to be declared in a state of
suspension of payments;
6. Petition for rehabilitation; and
7. Appointment of rehabilitation receiver or
management commi t t ee ( pr ovi si onal
remedies).
Note: RA 8799 effectively amended Sec. 5 of PD
902-A, jurisdiction over intra-corporate disputes is
now vested in the RTCs. However, while Sec. 5
was amended, there is no repeal of Sec. 6 thereof
declaring that the fraudulent acts or schemes,
which the SEC shall exclusively investigate and
prosecute, are those in violation of any law or
rules and regulations administered and enforced
by the SEC alone. The filing of civil/intra-corporate
case before SEC does not precl ude the
simultaneous and concomitant filing of a criminal
action before the regular courts; such that a
fraudulent act may give rise to liability for violation
of the rules and regulations of the SEC cognizable
by the SEC itself, as well as criminal liability for
violation of the Revised Penal Code cognizable by
the regular courts; both charges to be filed and
proceeded independently and simultaneously
(Fabia v. CA, G.R. No. 132684. September 11, 2002).
A corporate officers dismissal is always a
cor por at e act and/ or an i nt r a- cor por at e
controversy. However, the corporate officers
contemplated are those whose offices are created
by the Corporation Code or the by-laws.
INTRA-CORPORATE DISPUTE
Elements
1. Status or relationship of the parties
controversy must be between and among
corporators, between corporators and the
corporation.
2. Nature of the question intrinsic connection
with the regulation or the internal affairs of the
corporation.
Examples:
a. Action by a corporate officer to recover
compensation from the corporation;
b. Action by a stockholder to compel issuance of
certificate of stocks; and
c. Action for recovery of corporate funds
G R O U N D S F O R S U S P E N S I O N O R
CANCELLATI ON OF CERTI FI CATE OF
REGISTRATION (Sec. 6[L])
1. fraud in procuring registration;
2. serious misrepresentation as to objectives of
corporation;
3. refusal to comply with lawful order of SEC;
4. continuous inoperation for at least 5 years;
5. failure to file by-laws within required period;
6. failure to file reports; and
7. other similar grounds.
Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04). Effective April 1, 2001
CASES COVERED
1. Devices or schemes employed by, or any act
of , t he board of di rect ors, busi ness
associates, officers or partners, amounting to
fraud or misrepresentation which may be
detrimental to the interest of the public and/or
of the stockholders, partners, or members of
any corporation, partnership, or association;
2. Controversies arising out of intra-corporate,
partnership, or association relations, between
and among stockholders, members, or
associates; and between, any or all of them
and t he corporat i on, part nershi p, or
association of which they are stockholders,
members, or associates, respectively;
3. Controversies in the election or appointment
of directors, trustees, officers, or managers of
corporations, partnerships, or associations;
4. Derivative suits; and
Corporation Law
5. Inspection of corporate books.
The provisions of this rule shall also apply
to election contests in stock and non-stock
corporations.
An el ect i on cont est ref ers t o any
controversy or dispute involving title or
claim to any elective office in a stock or
non-stock corporation, the validation of
proxies, the manner and validity of
el ecti ons, and the qual i fi cati ons of
candidates, including the proclamation of
winners, to the office of director, trustee or
other officer directly elected by the
stockholders in a close corporation or by
members of a non-stock corporation
where the articles of incorporation or by-
laws so provide.
All actions covered by these Rules shall
be commenced and tried in the Regional
Trial Court which has jurisdiction over the
pri nci pal offi ce of the corporati on,
partnership, or association concerned.
Wher e t he pr i nci pal off i ce of t he
corporation, partnership or association is
registered in the Securities and Exchange
Commission as Metro Manila, the action
must be filed in the city or municipality
where the head office is located.
Nuisance and harassment suits are prohibited.
In determining whether a suit is a nuisance or
harassment suit, the court shall consider,
among others, the following:
a. The extent of the shareholding or interest of
the initiating stockholder or member;
b. Subject matter of the suit;
c. Legal and factual basis of the complaint;
d. Availability of appraisal rights for the act or
acts complained of; and
e. Prejudice or damage to the corporation,
partnership, or association in relation to the
relief sought.
In case of nuisance or harassment suits,
the court may, motu proprio or upon
motion, forthwith dismiss the case.
All decisions and orders issued under
these Rul es shal l i mmedi atel y be
executory. No appeal or petition taken
therefrom shall stay the enforcement or
implementation of the decision or order,
unless restrained by an appellate court.
Interlocutory orders shall not be subject to
appeal.
Interim Rules of Procedure on Corporate Rehabilitation.
Effective December 15, 2000
CORPORATE REHABILITATION
A process to conserve and administer the
corporations assets in the hope that it may
eventually be able to recover from financial stress
to solvency.
Nature
In rem, summary, and non-adversarial.
Applicability
These Rules apply to petitions for rehabilitation
f i l ed by cor por at i ons, par t ner shi ps and
associations pursuant to P.D. 902-A.
Venue
Petitions for rehabilitation pursuant to these Rules
shall be filed in the RTC having jurisdiction over
the territory where the debtors principal office is
located.
STEPS
1. Filing a verified petition with the appropriate
RTC by:
c. corporate debtor who foresees the
impossibility of meeting its debts when
they respectively fall due; or
d. creditors holding at least 25% of the
debtors total liabilities;
2. The following shall be annexed to the petition:
a. a. audited financial statements at end of
its last fiscal year;
b. interim financial statement;
c. schedule of debts and liabilities;
d. inventory of assets;
e. rehabilitation plan;
f. schedule of payments and disposition of
assets effected within 3 months preceding
the filing of the petition;
g. schedule of cash flow for the last 3
months;
h. statement of possible claims;
i. affidavit of general financial condition;
j. at least 3 nominations for rehabilitation
receiver; and
k. certificate under oath that directors and
stockholders have irrevocably approved/
consent ed t o al l act i ons/ mat t er s
necessary under the rehabilitation plan.
3. The court shall issue the stay order not later
than 5 days from the filing of the petition,
which among others, shall:
a. appoint a rehabilitation receiver;
b. stay all actions for claims against the
debtor, which shall cover both secured
and unsecured creditors;
c. set an initial hearing for the petition (not
earlier than 45 days but not later than 60
days from filing of the petition); and
d. direct the creditors to file their verified
comment or opposition not later than 10
days before the initial hearing; their failure
to do so would bar them from any
participation in the proceedings.
4. Publication of the stay order in a newspaper
of general circulation once a week for 2
consecutive weeks;
5. Referral of rehabilitation plan to rehabilitation
receiver;
6. Meetings between corporate debtor and
creditors. Discussions on the rehabilitation
plan;
7. Submission of final rehabilitation plan to the
RTC for approval;
8. The petition shall be dismissed (which results
into the automatic lifting of the stay order
unl ess RTC ordered otherwi se) i f no
rehabilitation plan is approved after 180 days
from initial hearing;
9. Approval or disapproval of the rehabilitation
plan by RTC.
STAY ORDER / AUTOMATIC STAY
Eff ect of appoi nt ment of a management
committee or rehabilitation receiver
All actions for claims against the corporation shall
be suspended accordingly.
Purpose
To enable the management committee or the
rehabilitation receiver to effectively exercise its
powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent
the rescue of the debtor company (Rubberworld v.
NLRC, GR No. 126773, April 14, 1999).
No definite duration; deemed to apply during the
entire period that the corporate debtor is under
management committee or the rehabilitation
receiver (BF Homes v. CA, GR No. 30690, Nov. 19, 1982).
1. All claims against corporations, partnerships,
or associations that are pending before any
court, tribunal, or board, without distinction as
to whether or not a creditor is secured or
unsecured, shall be suspended effective upon
the appointment of a management committee,
rehabilitation receiver, board, or body in
accordance P.D. No. 902-A.
The purpose for the suspension of the
proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the rights
of party litigants as well as the interest of the
investing public or creditors. Such suspension
is intended to give enough breathing space
f or t he management commi t t ee or
rehabilitation receiver to make the business
viable again, without having to divert attention
and resources to litigations in various for fora
(Sobrejuanite v. ASB, GR No. 165675 , September 30,
2005).
All actions and claims against the corporation
are suspended upon the appointment by the
Court of a Management Committee or
Rehabilitation Receiver (Sec. [c], PD 902-A). The
stay order shall be effective from the time of
its issuance up to the dismissal of the petition
or t er mi nat i on of t he r ehabi l i t at i on
proceedings (PAL v. Spouses Kurongking, No.
146698, September 24, 2002).
The suspension also covers employees
claims (Lingkod ng Manggagawa sa Rubberworld v.
Rubberworld, Phils. Inc., GR No. 153882, January 29,
2006).
The suspension embraces all phases of the
suit, be it before the trial court or any tribunal
or before the Supreme Court. Not just
payment of claims but also proceedings of a
suit are automatically suspended (Garcia, et. al.
v. PAL, 29 August 2007).
2. This suspension shall not prejudice or render
ineffective the status of a secured creditor as
compared to a totally unsecured creditor.
P.D. 902-A does not state anything to this
effect. What it merely provides is that all
actions for claims against the corporation,
par t ner shi p or associ at i on shal l be
suspended. This should give the receiver a
chance to rehabilitate the corporation if there
should still be a possibility for doing so.
However, in the event that rehabilitation is no
longer feasible and claims against the
distressed corporation would eventually have
to be settled, the secured creditors shall enjoy
preference over the unsecured creditors,
subject only to the provisions of the NCC on
Concurrence and Preferences of Credit (RCBC
v. IAC, G.R. No. 74851, December 9, 1999).
The order prohibits the debtor from selling,
encumbering, transferring, or disposing in any
manner any of its properties except in the
ordinary course of business; and from making
any payment of its liabilities outstanding as at
the date of filing of the petition.
The order likewise prohibits the debtors
suppl i ers of goods or servi ces f rom
Corporation Law
withholding supply of goods and services in
the ordinary course of business for as long as
the debtor makes payments for the services
and goods supplied after the issuance of the
stay order.
Upon motion or motu proprio, the court may
declare void any transfer of property or any
ot her conveyance, sal e, payment , or
agreement made in violation of its stay order
or in violation of these rules.
The stay order shall be effective from the date
of its issuance until the dismissal of the
petition or the termination of the rehabilitation
proceedings.
The petition shall be dismissed if no
rehabilitation plan is approved by the court
upon the lapse of 180 days from the date of
the initial hearing. The court may grant an
extension beyond this point only if it appears
by convincing and compelling evidence that
the debtor may successfully be rehabilitated.
REHABILITATION RECEIVER
A person appointed by the RTC, in behalf of all the
parties for the purpose of preserving and
conserving the property and preventing its
possible destruction or dissipation, if it were left in
the possession of any of the parties.
He acts in a fiduciary capacity and with impartiality
towards all interested.
He does not take over the management and
control from the debtor, but shall closely oversee
and monitor the operations of the debtor during
the pendency of the proceedings (Bar Review Materials
in Commercial Law, Jorge Miravite, 2002ed).
He shall not be subject to any action, claim or
demand in connection with any act done or
omitted by him in good faith in the exercise of his
functions and powers conferred in the rules.
He may be dismissed by the court, upon motion or
motu proprio, on account of conflict of interest, or
on any of the grounds for removing a trustee
under the general principles of trusts.
EFFECTS OF THE REHABILITATION PLAN
1. The plan and its provisions shall be binding
upon the debtor and all persons who may be
affected by it, including the creditors, whether
or not such persons have participated in the
proceedings or opposed the plan or whether
or not their claims have been scheduled;
2. The debtor shall comply with the provisions of
the plan and shall take all actions necessary
to carry out the plan;
3. Payments shall be made to the creditors in
accordance with the provisions of the plan;
4. Contracts and other arrangements between
the debtor and i ts credi tors shal l be
interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the plan; and
5. An y c o mp r o mi s e s o n a mo u n t s o r
rescheduling of timing of payments by the
debt or shal l be bi ndi ng on credi t ors
regardless of whether or not the plan is
successfully implemented.
POWERS AND FUNCTIONS OF MANAGEMENT
COMMITTEE OR REHABILITATION RECEIVER
(Sec. 6[d], P.D. 902-A)
1. To take custody of, and control over, all the
existing assets and property of such entities
under management;
2. To evaluate the existing assets and liabilities,
earnings and operations of such corporations,
partnerships or other associations;
3. To determine the best way to salvage and
protect the interest of the investors and
creditors;
4. To study, review and evaluate the feasibility of
continuing operations and structure and
rehabilitate such entities if determined to be
feasible by the RTC;
5. To report and be responsible to the RTC until
dissolved; and
6. May overrule or revoke the actions of the
previous management and board of directors
o f t h e e n t i t y u n d e r ma n a g e me n t ,
notwithstanding any provision of law, articles
of incorporation or by-laws to the contrary.
Mere disagreement among stockholders as to

the affairs of the corporation would not in itself
suffice as a ground for the appointment of a
management committee. At least where there
is no imminent danger of loss of corporate
property or of any other injury to stockholders,
management of corporate business should
not be wrested away from duly elected
officers, who are prima facie entitled to
administer the affairs of the corporation, and
placed in the hands of the management
committee. However, where the dissension
among stockhol ders i s such that the
corporation cannot successfully carry on its
corporate functions the appointment of a
management committee becomes imperative
(Ramon Jacinto and Jaime Colayco v. First Womens Credit
Corporation, GR No. 154049, August 28, 2003).
Securities Regulation Code (R.A. No. 8799)
PURPOSES
1. To establish a socially conscious, free market
that regulates itself;
2. To encourage the widest participation of
ownership in enterprises;
3. To enhance the democratization of wealth;
4. To promote the development of the capital
market;
5. To protect investors;
6. To ensure full and fair disclosure about
securities; and
7. To minimize if not totally eliminate insider
trading and other fraudulent or manipulative
devices and practices which create distortions
in the free market (Sec. 2).

FEATURES WHI CH ARE I NTENDED TO
PROTECT THE INVESTING PUBLIC
1. All securities are required to be registered
before they can be sold to the public (Sec. 8, RA
8799);
2. Rejection and revocation of registration of
securities (Sec. 13. Ibid);
3. Regulation of pre-need plans (Sec. 16);
4. Protection of shareholder interests (Sec. 19);
5. Prohibition on fraud, manipulation and insider
trading (Secs.24, 25, 26 and 27);
6. Regulations of Securities Market Professionals
(Sec.28);
7. Revocat i on, ref usal or suspensi on of
registration of brokers, dealers and salesmen
and associated persons (Sec.29);
8. Restrictions on over-the-counter markets (Sec.
32);
9. Self-regulation of associations of securities
brokers, dealers and other securities related
organizations (Sec. 29);
10. Registration of clearing agencies (Sec. 42);
11. Limitations on margin trading or the amount of
credit that may be extended on any security
(Sec. 49);
12. Civil liabilities arising from false statement in
the registration statement (Sec. 56);
13. Civil liabilities arising from false statements or
omissions in the prospectus, communications
and reports (Sec. 57);
14. Protection against manipulation of security
prices, manipulative and deceptive devices (Sec.
59), fraud in pre-need plans and commodities
f ut ur es cont r act s ( Se c . 60) , f r audul ent
transactions (Sec. 58), and insider trading (Sec.
61);
15. Establishment of trust funds to compensate
investors for extraordinary losses or damage
they may suffer due to business failure or fraud
or mismanagement of the persons with whom
they transact (Sec. 36.5[a]).
POWERS AND FUNCTIONS OF THE SEC
1. Supervision over corporations, partnerships,
and grantees of primary franchise;
2. Approve, reject registration statements/
licensing applications;
3. Suspend, revoke, after notice and hearing,
primary franchise on grounds provided by law:
a) Fraud;
b) Serious misrepresentation;
c) Refusal to comply or defiance of any
lawful order of the SEC;
d) Continuous inoperation for at least 5
years;
e) Failure to file by-laws; and
f) Failure to file required reports
4. Regulate/ supervise activities of persons to
ensure compliance;
5. Supervise monitor, suspend or take over,
exchanges, clearing agencies and other
SROs;
6. Recommend pol i ci es, advi se, propose
legislation to Congress on securities market;
7. Prepare, approve, amend or repeal rules,
regulations, issue opinions
8. Enlist the aid and support of and/or deputize
any and all enforcement agencies of the
Government as well as any private institution,
corporation, firm, association or person in the
implementation of its powers;
9. Issue cease and desist orders to prevent
fraud or injury;
10. Punish for contempt of the Commission;
11. Impose sanctions for violation of laws and
rules, regulations and orders;
12. Compel the officers of any registered
corporation or association to call meetings of
13. Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission; and
Corporation Law
14. Exercise such other powers as may be
provided by law which are necessary or
incidental to the carrying out its express
powers (Sec. 5).
With the transfer of jurisdiction of the SEC
over intra-corporate controversies to the RTC
under RA 8799, the RTC has the power to
hear and deci de t he i nt r a- cor por at e
controversies between the parties herein.
Concomitant to said power is the authority to
issue orders necessary or incidental to the
carrying out of the powers expressly granted
to it. Thus, the RTC may, in appropriate
cases, order the holding of a special meeting
of stockholders or members of a corporation
involving an intra-corporate dispute under its
supervision (Yujuico v. Quiambao, GR No. 168639,
January 29, 2006).
Section 53.1 of the Securities Regulation
Code provides that, a criminal complaint for
violation of any law or rule administered by
the SEC must first be filed with the latter. If
the Commission finds that there is probable
cause, then it should refer the case to the
DOJ. A criminal charge for violation of the
Securities Regulation Code is a specialized
dispute. Hence, it must first be referred to an
administrative agency of special competence,
i.e., the SEC (Baveira v. Paglinawan, GR No. 168380,
February 8, 2007).
Reason: Under the doctrine of primary
jurisdiction, courts will not determine a
controversy involving a question within the
jurisdiction of the administrative tribunal,
where the question demands the exercise
of sound administrative discretion requiring
the specialized knowledge and expertise of
said administrative tribunal to determine
technical and intricate matters of fact. The
Securities Regulation Code is a special law.
Its enforcement is particularly vested in the
SEC (Ibid).
SECURITIES
Shares, participation or interest in a corporation or
in a commercial enterprise or profit-making
ventures and evidenced by a certificate, contract,
or instrument whether written or electronic in
character (Sec. 3).
Kinds
1. Shares of stocks, bonds, debentures, notes,
evidence of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of interest or
participation in a profit-sharing agreement,
certificates of deposit for a future subscription
3. Fractional undivided interests in oil, gas, or
other mineral rights;
4. Derivatives like options and warrants;
5. Certificates of assignments and participation,
trust certificates, voting trust certificates or
similar instruments;
6. Proprietary or non-proprietary membership
certificates in corporations; or
7. Other instruments as may in the future be
determined by the SEC (Sec. 3).
Classes
1. Exempt securities and securities covered by
exempt transactions; and
2. Securities that are not exempt or the sale of
which is not an exempt transaction.
DERIVATIVE
A financial instrument, including options and
warrants, whose value depends on the interest in
or performance of an underlying security, but
which does not require any investment of principal
in the underlying security.
Kinds
1. Options contracts that give the buyer the
right, but not the obligation, to buy or sell an
underlying security at a predetermined price,
called the exercise or strike price, on or before
a predetermined date, called the expiry date,
which can only be extended in accordance with
Exchange rules.
2. Warrants rights to subscribe or purchase
new shares or existing shares in a company,
on or before a predetermined date, called the
expiry date, which can only be extended in
accordance with Exchange rules. Warrants
generally have a longer exercise period than
options (SRC Rule 3.1-1).
REGISTRATION OF SECURITIES
GENERAL RULE
A registration statement duly filed and approved
by the SEC is necessary before securities may be
sold and offered for sale or distribution within the
Philippines. Prior to any sale, information on the
securities, in such form and substance prescribed
by the SEC, shall be made available to each
prospective purchaser (Sec. 8).
EXCEPTIONS
1. Exempt securities; and
2. Exempt transactions.
EXEMPT SECURITIES (Sec. 9)
1. Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled by and acting as an
instrumentality of said Government.
2. Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations, or
by any state, province or political subdivision
or agency thereof on the basis of reciprocity.
3. Certificates issued by a receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body.
4. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of the
Insurance Commission, Housing and land Use
Regulatory Board, or the Bureau of Internal
Revenue.
5. Any security issued by a bank except its own
shares of stock.
6. Any securities added by the SEC by rule or
regulation after public hearing.
EXEMPT TRANSACTIONS (Sec. 10)
1. Judicial sale by executor, administrator,
guardian/receiver in insolvency or bankruptcy.
2. Sale of pledged or mortgaged security to
liquidate a bona fide debt.
3. Sale on isolated transactions by owner.
4. Distribution of stock dividends.
5. Sal e of capi t al st ock excl usi vel y t o
stockholders where no commission is paid.
6. The issuance of bonds or notes secured by
mortgage upon real estate or tangible personal
property, where the entire mortgage are sold to
a single purchaser at a single sale.
7. Issuance of security in exchange of any
security from same issuer pursuant to right of
conversion.
8. Brokers transactions
9. Pre-incorporation subscription and subscription
pursuant to an increase of the ACS.
10. Exchange of securi ti es by i ssuer wi th
existing security holders exclusively
11. Sale to less than 20 persons during any 12-
month period
12. Sale of securities to banks, registered
investment house, insurance companies,
pension fund or retirement plan maintained by
the government or other persons authorized by
the BSP to engage in trust functions.
The securities listed are exempt either
because the issuer is an entity that could be
trusted not to deceive the investor or the
issuer is regulated, supervised or monitored
by another government entity who could be
expected to protect the interest of the
investors in the same manner as the SEC
(Notes on Selected Commercial Laws: A Guide for Bar
Reviewees, Catindig, 2003).
The secur i t y i nvol ved i n an exempt
transaction is not in itself exempt but the
circumstances under which the security is
sold make the requirement of registration
under the SRC unnecessary in the public
interest or for the protection of the investors
(Ibid).
REJ ECT I ON AND REVOCAT I ON OF
REGISTRATION OF SECURITIES
The Commission may reject a registration
statement and refuse registration of the security
thereunder, or revoke the effectivity of a
registration statement and the registration of the
security thereunder after due notice and hearing
by issuing an order to such effect, setting forth its
findings in respect thereto, if it finds that
1. The issuer:
a. Has been judicially declared insolvent;
b. Has violated any of the provisions of this
Code, the rules promulgated pursuant
thereto, or any order of the Commission
of which the issuer has notice in
connection with the offering for which a
registration statement has been filed;
c. Has been or is engaged or is about to
engage in fraudulent transactions;
d. Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
e. Has failed to comply with any requirement
that the Commission may impose as a
condition for registration of the security
for which the registration statement has
been filed; or
2. The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading;
or
3. The issuer, any officer, director or controlling
person of the issuer, or person performing
similar functions, or any underwriter has been
convicted, by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/ or fraud or is enjoined or
restrained by the Commission or other
competent judicial or administrative body for
violations of securities, commodities, and
other related laws (Sec. 13.1).
Corporation Law
A registration statement may be withdrawn by
the issuer only with the consent of the
Commission (Sec. 13.6).
TENDER OFFER
A publicly announced intention by a person acting
alone or in concert with other persons to acquire
equity securities of a public company.
It is mandatory to make a tender offer for equity
shares of a public company in an amount equal to
the number of shares that the person intends to
acquire in the following circumstances:
a. Any person or group of persons acting in
concert, who intends to acquire 15% or more
of equity shares in a public company pursuant
to an agreement made between or among the
person and one or more sellers;
b. Any person or group of persons acting in
concert, who intends to acquire 30% or more
of equity shares in a public company in one or
more transactions within a period of 12 months
(Sec. 19).
However, under the Amended IRR of the SRC,
such tender offer is mandatory in the following
circumstances:
a. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) or more of equity shares in a
public company pursuant to an agreement
made between or among the person and one
or more sellers;
b. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) or more of equity shares in a
public company in one or more transactions
within a period of twelve (12) months; or
c. If any acquisition of even less than thirty five
percent (35%) would result in ownership of
over fifty one percent (51%) of the total
outstanding equity securities of a public
company.
NOTE: The Amended Implementing Rules and
Regulations of the Securities Regulation Code
(Rule 19) raised the thresholds of 15% or more for a
si ngl e acqui si ti on and 30% for creepi ng
acquisition to 35%.
The following are exempt from mandatory tender
offer requirements:
1. any purchase of shares from the unissued
capital stock provided that the acquisition will
not result to a fifty percent (50%) or more
ownership of shares by the purchaser;
2. any purchase of shares from an increase in
authorized capital stock;
3. purchase in connection with foreclosure
proceedings involving a duly constituted
pledge or security arrangement where the
acquisition is made by the debtor or creditor;
4. purchases in connection with privatization
undertaken by government of the Philippines;
5. purchases in connection with corporate
rehabilitation under court supervision;
6. purchases through an open market at the
prevailing market price
merger or consolidation. (Implementing Rules and
Regulation of the SRC, as amended)
Tender offer is made:
1. By filing with the SEC a declaration to make a
tender offer;
2. By furnishing the issuer or the originator of the
securi ty a statement contai ni ng such
information required under Sec. 17 of the
SRC:
a. Annual Report (includes balance sheet,
profit and loss statement); and
b. Periodical reports for interim fiscal
periods; and
3. By publishing all requests or invitations for
tender, or materials, making a tender offer or
requesting or inviting letters of such a
security.
The tender offer rule applies also an indirect
acquisition arising from the purchase of the
shares of a holding company of the listed firm.
In this case, the indirect acquisition by
petitioner of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is
covered by the mandatory tender offer rule.
(Cemco Holding, Inc. v. National Life Insurance Co., GR
No. 171815, August 7, 2007)
PUBLIC COMPANY
1. Any corporation with a class of equity
securities listed on an Exchange; or
2. Any corporation with assets in excess P50M
and having 200 or more holders, at least 200
of which are holding at least 100 shares of a
class of its equity securities.
PROXY RULES ON PUBLI CLY LI STED
CORPORATIONS
1. Proxies must be in writing, signed by the
st ockhol der or hi s dul y aut hor i zed
representative and filed before the scheduled
meeting with the corporate secretary.
2. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it
is intended. No proxy shall be valid and
effective for a period longer than 5 years at
one time.
3. No broker or dealer shall give any proxy,
consent or authorization, in respect of any
security carried for the account of a customer,
to a person other than the customer, without
the express written authorization of such
customer.
4. A broker or dealer who holds or acquires the
proxy for at least 10% or such percentage as
the SEC may prescribe of the outstanding
share of the issuer, shall submit a report
identifying the beneficial owner within 10 days
from such acquisition, for its own account or
customer, to the issuer of the security, to the
Exchange where the security is traded and to
the SEC.
UNLAWFUL ACTS
1. For any beneficial owner, director, or officer to
sell any security if the seller or his principal
does not own or does not deliver it within 20
days from sale (Sec. 23.3).
2. Manipulation of security prices (Sec. 24.1).
3. Employment of manipulative or deceptive
device or contrivance in connection with
purchase and sale of authorities. Execution of
short sal e, st op-l oss order not i n
accordance with SEC rules (Sec. 24.2).
4. For any member of Exchange directly or
i ndi r ect l y endor se or guar ant ee t he
performance of any put, call, straddle,
option or privilege in relation to any security
registered (Sec. 25).
5. Fraudulent transactions in the sale of securities
(Sec.26).
6. Insider trading (Sec. 27)
7. For an insider to communicate material non-
public information about the issuer or security
(Sec. 27.3).
8. Unlawful Tender Offer (Sec 27.4).
9. Use of Extensive Credit (Sec 48.1).
DEFINITION OF TERMS
1. SHORT SALE A contract for sale of shares
of stock which the seller does not own, or
certificates which are not within his control, so
as to be available for delivery at the time
when delivery must be made.
2. STOP-LOSS ORDER The direction by a
customer to his broker that if the commodity
touches the price named, the broker shall
close the trade at the best available price.
3. PUT An option that, in consideration of a
premium paid, gives the purchaser the right to
make the seller take from him a given number
of shares of a named stock between a given
time at a stipulated price which is usually
below the prevailing market price of the stock
at the time the put is purchased.
4. CALL An option that, in consideration of a
premium paid, entitles the buyer the right to
compel the seller to deliver to him a certain
number of shares within a given time at a
stipulated price which is usually higher than
the prevailing market price at the time the
call is bought. Call is the reverse of put.
5. STRADDLE The double privilege of a put
and a call, and secures to the holder the
right to demand of the seller at a certain price
within a certain time a certain number of
shares of specified stock, or to require him to
take, at the price within the same time, the
same shares of stock.
6. SHORT SWING TRANSACTION One
where a person buys securities and sells the
same within a period of six months.
7. FLOOR TRADER A professional trader in
securities who acts for himself and not for the
account of others, hence, receives no
commission at all.
8. BOILER ROOM SALES The use of high-
pressure sales tactics to promote purchases
and sales of securities.
9. OVER THE COUNTER TRANSACTION
Transactions which are not made at the stock
exchange, but directly between the broker
and the customer.
10. OVER-THE-COUNTER MARKET A
market created other than a registered stock
exchange for both the purchase and sale of
any security.
PROHIBITED CONDUCTS
1. PAINTING THE TAPE engaging in a series
of transactions in securities that are reported
publicly to give the impression of activity or
price movement in a security.
2. MARKING THE CLOSE buying and selling
securities at the close of the market in an
effort to alter the closing price of the security.
3. IMPROPER MATCHED ORDERS engaging
in transaction where both the buy and the sell
orders are entered at the same time with the
same price and quantity by different but
colluding parties.
4. HYPE AND DUMP engaging in buying
activity at increasingly higher prices and then
selling securities in the market at higher
securities.
5. WAS H S AL E t h e o p e r a t i o n o f
simultaneously buying and selling the same
Corporation Law
stock. It is any transaction in any security
which involves no change in the beneficial
ownership thereof. It is the reverse of
MATCHED ORDERS wherein there is a
change in the ownership of the securities.
6. SQUEEZING THE FLOAT taking advantage
of a shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
way as to create artificial prices.
INSIDER TRADING
The selling or buying of a security by an insider
while in possession of material non-public
information with respect to the issuer or the
security. It is considered unlawful UNLESS:
1. The insider proves that the information
was not gained from such relationship, or
2. If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves:
a. that he disclosed the information to the
other party, or
b. that he had reason to believe that the
ot her par t y ot her wi se i s al so i n
possession of the information (Sec. 27.1).
INSIDER
A person who, with respect to a particular security,
may be any of the following:
1. The issuer;
2. The director or officer of, or a person
controlling the issuer;
3. A person whose relationship or former
relationship to the issuer gives him access to
material information about the issuer or the
security that is not generally available to the
public;
4. A government employee, or director, or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
5. A person who learns such information by a
communication from any of the foregoing
insiders (Sec. 3.8).
MATERI AL NON-PUBLI C I NFORMATI ON
(formerly Fact of Special Significance)
1. Information about the issuer or the security
which has not been generally disclosed to the
public and would likely affect the market price
of the security after being disseminated to the
public and the lapse of a reasonable time for
the market to absorb the information; or
2. Information about the issuer or the security
which would be considered by a reasonable
person important under the circumstances in
determining his course of action to buy, sell or
hold security (Sec. 27.2).
SUITABILITY RULE
The rule states that in recommending to a
customer the purchase, sale or exchange of any
security, a broker or dealer shall have reasonable
grounds to believe that the recommendation is
suitable to such costumer based on the facts
disclosed by the latter as to his other security
holdings and his financial situations and needs.
MARGIN TRADING
A kind of trading that allows a broker to advance
for the customer /investor part of the purchase
price of a security and to keep it as collateral for
such advance.
The credit extended must be for an amount not
greater than whichever is higher of:
a. 65% of current market price of the security; or
b. 100% of the lowest market price of security
during the preceding 36 calendar months, but
not greater than 75% of the current market
price (Sec. 48).
MARGIN
Sum of money, or its equivalent, placed in the
hands of a broker by principal or persons on
whose account the purchase is to be made, as a
security to the former against losses to which he
may be exposed by a subsequent depression in
the market value of the stock.
Note: Trading on credit (or margin trading)
allows investors to buy more securities than their
cash position would normally allow. Investors pay
only a portion of the purchase price of the
securities; their broker advances for them the
balance of the purchase price and keeps the
securities as collateral for the advance or loan.
Brokers take these securities/stocks to their bank
and borrow the balance on it, since they have to
pay in full for the traded stock. Hence, increasing
margins i.e., decreasing the amounts which
brokers may lend for the speculative purchase
and carrying of stocks is the most direct and
effective method of discouraging an abnormal
attraction of funds into the stock market and
achieving a more balanced use of such resources
(Abacus Securities v. Ampil, GR No. 160016, February 27,
2006).
CORPORATE ACT
NUMBER OF
VOTES FOR BOD
NUMBER OF VOTES
OF CORPORATORS
SALIENT POINTS
Amendment of Articles of
Incorporation
Majority vote
Vote or written assent
of 2/3 of OCS/
members
Non-voting shares can vote
Appraisal right is available in certain cases
Effective upon approval by SEC, or date of filing if not acted upon within six months
Must be for a legitimate purpose
Election of Directors/
trustees (Sec. 24)
Majority of OCS /
members
Candidates with the highest number of votes get elected
Cumulative voting: No. of shares x No. of directors to be elected
Non-voting shares cannot vote
Election of officers (Sec. 25)
Majority vote of all
the members of
BOD
Removal of Directors/
Trustees (Sec. 28)
2/3 of OCS / members
Notice and statement of purpose are necessary
Must be made in a meeting called by the secretary on Presidents order or on written
demand of majority of OCS
Removal without cause cannot be used to deprive minority stockholders of their right of
representation
Vacancies in BOD if
NOT due to removal,
expiration of the term or
increase in number of
directors (Sec. 29)
Majority vote of
remaining
directors if quorum
still exists
If the directors do not constitute a quorum, stockholders have the right to elect
Fixing of compensation of
directors (Sec.30)
Reasonable per diems may be given
By-laws may provide for compensation
May be fixed by the majority of the OCS
Limit: not more than 10% of the net income before tax
Ratification of a contract
of self-dealing directors
(Sec. 32)
2/3 of OCS/ members
The contract must be fair and reasonable under the circumstances
Full disclosure of adverse interest of directors/ trustees involved is necessary
Presence of director/ trustee must be necessary to constitute quorum OR the vote of
director/ trustee must be necessary for the approval of the contract
Ratification of act of
disloyal director (Sec. 34)
2/3 of OCS
Extension or shortening of
corporate term (Sec. 37)
Majority vote 2/3 of OCS/ members
Appraisal right is available
Notice requirement
Effected through an amendment of the AOI
Corporation Law
CORPORATE ACT
NUMBER OF
VOTES FOR BOD
NUMBER OF VOTES
OF CORPORATORS
SALIENT POINTS
Increase or decrease of
capital stock (Sec. 38)
Meeting is required
No appraisal right
Notice requirement
SEC prior approval is necessary for its is only from and after the approval by the SEC
and the issuance of by the SEC of a certificate of filing that the capital stock shall stand
increased or decreased
Treasurers sworn statement is necessary
No decrease of capital stock if it will prejudice right of creditors
Incur, Create, Increase
Bonded Indebtedness (Sec.
38)
Majority Vote 2/3 of OCS/ members
Meeting is required
No appraisal right
Notice is required
Registration of bonds with the SEC is necessary
Denial of pre-emptive
right (Sec. 39)
2/3 of OCS
Only if the AOI or amendment thereto denies pre-emptive right
Denial extends to shares issued in good faith in exchange for property needed for
corporate purposes or in payment of previously contracted debts
Sale, Lease, Exchange,
Mortgage, Pledge,
Dispose of all or
substantially all of
corporate assets (Sec.40)
Majority of the board is sufficient if the transaction does not cover all or substantially all of
the assets of the corporation
Appraisal right is available
Notice is required
If sale is abandoned, directors action is sufficient, no need for ratification by stockholders
Power to acquire own
shares
(Sec. 41)
Majority Vote
Provided that there is unrestricted retained earnings
Only for legitimate purposes
Investment of Corporate
Funds in another
Corporation or Business
or for any other purpose
other than primary
purpose (Sec. 42)
Appraisal right available
Notice is required
Investment in the secondary purpose is covered
Stockholders ratification is not necessary if the investment is incidental to primary
purpose
Issuance of Stock
Dividends (Sec. 43)
Majority of the
quorum
2/3 of OCS/ members There must be unrestricted retained earnings
CORPORATE ACT
NUMBER OF
VOTES FOR BOD
NUMBER OF VOTES
OF CORPORATORS
SALIENT POINTS
Management Contract
(Sec. 44)
Majority vote of
BOD of both
managing and
managed
corporation
Majority of OCS/
members of both
managing and
managed corporation
and in some cases 2/3
of OCS/ members
Adoption of By-laws (Sec.
46)
Majority of OCS/
members
Amendment or repeal of
By-laws or Adoption of
new By-laws (Sec. 48)
Majority vote Majority of OCS Non-voting shares can vote
Delegation of the power
to Amend, Repeal or
adopt New By-laws to
BOD (Ibid)
2/3 of OCS
Delegation can be revoked by majority OCS
Fixing the issued Price of
No- Par value shares (Sec.
62, last par.)
Majority of quorum
of BOD, if
authorized by AOI
Majority of OCS, if
BOD is not authorized
by the AOI
Merger or Consolidation
(Sec. 77)
Majority of BOD of
constituent
corporations
2/3 of OCS/ members
of constituent
corporations
Appraisal right is available, except when the plan is abandoned
Adoption of plan or
distribution of assets of
non-stock corporation (Sec.
95 [2])
Majority vote of
trustees
2/3 of members
having voting rights
Dissolution of Corporation
(Secs. 118 and 119)
Majority vote
2/3 of OCS/ members See Sections 117-122
! END OF CORPORATION LAW "
Corporation Law
COMMERCIAL LAW
BANKING LAWS
BANKING LAWS
Governing Law
A. General Banking Laws
1. General Banking Law (R.A. No. 8791)
2. New Central Bank Act (R.A. No. 7653)
B. Special Banking Laws
1. 1. New Rural Banks Act (R.A. No. 7353)
2. Private Development Banks Act (R.A. No.
4093)
3. Savings and Loan Association Act (R.A.
No. 3779)
4. Thrift Banks Act (R.A. No. 7906)
C. Other Laws Affecting Banks
1. Secrecy of Bank Deposits Law (R.A. No.
1405)
2. Unclaimed Balances Law (Act No. 3936)
3. Philippine Deposit Insurance Corporation
Act (R.A. No. 3591)
Three Kinds of Entities that Introduce Funds
into the Economy:
1. Banks : entities that obtains funds from the
public in the form of deposits and re-lend it to
the public;
2. Quasi-banks : those that obtain funds in the
form of deposit substitutes and re-lend the
same; and
3. Finance companies and other financial
intermediaries: those that lend funds from
their own assets.
Five Persons Primarily Interested in the
Business of Banking (BIG-CD)
1. Government
2. Depositors
3. Investors
4. Creditors
5. Borrowers
EXECUTIVE COMMITTEE
COMMERCIAL LAW
General Banking Law of 2000
(GBL) (RA No. 8791)
PURPOSE
To promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the
demands of a developing economy (Sec. 2).
SCOPE OF APPLICATION
The GBL primarily governs universal banks and
commercial banks. It suppletorily governs thrift
banks, rural banks and other banking institutions.
General Concepts
BANKS
Entities engaged in the lending of funds obtained
in the form of deposits from the public (Sec 3.1).
An investment company that performs functions
as such is not a bank. Thus, an investment
company engaged solely in investing, reinvesting,
or trading in securities is not engaged in banking
(Banas v. Asia Pacific Finance Corp., GR No. 128703, October
18, 2000).
However, an investment company which loans out
the money of its customers, collects the interests,
and charges a commission to both lender and
borrower is engaged in banking (Republic vs. Security
Credit and Acceptance Corporation, GR No. L-20583).
QUASI-BANKS
Entities engaged in the borrowing of funds through
the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes for
purposes of rel endi ng or purchasi ng of
receivables and other obligations (Sec. 4).
Essential Elements of Quasi-Banking:
1. Borrowing funds for the borrowers own
account;
2. 20 or more lenders at any one time;
3. Me t h o d s o f Bo r r o wi n g : i s s u a n c e ,
endor sement , or accept ance of debt
instruments of any kind, other than deposits,
such as acceptances, promissory notes,
participations, certificates of assignments or
similar instruments with recourse, trust
certificates, repurchase agreements, and such
other instruments as the Monetary Board may
determine; and
4. The purpose of which is re-lending or
purchasing receivables or other obligations.
FINANCIAL INTERMEDIARIES
Persons or entities whose principal functions
include the lending, investing or placement of
funds on evidences of indebtedness or equity
deposited with them, acquired by them or
otherwise coursed through them, either for their
own account or for the account of others.
Organization and Operation
A. AUTHORITY TO REGISTER/INCORPORATE
The SEC shall not register the by-laws of any
bank, or any amendment thereto, unless
accompanied by a certificate of authority from
the BSP. (Sec. 14)
The certificate of authority shall not be issued
unless the Monetary Board is satisfied:
1. That all requirements of existing laws
and regulations to engage in the business
for which the applicant is proposed to be
incorporated have been complied with;
2. That the public interest and economic
conditions, both general and local, justify
the authorization; and
3. That the amount of the capital, the
financing, organization, direction and
administration, as well as the integrity and
responsibility of the organizers and
administrators, reasonably assure the
Banking Laws
safety of deposits and the public
interest (Sec. 14).
B. ORGANIZATION OF A BANK OR QUASI-
BANK
Requirements:
1. The entity is a stock corporation;
2. Its funds are obtained from the public,
i.e. 20 or more persons; and
3. The minimum capital requirements
prescribed by the Monetary Board are
satisfied (Sec. 8).
C. AUTHORITY TO ENGAGE IN BANKING OR
QUASI-BANKING FUNCTIONS
A person or entity cannot engage in banking
or quasi -banki ng f unct i ons wi t hout a
certificate of authority from the BSP (Sec. 6).
The determination of whether a person or
entity is performing banking or quasi-banking
functions without BSP authority shall be
decided by the Monetary Board.
D. STOCKHOLDING
GENERAL RULE
NO bank shall purchase or acquire shares of
its own capital stock or accept its own shares
as security for a loan.
EXCEPTION
When authorized by the Monetary Board,
BUT the stock so purchased or acquired,
within 6 months from the time of its purchase
or acquisition, shall be sold or disposed of at
a public or private sale (Sec. 10).
Nature of Banking Business
1. DEBTOR-CREDITOR RELATIONSHIP
The relationship between a depositor and a
bank is that of creditor and debtor (Gullas v.
PNB, GR No. L-43191, November 13, 1935).
2. FIDUCIARY DUTY
Banks must treat the accounts of its
depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship (Simex International (Manila) Inc. v. CA,
GR No. 88013, March 19, 1990).
Banks assume a degree of diligence higher
than that of a good father of a family. Its
fiduciary duty imposes upon it a higher level
of accountability than that expected of a
depositor (Philippine Banking Corporation v. CA, GR
No. 127469, January 15, 2004).
Civil Code provisions on common carriers are
applicable to banks. By the nature of their
business, they are required to observe the
hi ghest st andar ds of i nt egr i t y and
performance, and utmost assiduousness as
well (Solidbank Corporation/ Metropolitan Bank and
Trust Company v. Spouses Peter and Susan Tan, GR No.
167346, April 2, 2007).
3. NOT A TRUST AGREEMENT
The fiduciary nature does not convert the
contract between the bank and its depositors
from a simple loan to a trust agreement.
Failure by the bank to pay the depositor is
failure to pay a simple loan and not a breach
of trust (Serrano vs. Central Bank, GR No. L-30511,
February 14, 1980).
4. INDISPENSABLE INSTITUTION
It plays a vital role in the economic life of
every civilized nation.
Even the humble wage-earner has not
hesitated to entrust his lifes savings to the
bank of his choice, knowing that they will be
safe in its custody and will even earn some
interest for him. The ordinary person, with
equal faith usually maintains a modest
checki ng account f or secur i t y and
convenience in the settling of his monthly bills
and the payment of ordinary expenses. As for
business entities, the bank is an active and
trusted associate that can help in the running
of their affairs (Simex International (Manila) Inc. v.
CA, GR No. 88013, March 19, 1990).
5. IMPRESSED WITH PUBLIC INTEREST
Impressed with public interest where the trust
and confidence of the public in general is of
paramount importance such that:
a. The appropriate standard of diligence
must be very high, if not the highest,
degree of diligence; highest degree of
care (PCI Bank v. CA, GR No. 121413, January
29, 2001; PBCom v. CA, GR No. 121413, Jan. 29,
2001).
This applies only to cases where
banks are acting in their fiduciary
capacity, that is, as depository of the
deposits of their depositors (Reyes v. CA,
GR No. 118492, 15 Aug. 2001).
While an innocent mortgagee is not
expected to conduct an exhaustive
investigation on the history of the
mortgagors title, in case of a banking
institution, it must exercise due
diligence before entering into said
contract, and cannot rely upon on
what is or is not annotated on the title.
Reason: Before a loan is approved,
representati ves are sent to the
premises offered as collaterals so as
to investigate who the real owners are
(DBP v. CA, GR No. 129471, April 28,
2000).
Due diligence required of banks
extend even to persons, or institutions
like the GSIS, regularly engaged in the
business of lending money secured by
real estate mortgages (GSIS v. Eduardo
Santiago, GR No. 155206, October 28, 2003).
In approving the loan of an applicant,
the bank concerns itself with proper
information regarding its debtors. Any
investigation previously conducted on
the property offered as collateral does
n o t p r e c l u d e t h e b a n k f r o m
considering new information on the
same property as security for a
subsequent loan (Omengan v. Phil. National
Bank, GR No. 161319, January 23, 2007).
The bank is expected to ascertain and
verify the identities of the persons it
transacts business with (UCPB v. Ramos,
GR No. 147800, November 11, 2003).
b. Subject to reasonable regulation under
the police power of the state.
It is subject to heavy and close
supervision and/ or regulation by the
BSP (Central Bank of the Philippines vs. Court
of Appeals, GR No. 88353, May 8, 1992).
c. Any strike or lockout involving banks, if
unsettled after 7 calendar days shall be
reported by the BSP to the Secretary of
Labor who has two options:
1. He may assume jurisdiction over and
decide the dispute; or
2. Certify the same to the National
Labor Relations Commission for
compulsory arbitration.
The law also allows the President of
the Philippines to, at any time,
intervene and assume jurisdiction over
such labor dispute in order to settle or
terminate the same (Sec. 22).
6. NOT EXPECTED TO BE INFALLIBLE
Banks must bear t he bl ame f or not
discovering mistakes despite established
procedures (BPI vs. IAC, GR No. 69162, February
21, 1992).
Classification of Banks
1. UNIVERSAL BANKS
Primarily governed by the GBL. Has the
authority to exercise the powers of a
commercial bank and an investment house
and invest in non-allied enterprises (Sec. 23),
and have t he hi ghest capi t al i zat i on
requirement.
2. COMMERCIAL BANKS
Ordinary banks governed by the GBL which
have a lower capitalization requirement than
universal banks and can neither exercise the
powers of an investment house nor invest in
non-allied enterprises.
3. THRIFT BANKS
These are a) Savings and mortgage banks; b)
Stock savings and loan associations; c)
Private development banks, which are
primarily governed by the Thrift Banks Act
(R.A. 7906).
4. RURAL BANKS
Mandated to make needed credit available
and readily accessible in the rural areas on
reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA
7353).
5. COOPERATIVE BANKS
Those banks organized by, the majority
shares of which is owned and controlled by,
cooperatives primarily to provide financial and
credit services to cooperatives. It shall
include cooperative rural banks. Governed
primarily by the Cooperative Code (RA 6938).
6. ISLAMIC BANKS
Banks whose business dealings and activities
are subject to the basic principles and rulings
of Islamic Sharia, such as the Al Amanah
Islamic Investment Bank of the Philippines
which was created by RA 6848.
7. Other classification of banks
As determined by the Monetary Board of the
Bangko Sentral ng Pilipinas.
ORDINARY
CORPORATION
BANKING
CORPORATION
Classification
May be a stock or
non-stock corporation
Must generally be a stock
corporation
Stocks issued
May issue par value or
no par value stocks.
Shall issue par value
stocks only (Sec. 9).
Banking Laws
ORDINARY
CORPORATION
BANKING
CORPORATION
Registration
May be registered with
the SEC without any
certificate of authority
issued by a
government agency.
Must secure a certificate
of authority from the
Monetary Board before it
can register with SEC.
Acquisition of shares
May purchase/
acquire its own shares
for a legitimate
corporate purpose;
provided that, it has
earnings in its books
to cover the shares to
be purchased/
acquired.
May not purchase/
acquire its shares or
accept them as security
for a loan. Except: when
authorized by the
Monetary Board. But the
bank must sell or dispose
of said shares within 6
months from the time of
their acquisition (Sec. 10).
Number of directors
Must be composed of
5 to 15 directors, each
of whom shall own at
least one (1) share of
the capital stock of the
corporation.
Also composed of 5 to 15
directors. In case of
merger or consolidation,
the number of directors
shall not exceed 21 (Sec.
17).
Declaration of dividends
May declare dividends
out of its unrestricted
retained earnings.
May not declare
dividends, if any of the
conditions set forth under
Sec. 57 are present.
UNIVERSAL
BANK
COMMERCIAL BANK
Additional powers
Authority to
exercise additional
powers other than
those authorized
for commercial
banks
No such additional powers
Type of investments
May invest in the
equities of allied,
whether financial
or non-financial,
and non-allied
enterprises (Sec. 24)
May only invest in equities of
allied enterprises, whether
financial or non-financial
Powers
1. The powers
authorized for
a commercial
bank;
2. The powers of
an investment
house; and
3. The power to
invest in non-
allied
enterprises
(Sec. 23).
1. General powers incident
to corporations
2. Such powers as may be
necessary to carry on the
business of commercial
banking:
a. Accepting drafts and
issuing letter of credits;
b. Discounting and
negotiating promissory
notes, drafts, bills of
exchange and other
evidence of debt;
c. Accepting or creating
demand deposits;
receiving other types of
deposits and deposit
substitutes;
d. Buying and selling
foreign exchange and
other debt securities;
e. Extending credit. (Sec.
29)
UNIVERSAL & COMMERCIAL
BANK
OTHER
BANKS
Quasi-banking functions
Authorized to engage in quasi-
banking functions without need for
approval
Not so
authorized
Demand deposits
May accept or create demand
deposits without need for approval
Demand deposits - Liabilities of
the BSP and of other banks which
are denominated in Philippine
currency and are subject to
payment in legal tender upon
demand by the presentation of
checks (Sec. 58, NCBA).
Must seek
approval of
Monetary
Board before
accepting or
creating
demand
deposits
(Sec. 33).
UNIVERSAL BANK
(Sec. 24-28)
COMML BANK
(Sec. 30-32)
Total investment in Allied Enterprises
50%
of net worth
35%
of net worth
Total investment in non-allied enterprises
50%
of net worth
N/A
Equity investment in any one enterprise
25%
of net worth
25%
of net worth
(Allied only)
UNIVERSAL BANK
(Sec. 24-28)
COMML BANK
(Sec. 30-32)
Equity investment in financial allied
enterprise (Sec. 25)
100% of equity
A publicly-listed bank
may own up to 100%
of the voting stock of
only one other UB /
CB (Sec. 25).
100% of equity of a thrift or
rural bank
In other financial allied
enterprises including
another commercial bank,
investment shall remain a
minority holding (Sec. 31).
Equity investment in non-financial allied
enterprises
100%
of equity
100%
of equity
Equity investment in a single non-allied
enterprise
Shall not exceed
35% of the total
equity in that
enterprise nor shall it
exceed 35% of the
voting stock in that
enterprise
N/A
Equity investment in Quasi-Banks
40% 40%
Allied Enterprises
Those entities which enhance or complement
banking.
NON-FINANCIAL ALLIED ENTERPRISES (Sec.
X380, Manual of Regulations for Banks) Activities that do
not involve money matters such as:
a) Warehouse companies;
b) Storage Companies;
c) Safety Deposit Box Companies;
d) Management of mutual funds;
e) Management corporations engaged or to be
engaged i n an acti vi ty si mi l ar to the
management of mutual funds;
f) Computer services;
g) Insurance agencies/ brokerages;
h) Home building and home development.
FINANCIAL ALLIED ENTERPRISES (Sec. X377,
Manual of Regulations for Banks)
c) Leasing companies including leasing of stalls
and spaces in a commercial establishment
provided that bank investment in/ acquisition of
shares of such leasing company shall be
limited/ applicable only in cases of conversion
of outstanding loan obligations into equity;
a) Banks;
b) Investment Houses;
c) Financing Companies;
d) Credit Card Companies;
e) Financial institutions catering to small and
medium scale industries including venture
capital corporation;
f) Securities dealership; and
g) Foreign exchange dealership/ brokerage.
Non-Allied Enterprises
(a) Agriculture, mining, quarrying, manufacturing,
public utilities, construction, wholesale trade
and community and social services following
the industrial groupings in the Phil. Standard
Industrial Classification;
(b) Industrial park projects and/ or industrial estate
developments;
(c) Financial and commercial complex projects
arising from or in connection with the
Governments privatization program;
(d) Such other categories as the Monetary Board
may declare as appropriate.
NET WORTH
The total of the unimpaired paid-in capital
including paid-in surplus, retained earnings and
undivided profit, net valuation reserves and other
adjustments as may be required by the Bangko
Sentral (Sec. 24).
RISKBASED CAPITAL
The minimum ratio prescribed by the Monetary
Board which the net worth of a bank must bear to
its total risk assets which may include contingent
accounts.
Banking Laws
Monetary Board may alter or suspend compliance
with such ratio whenever necessary for a
maximum period of one year; PROVIDED that,
such ratio shall be applied uniformly to banks of
the same category (Sec. 34).
Effect of non-compliance with the prescribed
minimum ratio:
1. Distribution of net profits may be limited or
prohibited and MB may require that the net
profits be used to increase the capital
accounts of the bank until the minimum
requirement has been met; or
2. Acquisition of major assets and making of
new investments may be restricted or
prohibited. EXCEPT purchases of readily
marketable evidence of indebtedness or
obligations, the servicing and repayment of
which are guaranteed by the Government,
until the minimum required capital ratio has
been restored (Sec. 34).
3. In case of a bank merger or consolidation, or
when a bank is under rehabilitation under a
program approved by BSP, the MB may
temporarily relieve the surviving bank,
consolidated bank, or constituent bank or
corporations under rehabilitation from full
compliance with the required capital ratio (Sec.
34).
Functions of Banks
A.
LOAN FUNCTION
Requirement for Grant of Loans
Before granting a loan, a bank must ascertain that
the debtor is capable of fulfilling his commitments
to the bank.
Rules:
1. A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed.
2. Shall be consistent with safe and sound
banking practices.
3. Before granting a loan or other credit
accommodation, a bank must ascertain that
the debtor is capable of fulfilling his
commitments to the bank.
A bank may demand from its applicants a
statement of their assets and liabilities
and of their income and expenditures and
other information to enable the bank to
evaluate the credit application.
4. Should such statements prove to be false or
incorrect, the bank may terminate any loan
granted on the basis of said statements and
shall have the right to demand immediate
repayment or liquidation of obligation (Sec. 40).
5. Payments Amortization schedule of bank
loans and other credit accommodations shall
be adapted to the nature of the operations to
be financed (Sec. 44).
Loans and other credit accommodations
with maturities of more than 5 years,
provisions must be made for periodic
amor t i zat i on payment s but such
payments must be made at least annually
(Sec. 44).
A borrower may at any time prior to the
agreed maturity date prepay, in whole or
in part, the unpaid balance of any bank
loan and other credit accommodation,
subject to such reasonable terms and
conditions as may be agreed upon
between the bank and its borrower (Sec.
45).
CLASSIFICATION OF LOANS
UNCLASSIFIED LOANS CLASSIFIED LOANS
Those that do not have a
greaterthannormal risk
and the borrower has
apparent ability to satisfy
it in full and no loss in
ultimate collection is
anticipated.
Those that have
extraordinary risks of
loss in collection due
to some defects such
as bad debts or those
under litigation.
Limit on loans, credit accommodations and
guarantees: (Sec. 35)
I. Single Borrowers Limit (SBL) Rules
a. The t ot al amount of l oans, cr edi t
accommodations and guarantees extended
by a bank to any person, partnership,
association, corporation or other entity shall
at no time exceed 25% of the net worth of
such bank (as increased by BSP Circular
425). The basis for determining compliance
with the SBL is the total credit commitment
of the bank to the borrower (Sec. 35.1).
b. The t ot al amount of l oans, cr edi t
ac c ommodat i ons and guar ant ees
prescribed in (a) may be increased by an
additional 10% of the net worth of such
bank provided the additional liabilities of
any borrower are adequately secured by
t rust recei pt s, shi ppi ng document s,
warehouse recei pts or other si mi l ar
documents transferring or securing title
covering readily marketable, non-perishable
goods which must be fully covered by
insurance (Sec. 35.2).
Exclusions (NON-RISK LOANS):
1. Loans secured by obligations of the
Bangko Sent ral or t he Phi l i ppi ne
Government;
2. Loans f ul l y guar ant eed by t he
government;
3. Loans covered by assignment of deposits
maintained in the lending bank and held
in the Philippines;
4. Loans, credit accommodations and
acceptances under letters of credit to the
extent covered by margin deposits; and
5. Other loans or credit accommodations
which the MB may specify as non-risk
items.
ESCALATION CLAUSE
Parties may stipulate that the rate of interest
agreed upon may be increased in the event
that the applicable maximum rate interest is
increased by the Monetary Board.
JOINT AND SOLIDARY SIGNATURE (JSS)
PRACTICE
A common banking practice requiring as an
additional security for a loan granted to a
corporation the joint and solidary signature of
a major stockholder or corporate officer of the
borrowing corporation (Security Bank v. Cuenca, GR
No. 138544, October 3, 2000).
Reasons:
a. In case of default, creditors recourse is
not limited to corporate properties but
extends to personal assets of the surety;
b. Surety would be compelled to ensure that
the loan would be used for the purpose
intended.
II. DOSRI Accounts (Directors, Officers,
Stockholders, and Related Interests)
Requisites (BSP Circular No. 170; Art. 26, NCBA):
a. The borrower is director, officer, or any
stockholder of a bank and related
interest;
b. He contracts a loan or any form of
financial accommodation;
c. The loan or financial accommodation is
from (1) his bank, or (2) a bank that is a
subsidiary of a bank holding company of
which both his bank and lending bank are
subsidiaries, (3) a bank in which a
controlling proportion of the shares is
owned by the same interest that owns a
controlling proportion of the shares of his
bank; and
d. The loan or financial accommodation of
the DOS, singly or with that of his related
interest, is in excess of 5% of the capital
and surplus of the lending bank or in the
maximum amount permitted by law,
whichever is lower.
Who are covered (BSP Circular No. 170):
1. Directors Directors of the lending bank;
2. Officers Either identified in the by-laws
or are generally known as such;
3. St o c k h o l d e r s t h o s e wh o s e
stockhol di ngs, i ndi vi dual l y and/ or
together with any of the following
persons, amount to 2% or more of the
total subscribed capital stock of the bank:
a. His spouse or relative within the first
degree of affinity/consanguinity or
relative by legal adoption, partnership
wherein any of the foregoing is a
general partner; and
b. A co-owner, with the stockholder or
the stockholders spouse, or relative
mentioned above, of property/ right/
interest mortgaged, pledged or
assigned to secure the loan or credit
accommodations, except when the
mortgage, pledge or assignment
cover s onl y sai d co- owner s
undivided interest.
4. Related Interest
a. Spouse, relatives within first degree
of consanguinity or affinity, or relative
by legal adoption of a DOS;
b. Partnerships of which a DOS or his
spouse or relative within the first
degree of consanguinity or affinity, or
relative by legal adoption is a general
partner;
c. Co-owner, with the DOS or his
spouse or relative within the first
degree of consanguinity or affinity, or
relative by legal adoption, of the
property/interest/ right mortgaged,
pledged, assigned to secure the
l o a n s o r o t h e r c r e d i t
accommodations, except when the
mortgage, pledge or assignment
cover s onl y sai d co- owner s
undivided interest;
Banking Laws
d. Corporation, association, or firm of
which a DO of the bank or his spouse
is also a director or officer of the
same EXCEPT where the securities
of such corporation are listed and
traded in the big board or commercial
and industrial board of domestic
stock exchanges and less than 50%
of the voting stock is owned by 1
person or by persons related to each
other within the first degree of
consanguinity or affinity or where the
DOS sits as a representative of the
bank in the board of directors of such
corporation.
Bank representatives shall not

have equity interest in the borrower
corporation except for the minimum
shares required by law, rules and
regulations or by-laws of the
corporation;
e. Corporation, association or firm of
which any or a group of DOS of the
lending bank and/ or their spouses or
relatives within the first degree of
consanguinity or affinity or relative by
legal adoption, hold or own at least
20% of the subscribed capital of such
corporation, or of the equity of such
association or firm;
f. Corporation, association or firm
whol l y or maj or i t y- owned or
controlled by any related entity or a
group of related entities in items (b),
(d), and (e).
Restrictions under the GBL and NCBA:
1. Procedural Requirement - No director or
officer of any bank shall, directly or
indirectly, borrow from such bank nor
shall be 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. The written approval
shall not be required for loans, other
credit accommodations and advances
granted to officers under a fringe benefit
plan approved by the Bangko Sentral (Sec.
36, GBL).
2. Arms Length Rule - Dealings of a bank
with any of its DOSRI shall be upon terms
not less favorable to the bank than those
offered to others (Sec. 36, GBL).
3. Aggregate Ceilings 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 DOSRI, as well
as i nvest ment s of such bank i n
enterprises owned or controlled by said
DOSRI (Sec. 36, GBL).
The Manual of Regulations for Banks

provides that the aggregate is 15% of
the total loan portfolio of the bank or
100% of the combi ned capi tal
accounts, whichever is lower.
4. Individual Ceilings - The outstanding
l oans, credi t accommodati ons and
guarantees extended to DOSRI shall be
limited to an amount equivalent to their
respective unencumbered deposits and
book value of their paid-in capital
contribution in the bank.
EXCEPT
i. Loans, credit accommodations, and
guarantees secured by assets
considered as non-risk items by the
Monetary Board;
ii. Loans, credit accommodations, and
advances to officers under a fringe
benefit plan approved by the BSP;
and
iii. Extended by Cooperative banks to its
cooperative stockholders.
5. Repor t or i al Requi r ement - The
resolution approving the loan shall be
entered in the records of the bank and a
copy of the entry shall be transmitted
forthwith to the Supervising Examination
Sector of the BSP (Sec. 36, GBL).
6. Waiver of Secrecy of Bank Deposits
Waiver of secrecy of deposits of whatever
nature in all banks in the Philippines by
the borrower. No waiver is required if
the related interests are the borrower (Sec.
26, NCBA).
7. Examination - The accounts are subject
to examination but any information
obtained from an examination of his
deposits is strictly confidential and may
be used by examiners only in connection
with the supervisory and examination
responsibility or by the Bangko Sentral in
an appropriate legal action it has initiated
involving the deposit account (Sec. 26,
NCBA).
III. Rules on Amount of Secured Loans
a. Those secured by real estate shall not
exceed 75% of the appraised value of the
real estate security, plus 60% of the
appr ai sed val ue of t he i nsur ed
improvements (Sec. 37).
b. Those secured by chattels and intangible
properties (such as patents, trademarks,
trade names, and copyrights) shall not
exceed 75% of the appraised value of the
security (Sec. 38).
B.
DEPOSIT FUNCTION
Kinds of Deposits between a Bank and its
Depositor
1. AS DEBTOR-CREDITOR
Characteristics:
i. In the nature of irregular deposits (Serrano
vs. Central Bank, GR No. L-30511, February 14,
1980).
ii. Contract of loan/ mutuum with the
depositor as creditor
iii. Bank acquires ownership of the thing
deposited and the right to use and
dispose
iv. Money deposited is commingled with the
other money, constituting a common fund.
v. Not preferred credits (Central Bank v. Morfe,
GR No.L-38427, March 12, 1975).
Kinds:
a. Demand Deposits
All those liabilities of banks which are
denominated in Philippine currency and
are subject to payment in legal tender
upon demand by presentation of checks
b. Savings Deposits
The most common type of deposit and is
usually evidenced by a passbook.
The requirement of presentation of
passbooks is usually included in the
terms and conditions printed in the
passbooks. A bank is negligent if it allows
the withdrawal without requiring the
presentation of a passbook (BPI v. Court of
Appeals, GR No. 112392, February 29, 2000).
c. Negoti abl e Order of Wi thdrawal
Accounts (NOW)
Interest-bearing deposit accounts that
combine the payable on demand feature
of checks and investment feature of
savings accounts.
Time Deposit
An account with fixed term; payment of
which cannot be legally required within
such a specified number of days.
Note: Demand, savings, NOW accounts, time
deposits and deposit substitutes shall not be
subject to interest ceilings (Sec. X242, Manual of
Regulations for Banks).
2. BAILOR - BAILEE
Deposit strictly for safekeeping and for
specific purposes.
Safety deposit boxes
The relation between a bank renting out
safety deposit boxes and its customer with
respect to the contents of the box is that of a
bailor and bailee the bailment for hire and
mutual benefit has been adopted in this
jurisdiction. It cannot be considered as a
contract of lease because the full possession
and control of the safety deposit box is not
given to the renters (Sia v. CA, GR No. 102970,
May 13, 1993).
3. AS TRUSTEE-TRUSTOR
a. Trust account
4. AS AGENT-PRINCIPAL
b. Deposit of check for collection
c. Deposit for specific purpose
d. Deposit for safekeeping
TYPES OF DEPOSIT ACCOUNTS (Handbook on
Bank Deposits, A. Viray, 1998ed)
1. INDIVIDUAL; or
2. JOINT
a. And account
Co-ownership
The signatures of both co-depositors
are required for withdrawals.
b. And/or account
Either one of the co-depositors may
deposit and withdraw from the account
without the knowledge, consent and
signature of the other. And upon the
death of one, the survivor may
wi thdraw the enti re bal ance on
deposit.
Joint accounts may be deemed a
survivorship agreement depending on
the intention of the parties; aleatory
contract supported by a l awful
consideration which is valid unless
when made as a mere cloak to hide
an inofficious donation, to transfer
property in fraud of creditors, or to
defeat the legitime of a forced heir
(Rivera vs. Peoples Bank and Trust Co., No.
47757, April 17, 1942).
Sur vi vor shi p agr eement - one
whereby the co-depositors agree to
permit either of them to withdraw the
whole deposit during their lifetime and
transferring the balance to the survivor
upon the death of one of them (Vitug vs.
Banking Laws
Court of Appeals, GR No. 82027, March 29,
1990).
ANONYMOUS ACCOUNTS
Anonymous accounts or those under fictitious
names are prohibited (RA 9160 as amended by RA
9194; BSP Circular No. 251, July 21, 2000).
EXCEPTION
Foreign currency deposits which may be a
numbered account. However, necessary
measures must be undertaken by the bank to
record and establish the true identity of the
depositor (Sec 8, RA 6426 as amended, FCDA).
DEPOSIT SUBSTITUTES
An alternative form of obtaining funds from the
public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments
for the borrowers own account, for the purpose of
re-lending or purchasing of receivables and other
obligations (Sec. 95, RA 7653).
DEPOSIT DEPOSIT SUBSTITUTE
No security given to
guarantee repayment;
the depositor relies on
the stability and
reputation of the bank.
Guaranteed by
certificates and other
instruments. (Handbook on
Bank Deposits, A. Viray,
1998ed)
NATURE OF BANK DEPOSITS
All kinds of bank deposits are LOANS. Thus, the
rel at i onshi p bei ng cont ract ual i n nat ure,
mandamus is therefore NOT an available remedy
since mandamus does not lie to enforce the
performance of contractual obligations (Maclaring
Lucman v. Alimatar Malawi, GR No. 159794, December 19,
2006).
The fi duci ary nature of a bank-deposi tor
relationship does not convert the contract between
the bank and its depositors from a simple loan to a
trust agreement whether express or implied.
Failure by the bank to pay the depositor is failure
to pay a simple loan and not a breach of trust. The
law simply imposes on the bank a higher standard
of integrity and performance in complying with its
obligations under the contract of simple loan,
beyond those required of non-bank debtors, under
a similar contract of simple loan (CBTC v. CA, GR No.
138569, September 11, 2003).
The bank can make use as its own the money
deposited. Said amount is not being held in trust
for the depositor nor is it being kept for
safekeeping (Tang Tiong Tick v. American Apothecaries, GR
No. 43682, March 31, 1938).
Third persons who may have a right to the money
deposited cannot hold the bank responsible
unless there is a court order or garnishment. The
duty of the bank is to its creditor-depositor and not
to third persons (Fulton Iron Works vs. Chinabank, No.
32576, November 6, 1930).
The bank has the right to compensation. It can
set-off the deposits in its hands for the payment of
any outstanding indebtedness of the depositor to it
that are due and demandable (Gullas v. PNB, GR No.
43191, November 13, 1935; PNB vs. CA, GR No. 118357,
May 6, 1997).
In the case of Citybank N.A. v. Modesta R.
Sabeniano, (GR No. 156132, February 6, 2007), the
SC said that the off-setting or compensation
of respondents loans with Citibank-Manila
using her dollar accounts with Citibank-
Geneva cannot be effected. The parties
cannot be considered principal creditor of the
other. As for the dollar accounts, respondent
was the creditor and Citibank-Geneva was the
debtor; and as for the outstanding loans,
petitioner Citibank-Manila, was the creditor
and respondent was the debtor. Since legal
compensation was not possible, petitioner
Citibank could only use respondents dollar
accounts with Citibank-Geneva to liquidate
her loans if she had expressly authorized it to
do so by contract.
SPECIAL RULES ON DEPOSITORS
1. Minors they can open bank accounts in
their own right provided that:
i. they are at least 7 years of age;
ii. they are able to read and write and have
sufficient discretion;
iii. they are not otherwise disqualified by any
other incapacity; and
iv. It should only be savings or time deposits
(Sec. 1, PD 734).
Parents may nevertheless deposit for
their minor children and guardians for
their wards (Sec. 1, PD 734).
With respect to thrift banks, if any
guardian shall give notice in writing to any
thrift bank not to make payments of
deposits, dividends, or interest to the
minor of whom he is the guardian, then
such payment shall be made only to the
guardian (Sec. 22, Thrift Banks Act of 1995).
2. Married Women they are allowed to open
bank accounts without the assistance of their
husbands (RA 7192).
3. Corporati ons j udi ci al persons are
capacitated to open bank accounts. With
respect to corporations, the opening of an
account in its behalf is in fact a requirement
even before its life commences.
The life of a corporation starts from the
i s s u a n c e o f t h e Ce r t i f i c a t e o f
Incorporation by SEC , which can only be
issued upon filing and approval of the
Articles of Incorporation to which a bank
certificate covering the deposit of the
paid-up capital in accordance with the
prescribed form signed under oath by a
responsible official of the bank shall be
attached (Sec. 1, SEC Guidelines for the
Verifications of the Paid-up Capital of Corporations
[1976]; Sec. 11, Guidelines in the Formation and
Organization of a Private Stock Corporation [1982]).
Suspension of Payment on its Deposit
Liabilities
In case a bank or quasi-bank notifies the Bangko
Sentral or publicly announces a bank holiday, or in
any manner suspends the payment of its deposit
liabilities continuously for more than 30 days, the
Monetary Board may summarily and without need
for prior hearing close such banking institution and
place it under receivership of the Philippine
Deposit Insurance Corporation (Sec. 53).
C.
OTHER FUNCTIONS (Sec. 53)
1. Receive in custody funds, documents and
valuable objects (as bailee or trustee);
2. Act as financial agent and buy and sell, by
order of and for the account of their
c u s t o me r , s h a r e s , e v i d e n c e s o f
indebtedness and types of securities;
3. Make collection and payments for the
account of others and perform such other
services for their customer as are not
incompatible with banking business (as
agent);
4. Upon prior approval of the Monetary Board,
a c t a s ma na gi ng a ge nt , a d v i s e r ,
consultant or administrator of investment
management / advi sor y/ consul t ancy
accounts; and
5. Rent out safety deposit boxes.
Any stipulation exempting the depositary

from any liability arising from loss on
account of fraud, negligence would be
void for being contrary to public policy
(CA-Agro Devt v. CA, CA, GR No. 90027,
March 3, 1993).
Note: The bank shall act as depositary or as an
agent. It shall keep the funds, securities and other
effects which it receives duly separated from its
own assets and liabilities (Sec. 53).
Prohibitions
A. ON BANKS:
1. To directly act as insurer (Sec. 54)
2. For banks or quasi-banks, to declare
dividends, if at the time of declaration:
i. Its clearing account with the Bangko
Sentral is overdrawn;
ii. It is deficient in the required liquidity
floor for government deposits for 5 or
more consecutive days;
iii. It does not comply with the liquidity
standards/ ratios prescribed by the
Bangko Sentral for purposes of
determi ni ng funds avai l abl e for
dividend declaration; or
iv. It has committed a major violation as
may be determined by the Bangko
Sentral (Sec. 57).
3. To conduct business in an unsafe or
unsound manner (Sec. 56);
4. Publication of capital stock (Sec. 62);
5. Unauthorized advertisement or business
representation (Sec. 64); or
6. To empl oy casual or non-regul ar
personnel or too lengthy probationary
personnel in the conduct of its business
involving bank deposits (Sec. 55).
Reason: To prevent violation of Bank
Secrecy Law.
7. No bank or any di rect or, off i cer,
empl oyee, or agent t hereof shal l
outsource inherent banking functions.
Such is a contract between the bank and
a service provider for the latter to supply,
or any act whereby the latter supplies, the
manpower t o servi ce t he deposi t
transactions of the former. Banks cannot
outsource management functions except
as may be authorized by the Monetary
Board when circumstances justify (Sec.
X169.1, Manual of Regulations of Banks).
8. To extend peso loans to non-residents.
Reason: To curb undue speculation in
the foreign exchange market and to
Banking Laws
enforce the memorandum that peso
deposits should be funded from inward
foreign exchange remittance (BSP Circular
No. 222, 1999).
B. ON DIRECTORS, OFFICERS, EMPLOYEES,
OR AGENTS OF BANKS:
1. Make false entries in any bank report or
statement or participate in any fraudulent
transaction;
2. Without order of a court of component
jurisdiction, disclose to any unauthorized
person any information relative to the
funds or properties in the custody of the
bank belonging to private individuals,
corporations, or any other entity;
3. Accept gifts or any other form of
remuneration in connection with the
approval of a loan or other credit
accommodation from said bank;
4. Overvalue or aid in overvaluing any
security for the purpose of influencing in
any way the actions of the bank or any
bank; or
5. Outsource inherent banking functions a
bank cannot engage the services of
another entity to receive deposits on its
behalf; the bank has to do it by itself.
Reason: To prevent violation of Bank
Secrecy Law (Handbook on Bank Deposits, A.
Viray, 1998ed).
However, a bank may outsource, upon
prior approval of the Monetary Board
the following functions:
a. Al l i nf or mat i on t echnol ogy
systems and processes, except
for certain functions affecting the
ability of the bank to ensure the fit
of technology services deployed
to meet its strategic and business
obj ect i ves and compl y wi t h
pertinent laws and regulations;
b. Data imaging, storage, and other
related systems;
c. Cl eari ng and processi ng of
checks not i ncl uded i n t he
Phi l i ppi ne Cl ear i ng House
System;
d. Printing of bank statements;
e. Credit card services;
f. Printing of bank loan statements
and other non-deposit records,
bank forms and promotional
materials;
g. Credit investigation and collection;
h. Processing of export, import and
other trading transactions;.
i. Transfer agent services for debt
and equity services;
j. Property appraisal;
k. Property management services;
l. Messenger, courier and postal
services;
m. Security guard services;
n. Vehicle service contracts
o. Janitorial services;
p. Other services as determined by
the Monetary Board.
C. ON BORROWERS (Sec. 55.2):
1. Fraudulently overvalue property offered
as security for a loan from the bank;
2. Furnish false or make misrepresentations
or suppression of material facts for the
purpose of obtaining, renewing, or
increasing a loan or extending the period
thereof;
3. Attempt to defraud the said bank in the
event of a court action to recover a loan
or other credit accommodation; or
4. Offer any director, officer, employee or
agent of a bank any gift, fee, commission,
or any other form of compensation in
order to influence such persons into
approvi ng a l oan or ot her credi t
accommodation application.
D. ON EXAMINERS, BSP OR GOVERNMENT
OFFICERS AND EMPLOYEES ASSIGNED
TO SUPERVISE, EXAMINE, ASSIST OR
RENDER TECHNICAL ASSISTANCE TO
ANY BANK:
Commit any of the acts enumerated in Sec.
55 or aid in the commission of the same.
The maki ng of f al se r epor t s or
misrepresentations or suppression of
material facts by personnel of the BSP
shall constitute fraud and shall be subject
to administrative and criminal sanctions.
Conducting Business in an Unsafe or
Unsound Manner (Sec. 56)
In determining whether a particular act or
omission, which is not otherwise prohibited by law,
rule or regulation affecting banks, quasi-banks, or
trust entities, may be deemed as conducting
business in an unsafe or unsound manner, the MB
shall consider any of the following circumstances:
1. The act or omission has resulted or may result
in material loss or damage, or abnormal risk
or danger to the safety, stability, liquidity or
solvency of the institution;
2. The act or omission has resulted or may
result in material loss or damage, or abnormal
risk to the institutions depositors, creditors,
investors, and stockholders or to the BSP or
to the public in general;
3. The act or omission has caused any undue
injury, or has given any unwarranted benefits,
advantage or preference to the bank or any
party in the discharge by the director or officer
of his duties and responsibilities through
manifest partiality, evident bad faith or gross
inexcusable negligence;
4. The act or omission involves entering into any
contract or transaction manifestly and grossly
disadvantageous to the bank, quasi-bank or
trust entity, whether or not the director or
officer profited or will profit thereby.
Ownership of Stocks of A Domestic Bank
1. FILIPINO
In case of a Filipino individual or a domestic
non-bank corporation, EACH may own up to
40% of the outstanding voting stock of a local
bank.
2. FOREIGN
a. Individuals and Non-banks
Forei gn i ndi vi dual s and non-bank
corporations may own or control up to an
AGGREGATE of 40% of the voting stock
of a domestic bank.
The percentage of foreign-owned voting
stocks in a bank shall be determined:
(Grandfather Rule)
i. Individual: by the citizenship of the
individual stockholder in that bank;
ii. Corporation: by the citizenship of the
cont rol l i ng st ockhol ders of t he
corporation, irrespective of the place
of incorporation (Sec. 11).
b. Foreign Banks
They are not subject to the 40% limitation
prescribed under Sec. 11. The law
prescribes 60% as the maximum foreign
bank equity (RA 7721).
c. Family Groups or Related Interests
Ownership of stock by members of the
same family or related interest is not
prohibited.
Family groups or related interests -

stockholdings of individuals related to
each other within the fourth degree of
consanguinity or affinity, legitimate or
common-law; must be fully disclosed in
all transactions by such an individual
with the bank (Sec. 12).
Rel at ed I nt er est s 2 or mor e

corporations owned or controlled by the
same family group or same groups of
persons; must be fully disclosed in all
transactions by such corporations or
related groups of persons with the bank
(Sec. 13).
Note: There is no limit on the number of
shares that can be owned by the same
fami l y or rel ated i nterest, wi thout
prejudice to the 40% restrictions imposed
by Sec. 11.
Act Liberalizing Entry of Foreign Banks (R.A. No. 7721)
The Monetary Board authorizes foreign banks
to operate through any of the following modes
of entry:
1. By acquiring, purchasing or owning up to
60% of the voting stock of an existing bank;
2. By investing in up to 60% of the voting
st ock of a new banki ng subsi di ar y
incorporated under laws of Philippines;
3. By establishing branches with full banking
authority, provided:
a. foreign bank may avail itself of only one
mode of entry; and
b. foreign bank or Philippine corporation
may own up to 60% of the voting stock of
only one domestic bank or new banking
subsidiary (Sec. 2).
Note: Entries under the second and third modes
are restricted to banks which are among the top
150 foreign banks in the world or top 5 banks in
their country of origin as of the date of application.
To establish a branch or subsidiary, the foreign
bank must be widely-owned and publicly-listed in
its country of origin, unless the foreign bank
applicant is owned by the government of its
country of origin.
MINIMUM CAPITALIZATION
1. For locally incorporated subsidiaries
equal to that of domestic banks of the same
category
2. For foreign bank branches for those
seeking entry under the third mode shall
Banking Laws
permanently assign capital of not less than
the US$ equivalent of P210M;
Amendments introduced by GBL 2000
1. Within seven years from effectivity of the
GBL (June 13, 2000), foreign banks may
acquire 100% of the voting stocks of an
existing bank or invest in up to 100% of
the voting stocks of a new subsidiary (Sec.
73, GBL).
2. Other foreign individuals and non-bank
corporations may own up to 40% of the
voting stock of a domestic bank; the
citizenship of the controlling shareholders
of the non-bank corporations will be
traced to determine the foreign ownership
of the domestic bank (Sec. 11, GBL).
FOREIGN BANKS (Secs. 7278)
1. Entry: Governed by the provisions of the
Foreign Bank Liberalization Act and by the
Offshore Banking System Decree (Sec. 72)
Offshore Banking
The conduct of banking transactions in foreign
currencies involving the receipt of funds from
external sources and the utilization of such
funds (PD 1034).
Offshore Banking Unit
A branch, subsidiary or affiliate of a foreign
banking corporation duly authorized by the
BSP to transact offshore business in the
Philippines (PD 1034).
2. Revocation of license to do business in
the Philippines: The Monetary Board
may revoke such license on the grounds that
the foreign bank is insolvent or in imminent
danger thereof or that its continuance in
business will involve probable loss to those
transacting business with it (Sec. 78).
3. In case of a foreign bank which has more than
1 branch in the Philippines, all such banks
shall be treated as 1 unit for the purposes of
the GBL, and all reference to the Philippine
branches of foreign banks shall be held to
refer to such units (Sec. 74).
4. Residents and citizens of the Philippines who
are creditors of a branch in the Philippines of
a foreign bank shall have preferential rights to
assets of the same in accordance with
existing laws (Sec. 75).
Ownership of Real Property
GENERAL RULE
A bank cannot acquire and own real property.
Rationale: Banks are not engaged in the
business of acquiring and possessing real
property. Also, banks must maintain liquidity at all
times to enable it to perform its functions. Thus,
banks must as much as possible retain only
assets that are easily marketable.
EXCEPTIONS
1. As shall be necessary for its own use in the
conduct of its business, provided:
a. The total investment in such real estate
and i mprovements, i ncl udi ng bank
equipment, shall NOT exceed 50% of the
combined capital accounts; and
b. The equity investment of a bank in
another corporation engaged primarily in
real estate shall be considered as part of
the bank's total investment in real estate,
unl ess otherwi se provi ded by the
Monetary Board (Sec. 51).
2. As mortgaged to it in good faith by way of
securi ty for debts, conveyed to i t i n
satisfaction of a debt previously contracted in
the course of its dealings, and such as it shall
purchase at sales under judgments, decrees,
mortgages, or trust deeds held by it and to
secure debts; provided, however, that
property acquired or held under such
circumstances shall be disposed of by the
bank within a period of 5 years; provided that
the bank may after said period continue to
hold the property for its own use, subject to
(1) (Sec. 52).
WAREHOUSING AGREEMENT
The bank will make it appear that some of its
properties were transferred to another entity such
as when stockholders of a bank formed a
corporation for the purpose of purchasing the
existing bank sites and to lease them later back to
the bank (Tala Realty Services Corporation v. Banco Filipino
Savings and Mortgage Bank, GR No. 143263, January 29,
2004).
Parties to the agreement are in pari delicto and
should suffer the consequences of their deception
by denying them affirmative relief (Ibid).
Effect: The bank CANNOT claim that it is still the
owner of the transferred properties and the
transferee cannot demand payment of rentals
from the bank (Ibid).
RULES ON FORECLOSURE OF A REAL
ESTATE MORTGAGE BY A MORTGAGEE-
BANK
Application: Judicial or extrajudicial foreclosure
JUDICIAL EXTRAJUDICIAL
Right of Redemption
Within 1
year from
registration
of the
foreclosure
sale
(exception
to Rule 68)
1. Mortgagor is a natural person
Within one year after the registration
of sale with the Register of Deeds
(Sec. 1(3) SC Cir. AM No. 99-10-05).
2. Mortgagor is a juridical person
At any time before the registration
of the certificate of foreclosure sale
which in no case shall be more than
3 months after foreclosure,
whichever is earlier.
Redemption Price
Amount due under the mortgage deed + interest
+ all the costs and expenses incurred by the
bank or institution from the sale and custody of
the property less the derived income therefrom
(Sec 47; Union Bank v. CA, GR 134068, June 25, 2001)
Possession
Purchaser has the right to enter upon and take
possession of the property immediately after the
date of the confirmation of the auction sale and to
administer the same in accordance with law (Sec
47).
Injunction and Bond
Any petition in court to enjoin or restrain the
conduct of foreclosure proceedings shall be
given due course only upon filing by the
petitioner of a bond in an amount fixed by the
court conditioned that he will pay all the damages
which the bank may suffer by the enjoining or
restraint of the foreclosure proceedings (Sec. 47).
A bank may be bound by an agreement providing
for a longer redemption period (Ibaan Rural Bank vs.
CA, GR No. 123817, December 17, 1999); thus,
converting it to conventional redemption or by
estoppel if the extension was unilaterally made.
When the mortgagee is a bank, amount of
redemption price is governed by section 78 of the
GBA (now Sec. 47 of the GBL) and not section 6
of Act no. 3135. The general rule in redemption is
that the intention to redeem must be accompanied
by actual and simultaneous tender of payment. As
an exception, while the filing of judicial action
within the one-year period will preserve the right to
redeem, such judicial action must be filed in good
faith (Maylou Tolentino v. Court of Appeals, GR No. 171354,
March 7, 2007).
The issue of whether the redemptioner had
remitted the correct redemption price is a matter
that should be resolved by the regular courts; the
LRA was vested with jurisdiction to resolve only
the registrability of the affidavit of consolidation
and the certificate of redemption (San Fernando Rural
Bank Inc. v. Pampanga Omnibus Development Corp., GR No.
168088, April 3, 2007).
Directors & Officers
FIT AND PROPER RULE
To maintain the quality of bank management and
afford better protection to depositors and the
public, in general, the Monetary Board shall
prescribe, pass upon and review the qualifications
and disqualifications of individuals elected or
appointed as bank directors or officers and
disqualify those found unfit after due notice (Sec.
16).
In determining whether an individual is fit and
proper to hold the position of a director or officer
of a bank, regard shall be given to his integrity,
experience, education, training, and competence
(Sec. 16).
Composition of Board
There shall be at least 5, and a maximum of 15
members of the board of directors of a bank, 2 of
whom shall be independent directors. In case of
merged or consolidated banks, the maximum
number of directors is 21 (Sec. 15).
Non-Filipino citizens may become members
of the board of directors of a bank to the
extent of the foreign participation in the equity
of said bank (Sec. 15).
Independent Director
A person other than an officer or employee of the
bank, its subsidiaries or affiliates or related
interests.
Meetings
Meetings of the board of directors may be
conducted through modern technologies such as,
Banking Laws
but not limited to, teleconferencing and video-
conferencing (Sec. 15).
Prohibition on Public Officials
GENERAL RULE
No appointive or elective official, whether full-time
or part-time, shall, at the same time, serve as an
officer of any private bank (Sec. 19).
EXCEPTIONS
1. As otherwise provided under Sec. 5 of the
Rural Bank Act of 1992;
2. Where such service is incidental to financial
assistance provided by the government or a
government-owned or -controlled corporation
to the bank;
3. As otherwise provided under existing laws.
Note: A bank holding out its officers and agents
as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk from
its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom (10 Am
Jur 2d, p. 114).
Accordingly, a banking corporation is liable to
innocent third persons where the representation is
made in the course of its business by an agent
acting within the general scope of his authority
even though, in the particular case, the agent is
secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some
other person, for his own ultimate benefit (Philippine
Banking Corp. v. CA and Marcos, GR No. 127469, January
15, 2004).
Trust Operations
Only a stock corporation or a person duly
authorized by the Monetary Board shall act as a
trustee or administer any trust or hold property in
trust or on deposit for the use, benefit, or behalf of
others (Sec. 79).
Trust Business
Any activity resulting from a trustor-trustee
r el at i onshi p ( t r ust eeshi p) i nvol vi ng t he
appointment of a trustee by a trustor for the
administration, holding, management of funds
and/ or properties of the trustor by the trustee for
the use, benefit or advantage of the trustor or of
others called beneficiaries (Sec. X403[a], Manual of
Regulations for Banks).
Powers of trust entities:
1. Act as trustee on any mortgage or bond issued
by any municipality, corporation or body politic
and to accept and execute any trust consistent
with law;
2. Act under the order or appointment of any
court as guardian, receiver, trustee, or
depositary of the estate of any minor or
incompetent person, and as receiver and
depositary of any money paid into court by
parties to any legal proceedings and of
property of any kind which may be brought
under the jurisdiction of the court;
3. Act as the executor of any will when it is
named the executor thereof;
4. Act as administrator of the estate of any
deceased person, with the will annexed, or
when there is no will;
5. Accept and execute any trust for the holding,
management and administration of any estate,
real or personal, and the rents, issues, and
profits thereof;
6. Establish and manage common trust funds,
subject to such rules and regulations as may
be prescribed by the MB (Sec. 83).
Prohibitions:
1. No trust entity shall, for account of the trustor
or the beneficiary of the trust, unless prior to
its execution, such transaction has been fully
disclosed and specifically authorized by the
client, beneficiary, other party-in-interest, court
of competent jurisdiction, or other competent
authority:
a. Lend, sell, transfer or assign money or
property to any of the departments,
di rect ors, off i cers, st ockhol ders, or
employees of the trust entity or fiduciary,
including relatives within the 1
st
degree of
consanguinity or affinity, or the related
interests, of such directors, officers and
stockholders; or to any corporation where
the trustee or fiduciary owns at least 50%
of the subscribed capital or voting stock in
its own right and not as trustee nor in a
representative capacity;
b. Purchase or acquire property or debt
instruments from any of the departments,
di rect ors, off i cers, st ockhol ders, or
employees of the trust entity or fiduciary,
including relatives within the 1
st
degree of
consanguinity or affinity, or the related
interests, of such directors, officers and
stockholders; or to any corporation where
the trustee or fiduciary owns at least 50%
of the subscribed capital or voting stock in
its own right and not as trustee nor in a
representative capacity;
c. Invest in equities of, or in securities
underwritten by the trustee or fiduciary or a
corporation in which the trustee or fiduciary
owns at least 50% of the subscribed capital
or voting stock in its own right and not as
trustee nor in a representative capacity;
and
d. Sell, transfer, assign, or lend money or
property from one trust or fiduciary account
to another except where the investment is
allowed by the Monetary Board (Sec. 409.3,
manual of Regulations for Banks; Sec. 80, GBL).
2. The trust business and all funds, properties or
securities received by any trust entity as
executor, administrator, guardian, trustee,
receiver or depositary shall be kept separate
and distinct from the general business,
including all other funds, properties, and
assets, of such trust entity (Sec. 87, GBL).
Penalties for Violation of The GBL (Sec. 66)
1. As provided by specific provisions;
2. Sections 34-37 of RA 7653 (by excluding the
bank from clearing);
3. Suspension or removal of the director or
officer; and
4. Dissolution of the corporation by quo warranto
proceedings.
The New Central Bank Act
(NCBA) (RA No. 7653)
Purpose
To maintain a central monetary authority that shall
function and operate as an independent and
accountable body in the discharge of its
responsibilities concerning money, banking and
credit.
BANGKO SENTRAL NG PILIPINAS (BSP)
The states central monetary authority charged
with the responsibility of administering the
monetary, banking and credit system of the
country and is granted the power of supervision
and examination over bank and non-bank financial
institutions performing quasi-banking functions,
including savings and loan associations (Busuego v.
CA, GR No. L-48955, June 30, 1987).
Primary objectives:
1. To maintain price stability conducive to a
balanced and sustainable growth of the
economy.
2. To promote and maintain monetary stability
and the convertibility of the peso (Sec. 3).
Responsibilities and Functions:
1. To provide policy directions in the areas of
money, banking, and credit;
2. To regulate the operations of finance
companies and non-bank financial institutions
performing quasi-banking functions, and
similar institutions (Sec. 3);
3. Custodian of reserves (Secs. 64-66, 94, 103);
4. Clearing channel or house, especially where
the PCHC does not operate (Sec. 102);
5. Money Function shall have the sole power
and authority to issue currency (Sec. 49-60)
within the Philippine territory.
6. To engage in open market operations
purchase and sale of securities exclusively in
accordance with price stability objective;
7. To act as the banker (Secs. 110-116) and
fi nanci al advi ser (Secs. 123-124) of the
government:
a. Designated as the official depositary of
the Government, its political subdivisions
and instrumentalities (Sec 113) and shall
represent it in all monetary fund dealings;
b. Before undertaking any credit operation
abroad, the Government, through the
Secretary of Finance, shall request the
opinion, in writing, of the MB on the
mo n e t a r y i mp l i c a t i o n s o f t h e
contemplated action (Sec. 123).
c. Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract
or guarantee foreign loans but with the
prior concurrence of the Monetary Board.
Banking Laws
d. To engage the services of other banking
institutions to act as its agent (Sec. 115);
8. To act as agent of the Government, its
instrumentalities and subdivisions in the
issuance of securities representing the
obl i gat i ons of t he Gover nment , i t s
instrumentalities and subdivisions (Secs.
117-119).
9. Source of credit (Secs. 61-63, 81-89, 109)
To make rediscounts, discounts, loans,

and advances to banking and other
financial institutions to influence the
volume of credit consistent with price
stability objectives;
10. Supervisor of the banking system.
Bangko Sentral shall have supervision

over banking institutions and quasi-
banks, including their subsidiaries and
affiliates engaged in allied activities.
Subsidiary
A corporation where more than 50% of
the voting stock is owned by a bank or a
quasi-bank.
Affiliate
A corporation where 50% or less of the
voting stock is owned by a bank or a
quasi-bank or which is related to linked to
such institution or intermediary through
common stockholders or such other
factors as may be determined by the MB.
MONETARY BOARD (MB)
The body through which the powers and functions
of the Bangko Sentral are exercised (Sec.6).
Composition
Seven (7) members appointed by the President of
the Philippines for a term of 6 years consisting of:
1. Chairman: Governor of the BSP;
2. A member of the cabinet to be designated by
the President of the Philippines; and
3. Five (5) members who shall come from the
private sector, all of whom shall serve full-
time.
Note: The degree of diligence required of the
members of the MB, officials and employees of
the BSP in the performance of their functions is
extraordinary diligence (Sec.16, NCBA).
The legal obligations of diligence and good faith
that BSP officials owe to the public start with the
official acts of the MB which, rightly or wrong, are
the cause of loss or injury to third parties, not any
preparatory report or recommendation (Borlongan v.
Reyes, GR No. 161276, January 31, 2005).
Corporate Powers of the BSP
(PS-Sue CoPAL)
1. To adopt, alter and use a corporate Seal
which shall be judicially noticed;
2. To enter into Contracts;
3. To lease, own, and sell or otherwise dispose
of its real and personal Property;
4. To Sue and be sued;
5. To do and Perform such other necessary or
proper powers to carry out purposes of NCBA
(Sec. 5);
6. To acquire and hold such Assets and incur
such l i abi l i ti es i n connecti on wi th i ts
operations or as are essential to the proper
conduct of operation;
7. To compromise, condone, or release, in whole
or in part, any claim of, or settled Liability to
the BSP, regardless of the amount involved,
under such terms and conditions as may be
prescribed by the MB.
CONSERVATORSHIP OF A BANK OR QUASI-
BANK
Ground
Whenever, on the basis of a report submitted by
the appropri ate supervi si ng or exami ni ng
department, the Monetary Board finds that a bank
or quasi-bank is
1. In a state of continuing inability; or
2. Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors.
A conservator appointed by the BSP may take
over without the need of first declaring the
bank insolvent.
Liquidity
Ability of an asset to be converted into cash
quickly and without any price discount.
Solvency
When liabilities amount to less than total
assets, providing the ability to pay debts.
Insolvency
When the actual market value of assets is
insufficient to pay its liabilities, not considering
capital stock and surplus which are not
liabilities for such purpose.
Duration: Not to exceed 1 year
Qualifications of Conservator
Should be competent and knowledgeable in bank
operations and management.
MB has exclusive power to designate the
conservator.
Effects:
1. Bank/quasi-bank retains juridical personality;
2. Not a precondition to the designation of a
receiver; and
3. Perfected transactions cannot be repudiated.
Powers of conservator:
1. To take charge of the assets, liabilities, and
the management thereof;
2. Reorganize the management;
3. Collect all monies and debts due said bank;
and
4. Exercise all powers necessary to restore its
viability, with the power to overrule or revoke
the actions of the previous management and
board of directors of the bank or quasi-bank
(First Philippine International Bank vs. Court of Appeals,
GR No. 115849, January 24, 1996).
The powers must be related to preservation of
assets, reorganization of management and the
restoration of viability. Such power to revoke
cannot extend to post-facto repudiation of
perfected transactions; otherwise they would
infringe the non-impairment clause of the
Constitution. The power to revoke contracts only
covers those that are deemed defective i.e.,
void, voidable, unenforceable or rescissible.
The conservators power is not unilateral and he
cannot simply repudiate valid obligations of the
bank. His authority would be to only bring court
actions to assail such contracts. To rule otherwise
would enable a failing bank to become solvent, at
the expense of third parties, by simply getting the
conservator to unilaterally revoke all previous
dealings which had one way or another come to
be considered unfavorable to the bank, yielding
nothing to perfected contractual rights nor vested
interests of third parties who had dealt with the
bank (First Philippine International Bank v. Court of Appeals,
GR No. 115849, January 24, 1996).
Termination
1. When the MB is satisfied that the institution
can continue to operate on its own and the
conservatorship is no longer necessary;
2. But if the continuance in business of the bank
would involve probable loss to its depositors
or creditors, proceedings for receivership
and liquidation shall be pursued (Sec. 29).
RECEIVERSHIP OF A BANK OR QUASI-BANK/
CLOSURE
Receivership is equivalent to an injunction to
restrain the bank in any way. Thus, the
appointment of a receiver operates to suspend the
authority of the bank and of its directors and
officers over its property and effects (Villanueva v.
CA, GR No. 114870, May 26, 1995).
Under NCBA Under GBL
Grounds
1. Inability to pay liabilities
as they become due in
the ordinary course of
business, but not
including inability to pay
those caused by
extraordinary demands
induced by financial
panic in the banking
community;
1. Notification to the
BSP or public
announcement of
a bank holiday (Sec.
53, GBL);
2. Insufficiency of
realizable assets to
meet its liabilities;
2. Suspension of
payment of
deposit liabilities
continuously for
more than 30 days
(Sec. 53, GBL);
3. Inability to continue
business without
involving probable
losses to its depositors
or creditors; or
3. Per s i s t enc e i n
c o n d u c t i n g
busi ness i n an
unsafe or unsound
manner (Sec. 56,
GBL);
4. Willful violation of a
cease and desist order
under Sec. 37 that has
become final, involving
acts or transactions
which amount to fraud
or a dissipation of the
assets of the institution
(Sec. 30).
Receiver:
1. Banks PDIC
2. Quasi-banks Any person of recognized
competence in banking or finance
Duties of Receiver:
1. Immediate gathering and taking charge of all
the assets and liabilities of the institution and
administering them for the benefit of creditors;
2. Exercise the general powers of a receiver
under Revised Rules of Court;
3. Receiver may deposit or place funds of the
institution in non-speculative investments;
4. Determination ASAP but not later than 90
days from takeover, whether the institution
should undergo rehabilitation or otherwise
Banking Laws
placed in such a condition so that it may be
permitted to resume business with safety to
its depositors and creditors and the general
public OR liquidation.
Any determination for the resumption of
business of the institution shall be subject
to prior approval of the Monetary Board
5. The receiver shall not, with the exception of
administrative expenditures, pay or commit
any act that will involve the transfer or
disposition of any asset of the institution.
CLOSE NOW, HEAR LATER SCHEME
1. Sec. 29 of the Central Bank Act does NOT
contemplate prior notice and hearing before
a bank may be directed to stop operations
and placed under receivership. It is enough
that such action is made the subject of a
subsequent judicial review. When the law
provides for the filing of a case within 10
days after the receiver takes charge of the
assets of the bank, it is unmistakable that
the assailed actions should precede the
filing of the case. The legislature could not
have intended to authorize no prior notice
and hearing in the banks closure and at
the same time allow a suit to annul it on the
basis of absence thereof (Central Bank v. CA,
GR No. 76118, March 30, 1993).
2. The pur pose of t he scheme i s t o
PREVENT unwarranted dissipation of the
banks assets and as a valid exercise of
police power to protect the depositors,
creditors, stockholders and general public.
Due process does not necessarily require
prior hearing; a hearing or an opportunity to
be heard may be subsequent to the
closure. (Central Bank v. CA, No. L-21146,
3. To require previous hearing would not only
be impractical but would tend to defeat the
very purpose of the law when it invested the
Monetary Board with such authority (Rural
Bank of Lucena vs. Arca, No. L-21146, September 20,
1965). The mere filing of a case for
receivership can trigger a bank run and
drain its assets in days even hours leading
to insolvency even if the bank be actually
solvent. The bank is given full opportunity to
prove arbitrariness and bad faith in placing
the bank under receivership, in which event
the resolution may be nullified and the
receivership lifted as the trial court may
determine (Central Bank v. CA, GR No. L-37859,
July 26, 1988).
NOTE: The absence of an examination before
the closure of a bank did not mean that there
was no basis for the closure order, under RA
7653, the basis need not arise from an
examination as required in the old law. The
purpose of the law is to make the closure of a
bank summary and expeditious in order to
protect public interest. This is also why prior
notice and hearing are no longer required
before a bank can be closed (Rural Bank of San
Miguel Inc. v. Monetary Board, GR No. 150886, February
16, 2007).
4. Only stockholders representing the majority of
the capital stock of a bank have the personality
to file a petition for certiorari to be filed within
10 days from receipt by the board of directors
of the institution of the order directing
receivership, liquidation or conservatorship.
Reason: Stockholders owning a majority of
the shares are expected to be more objective
in determining whether the resolution is
plainly arbitrary and issued in bad faith (Sec. 30,
NCBA; Central Bank v. CA, GR No. 76118, March 30,
1993).
Remedy
Actions of the MB taken under Sec. 29 or 30 shall
be final and executory and may not be restrained
or set aside except on petition for certiorari on
the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion
as to amount to lack or excess of jurisdiction.
Effect of Filing Petition for Review
The pendency of the case does NOT diminish the
authority of the liquidator to administer and
continue the banks transactions. He is allowed to
continue receiving collectibles and receivables or
paying off creditors claims and other transactions
pertaining to normal operations of a bank such as
the prosecution of suits against debtors for
collection and for foreclosure of mortgages. The
bank was allowed to collect interest on its loans
while under liquidation, provided that the interests
were legal (Banco Filipino Savings and Mortgage Bank vs.
Ybanez, GR No. 148163, December 6, 2004).
MANDATORY REQUIREMENTS FOR BANK
CLOSURE
1. Exami nat i on by t he appropri at e BSP
department as to the condition of the bank;
2. Examination shows that the condition of the
bank is one of insolvency;
3. Director shall inform the MB in writing of such
fact;
4. If the MB shall find the statement of the
department to be true, it shall appoint a
receiver of the assets and liabilities of the
bank (Banco Filipino vs. MB, GR No. 70054, December
11, 1991).
5. Within 60 days, the MB shall determine and
confirm if the bank is insolvent, and if public
interest requires, shall order the liquidation of
the bank.
LIQUIDATION
Grounds
1. The condition of the bank is one of insolvency
or that its continuance would involve probable
loss to its depositors and creditors.
2. A determination by the MB that the bank
cannot be rehabilitated.
Procedure
1. Receiver shall file ex parte, with the proper
RTC, a petition for assistance in the
liquidation of the institution pursuant to a
liquidation plan adopted by the PDIC for
general application to all closed banks. In
case of quasi-banks, the liquidation plan shall
be adopted by the Monetary Board.
2. Receiver shall convert the assets of the
institution to money for the purpose of paying
the debts of the institution (Sec. 30).
3. Payment shall be in accordance with the rules
on concurrence and preference of credits.
EFFECTS OF APPOINTMENT OF RECEIVER/
LIQUIDATION
1. Retention of Juridical Personality (Teal Motor
Co. v. CFI, GR No. 29119, February 18, 1928);
Note: A bank which had been closed by the
MB retains its juridical personality which can
sue and be sued through its liquidator. The
only limitation being that the prosecution or
defense of the action must be done through
the liquidator (Hernandez vs. Rural Bank of Lucena,
Inc., No. L-29791, January 10, 1978; citing Wauer v.
Bank of Pendleton, 65 S.W. 2
nd
167).
2. Suspension of Operations/ Stoppage of
Business;
Note: The forcible closure of the Bank by
operation of law permanently severed the
employer-employee relationship between it
and its employees when it ceased operations.
Such severance is not affected by the banks
subsequent rehabilitation (Cornista-Domingo v.
NLRC, GR No. 156761, October 17, 2006).
3. The asset s under recei vershi p or
liquidation shall be deemed in custodia
legis in the hands of the receiver and shall
be exempt from garnishment, levy,
attachment or execution (Villanueva v. Court of
Appeals, GR No. 114870, May 26, 1995; Sec. 30).
4. The stay of execution of judgment is
warranted if a bank was placed under
receivership. To execute the judgment would
unduly deplete the assets of bank (Lipana v.
Development Bank of Rizal, GR No. 73884, September
24, 1987).
5. Bank is NOT liable to pay interest on
deposits which accrued during the period
of suspension of operation (Overseas Bank v.
CA, No. L-56047, April 27, 1982).
Note: Unless a bank can lend money, engage
i n i nt ernat i onal t ransact i ons, acqui re
foreclosed mortgaged properties or their
proceeds and generally engage in other
banking and financing activities from which it
can derive income, it is inconceivable how it
can carry on as a depository obligated to pay
stipulated interest. It should be deemed read
into every contract of deposit with a bank that
the obligation to pay interest on the deposit
ceases the moment the operation of the bank
i s compl etel y suspended by the dul y
constituted authority, the Bangko Sentral
(Fidelity Savings and Mortgage Bank v. Cenzon, .R. No.
46208, April 5, 1990).
6. BUT the BSP shall collect interest and
other appropriate charges on all loans and
advances i t ext ends, t he cl osure,
receivership or liquidations of the debtor-
institution notwithstanding (Sec. 85, RA 7653).
7. The bank cannot do new business, i.e. to
grant new loans or to accept new deposits.
However the bank is obliged to collect pre-
existing debts due to the bank which form
part of the assets of the bank and in
connect i on t her ewi t h, t o f or ecl ose
mortgages securing debts. The receiver must
assemble the assets and pay the obligation of
the bank under receivership, and take steps
to prevent dissipation of such assets (Provident
Savings Bank vs. Court of Appeal, GR No. 97218, May
17, 1993).
Thus, petitioners obligation to pay interest
subsists even when respondent bank was
placed under receivership. The respondents
receivership is an extraneous circumstance
and has no effect on petitioners obligation
(Aguilar v. Manila Banking Corporation GR No. 157911,
8. Deposits do not become preferred credits
(CB v. Morfe, G.R No.L-38427, March 12, 1975).
PESO
Unit of monetary value in the Philippines,
represented by the P sign. It is divided into 100
equal parts called centavos, represented by the
c sign (Sec. 48).
All Monetary obligations shall be settled in the
Philippine currency which is the legal tender in the
Philippines. However, parties may agree that the
obligation or transaction shall be settled in any
other currency at the time of payment (Sec. 1, RA
8183).
LEGAL TENDER
Banking Laws
All notes and coins issued by the Bangko Sentral
are fully guaranteed by the Republic and shall be
legal tender in the Philippines for all debts, both
public and private (Sec. 52).
LEGAL TENDER POWER
Coins
1. 1-Peso, 5-Peso and 10-Peso coins: In
amounts not exceeding P1,000.00;
2. 25 centavo coin or less: In amounts not
exceeding P100.00 (Circular No. 537, 2006).
Checks
1. Those representing demand deposits which
do NOT have legal tender power and their
acceptance in the payment of public and
private debts is at the creditors option.
2. But a check that has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash
in an amount equal to the amount credited to
his account (Sec. 60).
RETIREMENT OF OLD NOTES AND COINS
Bangko Sentral may call in for replacement:
1. Notes of any series or denomination which
are more than 5 years old; and
2. Coins which are more than 10 years old.
Rules:
1. Notes and coins called in for replacement shall
remain legal tender for a period of one year
from the date of call.
2. After that period, they shall cease to be legal
tender, but during the following year or for
such longer period as MB may determine,
they may be exchanged at par and without
charge in the Bangko Sentral and by agents
duly authorized by the Bangko Sentral for this
purpose.
3. After the expiration of this latter period, the
notes and coins which have not been
exchanged shall cease to be a liability of BSP
and shall be demonetized. The Bangko
Sentral shall also demonetize all notes and
coins which have been called in and replaced
(Sec. 57).
MONETARY STABILIZATION
The MB shall endeavor to control any expansion
or contraction in monetary aggregates which is
prejudicial to the attainment or maintenance of
price stability (Sec. 61).
The exercise of the monetary policy involves
altering of the economys money supply to
stabilize aggregate output, employment and price
level.
The policy may mean two things:
1. Increasing money supply during recession to
stimulate spending; or
2. Restricting it during inflation to curtail spending.
Three Important Tools to Achieve Price
Stability:
1. DISCOUNT POLICY
BSP is empowered to extend loans and
advances to banking institutions to influence
the volume of credit consistent with the price
stability objective (Sec. 81).
The MB shall fix the interest and rediscount
rates to be charged by the BSP on its credit
operations. Interests and rediscount rates
shall be applied to all banks of the same
category uniformly and without discrimination
(Sec. 85).
a. If BSP wants to increase money supply, it
opens the rediscount window by reducing
interest on loans;
b. If BSP wants to decrease money supply,
it closes the rediscount window or
charges very high interest rates for
rediscounted notes.
2. OPEN-MARKET-OPERATIONS (Sec. 90)
The BSP may buy and sell in the open market
(a) evidence of indebtedness issued directly
by the Government or by its political
subdi vi si ons and (b) by government
instrumentalities and fully guaranteed by the
government:
a. If BSP wants to increase money supply, it
buys government securities;
b. If BSP wants to decrease money supply,
it sells government securities.
3. RESERVE REQUIREMENTS (Sec. 94) to
control the volume of money created by the
credit operations of the banking system, all
banks operating in the Philippines shall be
required to maintain reserves against the
deposit liabilities
Where a certain percentage of the deposit is
set aside and cannot be lent out.
a. If the volume of money is high, BSP will
raise reserve requirement;
b. If the volume of money is low, reserve
requirement is reduced.
Rules:
1." The required reserves of each bank shall
be proportional to the volume of its
deposit liabilities.
2. Since the required reserves are imposed
primarily to control the volume of money,
the Bangko Sentral shall not pay interests
thereon (Sec. 94).
3. Deposits maintained with the Bangko
Sent r al as par t of t he r eser ve
requirements shall be exempt from
attachment, garnishment, or any other
order or process of any court or agency
(Sec. 103).
4. No increase of more than 4% point within
30-day period.
INTERNATIONAL MONETARY STABILIZATION
MB shall determine the exchange rate policy of
the country. BSP is required to maintain adequate
international reserves to meet any foreseeable net
demands on the BSP for foreign currencies.
International Reserves include, but shall not be
limited to, gold and assets in foreign currencies.
BSP is authorized to adopt measures that are
necessary to correct abnormal movements in
monetary supply (Sec. 63).
BSP can purchase and sell gold and foreign notes
and coins, and documents and instruments or
types customarily employed for international
transfer of funds. Foreign exchange transactions
shall be with the following entities only:
e. Banki ng i nst i t ut i ons oper at i ng i n t he
Philippines;
f. The Government, its political subdivisions and
instrumentalities;
g. Foreign or international financial institutions;
h. Foreign governments and instrumentalities;
and
i. Other entities or persons which the MB may
authorize as foreign exchange dealers.
PROHIBITIONS ON THE BSP
1. It shall not acquire shares of any kind or
accept them as collateral, and shall not
participate in the ownership or management
of any enterprise, either directly or indirectly;
and
2. It shall not engage in development banking or
financing except that outstanding loans
obtained or extended for development
financing shall not be affected by the said
prohibition (Sec. 128).
Secrecy of Bank Deposits Law
PURPOSES
1. To encourage people to deposit in banking
institutions; and
2. To discourage private hoarding so that banks
may lend such funds and assist in the
economic development of the country.
Coverage
ALL DEPOSITS of whatever nature with banks or
banking institutions in the Philippines, including
investments in BONDS issued by the Government
of the Philippines, its political subdivisions and its
instrumentalities (Sec 2, RA 1405).
Money-market placement is NOT covered by
RA 1405 because it is not deposited in the
bank.
Prohibited Acts
1. Examination and inquiry or looking into all
deposits, of whatever nature, with the banks
in the Philippines including investments in
bonds issued by the Government.
2. Any disclosure by any official or employee of
any banking institution to any unauthorized
person of any information concerning the said
deposits.
GENERAL RULE
The deposits covered by law are considered as of
an absolutely confidential nature and may not
be examined, inquired or looked into by any
person, governmental bureau, or office.
EXCEPTIONS
A. From R.A. No. 1405 (BIPS)
1. Upon written permission of the depositor;
2. In cases of impeachment;
3. Upon order of a competent court in cases
of bribery or dereliction of duty of public
officials;
For purposes of RA 1405, the subject
matter of the litigation cannot be
Banking Laws
limited to bank accounts under the
name of defendant alone, but must
include those accounts to which the
money purportedly acquired illegally or
a portion thereof was alleged to have
been transferred. Plunder being thus
analogous to bribery; the exception to
R.A. 1405 applicable in cases of
bribery must also apply to cases of
plunder (Ejercito v. Sandiganbayan GR Nos.
157294-95, November 30, 2006).
4. Upon the order of a competent court in
cases where the money deposited or
invested is the subject matter of the
litigation (Sec. 2);
B. From other laws
1. Anti-Graft and Corrupt Practices Act -
Upon the order of a competent court or
tribunal in cases involving unexplained
wealth under the Anti-Graft and Corrupt
Practices Act (R.A. No. 3019).
The Anti-Graft Law is intended to amend
RA 1405 by providing an additional
excepti on to the rul e agai nst the
disclosure of bank deposits (PNB v.
Gancayco, No. L-18343, September 30, 1965).
Cases of unexplained wealth are similar
to cases of bribery and dereliction of duty
and there is no reason why these two
classes of cases cannot be excepted
from the rule making bank deposits
confidential. The policy as to one cannot
be different from the policy as to the
other. Inquiry into illegally acquired
property extends to cases where such
property is concealed by being held by or
recorded in the name of other persons
(Bangko Filipino v. Purisima, No. L-56429, May 28,
1988).
2. N I R C - U p o n I n q u i r y b y t h e
Commissioner of Internal Revenue into
bank deposits of:
i. A decedent to determine his gross
estate; and
ii. Any taxpayer who has filed an
application for compromise of his tax
liability under Sec. 204 (A) (2) by
reason of financial incapacity to pay
his tax liability. He must file a written
waiver of his privilege under RA 1405
or other general or special laws and
such waiver shall constitute the
authority of the Commissioner to
inquire into the bank deposits of the
taxpayer (Sec. 6[f], NIRC).
3. AMLA - Inquiry or examination by the
Anti-Money Laundering Council (AMLC)
upon order of any competent court in
cases of violation of the Anti-Money
Laundering Law, if there is probable
cause that the deposits or investments
are related to an unlawful activity or a
money laundering offense, EXCEPT that
no court order shall be required in the
following unlawful activities:
a. Kidnapping for ransom under Art. 267
RPC;
b. Violations of the Comprehensive
Dangerous Drugs Act of 2002 (Secs. 4, 5,
6, 8, 9, 10, 12, 13, 14, 15, and 16, RA No.
9165);
c. Hijacking and other violations under
RA 6235;
d. Destructive arson and murder under
RPC. Including those perpetrated by
terrorists against non-combatant
persons and similar targets (Sec. 11,
R.A. No. 9160 as amended by Sec. 8 of RA
9194).
4. Disclosure to the Treasurer of the
Philippines of dormant deposits for at
least 10 years under the Unclaimed
Balances Act (Sec. 2, Act No. 3936).
OTHER LAWS RELATING TO SECRECY OF
BANK DEPOSITS
A. Foreign Currency Deposit Act (R.A. No.
6426): Extends confidentiality to foreign
currency deposits, but the FCDA contains
only one ground authorizing examination:
upon written consent of the depositor.
(Intengan v. Court of Appeals, GR No. 128996, February
15, 2002).
A co-payee in a check deposited in a
bank is likewise a co-depositor thereof;
no written consent of the other co-payee
is necessitated in an inquiry of the
deposits by the said co-depositor (China
Banking Corporation v. Court of Appeals, GR No.
140687, December 18, 2006).
Another exception is provided for under the
AMLA, which is upon order of the court or
even without court order in proper cases
when there is probable cause of money
laundering as provided under Sec. 11 thereof.
Thus, as things now stand, there are TWO
EXCEPTIONS on the secrecy of foreign
currency deposits (Notes and Cases on Banks,
Negotiable Instruments and Other Commercial Documents,
Timoteo B. Aquino, 2006, 2
nd
Edition).
B. General Banking Law of 2000 (R.A. No. 8791):
1. No bank shall employ casual or non-
regul ar personnel or t oo l engt hy
probationary personnel in the conduct of
its business involving bank deposits (Sec.
55.4).
2. No director, officer, employee, or agent of
any bank shall, without court order,
disclose to any unauthorized person any
information relative to the funds or
properties in the custody of the bank
bel ongi ng t o pr i vat e i ndi vi dual s,
corporat i ons, or any ot her ent i t y:
Provided, that with respect to bank
deposits, the provisions of existing laws
shall prevail (Sec. 55.1 [b]).
3. Outsourcing of inherent bank functions.
C. New Central Bank Act (R.A. No. 7653)
1. DOSRI loans; and
2. Periodic and special examinations by the
BSP (Sec. 25);
Another exception is the examination
made by an independent auditor hired
by the bank to conduct its regular
audit provided that the examination is
for audit purposes only and the results
thereof shall be for the exclusive use
of the bank (Marquez v. Desierto, GR No.
135882, June 17, 2001; Citing Union Bank of
the Philippines vs. CA).
Examination by an auditor as an
exception to the rule can no longer be
f o u n d i n t h e s t a t u t e b o o k s .
Nevertheless, it can find basis in the
opinions of authors, banking experts
and practitioners. Moreover, common
sense would tell that the disclosure is
a natural consequence of examination
(Banking Laws and Jurisprudence, Atty. Efren L.
Dizon and Atty. Efren Vincent M. Dizon, 2006,
1
st
Edition).
GARNISHMENT
Bank accounts may be garnished by the creditors
of the depositor. There is NO violation of the Law
on Secrecy of Bank Deposits if the accounts are
garnished. It was not the intention of the
legislature to place bank deposits beyond the
reach of execution to satisfy a final judgment. Its
purpose is merely to secure information as to the
name of the depositor and whether or not the
defendant had a deposit in said bank, only for
purposes of garnishment. Any disclosure is purely
incidental to the execution process (China Banking
Corporation v. Ortega, GR No. L-34964, January 31, 1973).
The amount of deposit is actually not disclosed
and the intent of the legislature does not cover
garnishment (Philippine Commercial and Industrial Bank, et
al. v. The Hon. Court of Appeals, et al., GR No. 84526,
January 28, 1991).
REQUISITES FOR IN-CAMERA INSPECTION
OF BANK DEPOSITS
1. Pending case before a court of competent
jurisdiction;
2. Account must be clearly identified;
3. The inspection is limited to the subject of the
pending litigation;
4. The bank personnel and account holder must
be noti fi ed to be present duri ng the
inspection; and
5. The inspection must cover only the account
identified in the pending case.
Investi gati on by the Offi ce of the

Ombudsman is not considered pending
litigation before any court of competent
authority. Such investigation would not
warrant the opening of the bank account
for inspection (Marquez v. Desierto, GR No.
135882, June 27, 2001).
R.A. NO. 1405 vis-a-vis POWER OF THE BSP
TO CONDUCT PERIODIC AND/ OR SPECIAL
EXAMINATIONS (Sec. 4, GBL & Sec. 25, NCBA)
Prof. Aquino and Prof. Viray believe that the
general rule still applies. Hence, the deposit
remains confidential
Penalties
Imprisonment of not more than 5 years or a fine
not more than P20,000 or both, in the discretion of
the court.
Banking Laws
Anti-Money Laundering Act of 2001
PURPOSES
1. To 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; and
2. To pursue States foreign policy to extend
cooperation in transnational investigations
and prosecutions of persons involved in
money l aunderi ng acti vi ti es wherever
committed.
Covered Entities
1. Banks;
2. Non-banks;
3. Quasi-banks;
4. Trust entities; and
5. All other institutions their subsidiaries and
affiliates supervised or regulated by the BSP
(Sec 3 [1]).RD
Covered Transaction
Transaction in cash or other equivalent monetary
instrument involving a total amount in excess of
P500, 000.00, within one banking day.
Suspicious Transactions
Transactions with covered institutions regardless
of the amounts involved, where any of the
following circumstances exists:
1. There is no underlying legal or trade
obligation, purpose or economic justification;
2. Client is not properly identified;
3. Amount involved is not commensurate with
the business or financial capacity of the client;
4. Taking into account all known circumstances,
i t may be percei ved that the cl i ents
transaction is structured in order to avoid
being the subject of reporting requirements
under the Act;
5. Any circumstance relating to the transaction
which is observed to deviate from the profile
and/ or the clients past transactions with the
covered institution;
6. Transaction is in any way related to an
unlawful activity or offense under this Act that
is about to be, is being, or has been
committed; or
7. Analogous or similar transactions to any of the
foregoing.
MONEY LAUNDERING
A crime whereby the proceeds of an unlawful
activity are transacted, thereby making them
appear to have originated from legitimate sources
(Sec. 4, RA 9160 as amended by RA 9194).
It is committed by the following:
1. Any person knowing that any monetary
instrument or property represents, involves, or
relates to, the proceeds of any unlawful
activity, transacts or attempts to transact said
monetary instrument or property;
instrument or property involves the proceeds
of any unlawful activity performs or fails to
perform any act as a result of which he
facilitates the offense referred to in number 1
above;
instrument or property is required under this
Act to be disclosed and filed with the AMLC,
fails to do so (As amended by RA 9194).
Jurisdiction
All cases on money laundering: RTC (Sec. 5).
Those committed by public officers and private

p e r s o n s i n c o n s p i r a c y wi t h t h e m:
Sandiganbayan.
POWER TO FREEZE ACCOUNTS
The power of the AMLC to freeze accounts has
been deleted under RA 9194
The Court of Appeals may issue a freeze order,
which shall be effective immediately and for a
period of 20 days, unless extended by the court,
only:
a. upon ex parte application of AMLC; and
b. after determination that probable cause exists
that any monetary instrument or property is in
any way related to an unlawful activity.
Philippine Deposit Insurance
Corporation (PDIC) Act
PURPOSES
1. To create a government-owned entity, the
PDIC;
2. To insure the deposit liability of banks in an
account up to P250,000.00 for every single
depositor of each bank irrespective of the
number of accounts therewith;
3. To promote and safeguard the interests of the
depositing public by way of providing
permanent and cont i nui ng i nsurance
coverage on all insured deposits (Sec. 1);
PDIC FUNCTIONS
A. INSURANCE
NATURE
Compulsory insurance on all bank deposits.
COVERAGE
Insured Deposits
The net amount to any depositor for deposits
in an insured bank, after deducting any
offsets, but should not exceed P250, 000.00
(Sec. 4[g]).
If the depositor has 2 or more accounts
with the same bank, the maximum
coverage pertains to the sum of all such
accounts maintained in the same right
and capacity (Sec. 4[g]).
In determining such amount due to any
depositor, there shall be added together
all deposits in the bank maintained in the
same right and capacity for his benefit
either in his own name or in the name of
others (Sec. 4[g]).
Foreign currency deposits are covered
under the provisions of RA 3591, as
amended and insurance payment shall be
in the same currency in which the insured
deposits are denominated (Sec. 9, RA 6426;
Circular No. 1389, 1993).
Note: The PDIC law is not applicable to
Offshore Banking Units (P.D. No. 1034).
Trust funds held by an insured bank in a
fiduciary capacity whether held in trust or
deposited in any other department or in
another bank shall be insured like other
forms of deposits in an amount not to
exceed P10,000 for each trust estate;
such insurance shall be separate from
and addition to that covering other
deposits of the owners of such trust funds
or the beneficiaries (Banking Laws and
Jurisprudence, Dizon and Dizon, 2006).
Where a fiduciary bank deposits trust
funds in other insured banks, the amount
shall be considered as deposit liability of
the bank in which such funds are so
deposited (Ibid).
Specific Risk Insured Against
Bank closure ONLY; losses due to a bank
robbery are NOT covered.
Assessment (Sec. 6)
The PDIC assesses and collects insurance
assessments from member-banks to insure
member-banks deposit accounts.
PAYMENT OF INSURED DEPOSITS
Condition Precedent for Entitlement to
Payment
Filing of claim within twenty-four months from
order of closure.
Manner of Payment (Sec. 14)
a. Cash;
b. Transferred deposit A deposit in an
insured bank made available to a
depositor by the PDIC as payment of
the insured deposit of such depositor
in a closed bank and assumed by
another insured bank (Sec. 4[h]).
RECOGNITION OF OWNER (Sec. 16[c])
GENERAL RULE
PDIC or any insured bank is not required to
recognize as the owner of any portion of a
deposit appearing on the records of a closed
bank under a name other than that of the
claimant, any person whose name or interest
Banking Laws
as such owner is not disclosed on the records
of such closed bank as part owner of said
deposit, if such recognition would increase the
aggregate amount of the insured deposits in
such closed bank.
EXCEPTION
If such deposits would NOT increase the
aggregate amount of the insured deposits in
such closed bank.
Rules (Sec. 4[g]):
1. PDIC liability is on a per bank basis.
Accounts in a bank, even though in
several branches, are to be added
t oget her, pr ovi ded t hat t hey ar e
maintained in the same capacity and the
same right for his benefit either in his own
name or in the name of others.
Capacities: individual account, joint
and account, joint and/or account.
2. The insurance premiums are to be paid
by the insured bank, not the depositors.
3. In case the depositors account is more
than the insurance coverage, the balance
may still be recovered from the PDIC
after the final liquidation of the remaining
assets of the closed bank.
4. A joint account regardless of whether the
conjunction and, or, and/or is used,
shall be insured separately from any
individually-owned deposit account.
a. If the account is held jointly by two or
more natural persons, or by two or
more juridical persons or entities, the
maximum insured deposit shall be
divided into as many equal shares as
there are individuals, juridical persons
or entities, unless a different sharing is
stipulated in the document of deposit.
b. If the account is held by a juridical
person or entity jointly with one or
more natural persons, the maximum
insured deposit shall be presumed to
belong entirely to such juridical person
or entity: Provided, further, That the
aggregate of the interests of each co-
owner over several joint accounts,
whether owned by the same or
different combinations of individuals,
juridical persons or entities, shall
likewise be subject to the maximum
insured deposit of Two hundred fifty
thousand pesos (P250,000.00).
5. No owner/holder of any negotiable
certificate of deposit shall be recognized
as a depositor entitled to the rights
provided unless his name is registered as
owner/ holder thereof in the books of the
issuing bank.
WITHHOLDING OF PAYMENT (Sec. 16[d])
GENERAL RULE
Payment of insured deposit may be offset to
pay for any liability of the depositor to the
closed bank or its receiver
EXCEPTION
PDIC may withhold payment of such portion
of the insured deposit of any depositor in a
closed bank for the payment of any liability of
such depositor as a stockholder of the closed
bank or of any liability of the depositor to the
closed bank or its receiver which is not
offset against a claim due from such bank,
pending the determination and payment of
such liability by such depositor or any other
liable therefor
Effect of Payment by PDI C to the
Depositor of His Insured Deposit:
a. Discharges the PDIC from further liability
(Sec. 16[b]).
b. Subrogates the PDIC to all the rights of
the depositor against the closed bank to
the extent of such payment. (Sec. 15).
Statutory Liability
Liability of PDIC rests upon the existence of
deposits with the insured bank, not on the
negotiability or non-negotiability of certificates
evidencing these deposits The fact that a
bank instrument provides that the certificate is
insured by the PDIC does not ipso facto make
the latter liable for the same; the deposit
liability of the PDIC is determined by the
provisions of RA 3519 (PDIC vs. CA, GR No.
118917, December 22, 1997).
Authority to Terminate
1. Continued engagement in unsafe and
unsound banking practices
2. Should any insured bank fail or refuse to
pay any assessment required to be paid,
and should the bank not correct such
failure or refusal within 30 days after
written notice has been given to an officer
of the bank, and stating that the bank has
failed or refused to pay as required by
law, PDIC may at its discretion, file a case
for collection before the appropriate court
without prejudice to the imposition of
administrative sanctions on the bank
officials responsible for the non-payment
(Sec. 6[h]).
B. BANK EXAMINATION (Sec. 7)
Under the new law, PDIC's authority to
examine its member banks, with prior
approval by the Monetary Board, has been
restored.
C. BANK REHABILITATION (Sec. 17[c])
The PDIC, in the discretion of its Board of
Directors, may grant financial assistance to
distressed banks if it is proven to be a less
costly alternative than closure or determine
that the actual payoff and liquidation thereof
will be more expensive than the exercise of
such power, when in the opinion of the Board
of Directors, the continued operation of such
bank is essential to provide adequate banking
service in the community or maintain financial
stability in the economy.
D. RECEIVERSHIP OF CLOSED BANKS
Once a bank is ordered closed by the
Monetary Board (MB) of the Bangko Sentral
ng Pilipinas, the PDIC is designated as
statutory receiver. The PDIC upon receipt of
the MB resolution ordering the closure of a
bank, immediately physically takes over the
closed bank. Receivership is the stage within
which the PDIC manages the affairs of the
closed bank and preserves its assets for the
benefit of creditors (Sec. 10[a, b]).
E. LIQUIDATION OF CLOSED BANKS
After it is determined that the closed bank can
not be rehabi l i t at ed, t he PDI C shal l
recommend the liquidation of the assets of the
closed bank. Liquidation refers to the recovery
and conversion of assets into cash for
distribution to all creditors in accordance with
the order of creditor preference pursuant to
law.
There are substantial differences in the

procedure for involuntary dissolution and
liquidation of a corporation under the
Corporation Code, and that of a banking
corporation under the New Central Bank
Act, so that the requirements in one
cannot simply be imposed in the other.
PDIC, as liquidator of insolvent bank,
does not need to secure a tax clearance
before courts approval of the project of
distribution of the banks assets (In Re:
Petition for Assistance in the Liquidation of the Rural
Bank of Bokod [Benguet], Inc. v. BIR, GR No.
158261, December 18, 2006).
Unclaimed Balances Law
ELEMENTS OF UNCLAIMED BALANCES
1. Include credits or deposits of:
a. Money;
b. Bullion;
c. Security; or
d. Other evidence of indebtedness.
2. The credit or deposit must be with a bank,
building and loan association, or trust
corporation; and
3. The credit or deposit is in favor of a person:
a. who is known to be dead, or
b. who has not made further deposits or
withdrawals during the preceding 10
years or more (Sec 1, Act No. 3936).
Demand drafts cannot be escheated but
telegraphic notes can be escheated
(Republic v. FNCB, No. L-16106, December 30,
1961).
LEGAL CONSEQUENCE
The unclaimed balances may be subject of
escheat proceedings, after proper publication and
the depositors still do not lay claim to them.
Banking Laws
Foreign Currency Deposit Act
PESO DEPOSIT
FOREIGN CURRENCY
DEPOSIT
Governed by R.A.
No. 1405
Governed by R.A. No. 6426
4 exceptions +
exceptions found
in special laws
1 exception + 1 provided
under AMLA (R.A. No. 9160)
May be garnished
or attached (not a
violation of R.A.
No. 1405)
GENERAL RULE Exempt
from attachment,
garnishment, and other court
order and processes.
EXCEPTION (Salvacion vs. CB,
GR No. 94723, August 21, 1997)

OTHER FEATURES
1. Authorized banks may adopt a numbered
account system for recording and servicing
deposits in non-checking accounts.
2. Foreign currency deposits are exempt from
taxes except the interests.
3. In the event a new enactment or regulation is
issued decreasing the rights granted under
the law, it shall not apply to FCDs already
made or existing at the time of the issuance of
such new regulation or enactment.
In a sui generis case, the SC allowed

garnishment of such deposits of a
transient American tourist arising out of a
heinous crime committed against a
Filipino minor since to hold otherwise
would result to injustice to a citizen
perpetrated by a foreigner (Salvacion, et al. v.
Central Bank et al., GR No. 94723, August 21,
1997).
Note: This case does not constitute
another exception, the SC only ruled as
such due to the special circumstances of
the said case.
REPEALING LAW TO UNIFORM CURRENCY
ACT (R.A. No. 8183)
All monetary obligations shall be settled in the
Philippine currency which is legal tender in the
Philippines. However, the parties may agree that
the obligation or transaction shall be settled in any
other currency at the time of payment (Sec. 1).
! END OF BANKING LAWS "
COMMERCIAL LAW
(Republic Act 8293)
INTELLECTUAL PROPERTY CODE
LAW ON INTELLECTUAL PROPERTY
Purpose
To strengthen the intellectual and industrial property system in the Philippines as mandated by the countrys
accession to the Agreement Establishing the World Trade Organization (WTO) (Mirpuri vs. CA, GR No. 114508,
November 19, 1999).
Laws Specifically Repealed by The IPC
1. Patent Law (RA 165)
2. Trademark Law (RA 166)
3. Copyright Law (PD 49)
4. Articles 188 & 189 of RPC
Intellectual Property
Those property rights which result from the
physical manifestation of original thought
(Ballantine's Law Dictionary).
Note: There are NO property rights protected by
law in mere ideas or mental conceptions. When
creations of mind are put in tangible form, there is
appropriate subject of property that is protected by
law (63A Am Jur 3d, Property, Section 5).
INTELLECTUAL PROPERTY RIGHTS
(CoRe-PIMP-LG)
1. Copyright;
2. Related rights or neighboring rights of
copyright;
3. Patents;
4. Mark;
5. Geographic indications;
6. Industrial designs;
7. Layout designs (topographies) of integrated
circuits;
8. Protection of Undisclosed information (Sec. 4).
Note: Trademarks, copyrights and patents are
different intellectual property rights that cannot be
interchanged with one another.
COPYRIGHT
Confined to literary or artistic works which are
original creations in the literary or artistic domain
protected from the moment of their creation.
Law on Intellectual Property
EXECUTIVE COMMITTEE
COMMERCIAL LAW
PATENTABLE INVENTIONS
Any technical solution of a problem in any field of
human activity which is new, involves an inventive
step and is industrially applicable (Section 21, IPC).
TRADEMARK
Any visible sign capable of distinguishing the
goods or services of an enterprise and shall
include a stamped or marked container of goods
(Section 121.1, IPC, and Elidad Kho v. Court of Appeals, GR
No. 115758, March 11, 2002).
GEOGRAPHIC INDICATION
One which identifies a good as originating in the
territory of a TRIPS member, or a region or locality
in that territory, where a given quality, reputation or
other characteristic of the good is essentially
attributable to its geographical origin (Art. 22, Trade-
Related Aspects of Intellectual Property Rights [TRIPS
Agreement]).
LAYOUT-DESIGN (TOPOGRAPHY) OF AN
INTEGRATED CIRCUIT
INTEGRATED CIRCUIT
A product, in its final form or an immediate form, in
which the elements, at least one of which is an
element, and some or all of the interconnections
are integrally formed in and/ or on a piece of
material and which is intended to perform an
electric function (Art. 35, TRIPS Agreement).
LAY-OUT DESIGN (TOPOGRAPHY)
The three-dimensional disposition, however
expressed, of the elements, at least one of which
is an active element, and of some or all of the
interconnections of an integrated circuit, or such a
three-dimensional disposition prepared for an
integrated circuit intended for manufacture (Sec. 112
[3], R.A. No. 8293, as amended).
Note: For a layout-design to be entitled to
protection it must be original in the sense that they
are the result of their creators own intellectual
effort and are not commonplace among creators
of l ay out - des i gns ( t opogr aphi es ) and
manufacturers of integrated circuits at the time of
their creation.
TECHNOLOGY TRANSFER ARRANGEMENTS
Contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a
product, the application of a process, or rendering
of a service including management contracts; and
the transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
computer software except computer software
developed for mass market (Sec. 4.2, IPC).
UNDISCLOSED INFORMATION
Information which:
1. is a secret in the sense that it is not, as a
body or in the precise configuration and
assembly of components, generally known
among or readily accessible to persons within
the circles that normally deal with the kind of
information in question;
2. has commercial value because it is secret;
and
3. has been subject to reasonable steps under
the circumstances, by the person lawfully in
control of the information, to keep it secret
(Art. 39, TRIPS Agreement).
International Law Related Provisions
PERSONS ENTITLED TO THE BENEFITS OF
THE IPC (Principle of Reciprocity)
Any person who is a national or who is domiciled
or has a real and effective industrial establishment
in a country which:
(1) 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
(2) extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to
benefits to the extent necessary to give effect
to any provision of such convention, treaty, or
reciprocal law, in addition to the rights to
which any owner of an intellectual property
right is otherwise entitled by the IPC (Sec. 3).
Note: The court held that if the foreign corporation
not doing business in the Philippines is suing as a
party of a treaty to which the Philippines is a
signatory, the fact that it is suing under Sec 3, RA
8293 need not be alleged anymore and the court
may take judicial notice of such fact as it is
embodied in and supplied by the Paris Convention
which forms part of the law of the land, provided
that the party suing substantially complied with the
requirements of the law (Puma Sportschufabriken Rudolf
Dassler,K.G. vs. IAC, GR 75067, Feb. 26, 1988).
In another case, Leviton Industries, Inc. vs.
Salvador, (GR No. 40163, June 19, 1982), the Court
held that failure to allege reciprocity is fatal to
foreign corporations cause it being shown that it
failed to comply with the requirements of the law.
All that is alleged in private respondents
complaint is that it is a foreign corporation. Such
bare averment not only fails to comply with the
requirements imposed by Section 21-A but
violates as well the directive of Section 4, Rule 8
of the Rules of Court.
PRINCIPLE OF REVERSE RECIPROCITY
Any condition, restriction, limitation, diminution,
requirement, penalty or any similar burden
imposed by the law of a foreign country on a
Phi l i ppi ne nati onal seeki ng protecti on of
intellectual property rights in that country, shall
reciprocally be enforceable upon nationals of said
country within Philippine jurisdiction (Sec. 231, IPC).
NATIONAL TREATMENT PRINCIPLE
The Philippines, upon becoming a member of the
WTO, has adhered to the Trade-Related Aspects
of Intellectual Property Rights (TRIPS), which
provides that protection afforded to the member-
state (with respect to intellectual property) must be
extended to the nationals of other member-states.

MOST-FAVORED NATION PRINCIPLE
Whatever favor, al l owance, consi derati on,
privilege or immunity a member-state grants the
nationals of another country is immediately and
unconditionally accorded to the nationals of other
member-states (Art. 4, TRIPS).
Jurisdiction Over Disputes
1. ORIGINAL JURISDICTION
a. Director General
Over disputes relating to the terms of a
license involving the authors right to
p u b l i c p e r f o r ma n c e o r o t h e r
communication of his work (Sec. 7.1[c],
IPC).
b. Bureau of Legal Affairs
1. Opposi t i on t o appl i cat i ons f or
registration of marks;
2. Cancellation of trademarks;
3. Cancel l ati on of patents, uti l i ty
models, and industrial designs;
4. Petitions for compulsory licensing;
5. Administrative complaints for violation
of laws involving intellectual property
rights where the total damages
c l a i me d a r e n o t l e s s t h a n
P200,000.00. The Director of Legal
Affairs has the power to punish
contempt (Sec. 10, Ibid).
c. Documentati on, I nformati on and
Technology Transfer Bureau
Over disputes involving technology
transfer payments (Sec. 11.8).
d. Regular Courts (Sec. 225)
2. APPELLATE JURISDICTION
a. Director General
Over all decision rendered by the:
1. Director of Legal Affairs;
2. Director of Patents;
3. Director of Trademarks; and
4. Di rector of the Documentati on,
Information and Technology Transfer
(Sec. 7.1[b]).
b. Court of Appeals
Over decisions of the Director General in
the exercise of his appellate jurisdiction
over the decisions of the
a) Director of Legal Affairs,
b) Director of Patents,
c) Director of Trademarks (Sec. 7.1[b]).
c. Secretary of Trade and Industry
1. Over decisions of the Director
General in the exercise of his
appel l at e j uri sdi ct i on over t he
decisions of the Director of the
Documentation, Information and
Technology Transfer (Sec. 7.1[b]).
2. Over decisions of the Director
General in the exercise of his original
jurisdiction relating to terms of license
involving the authors right to public
performance or other communication
of his work (Sec. 7.1[c]).
INTER PARTES
PROCEEDINGS
CIVIL
PROCEEDINGS
Kinds
A. Patent
1. Petition to cancel an
invention, patent, utility
model registration,
industrial design
registration, or any claim
or parts of a claim.
2. Petition for compulsory
licensing or a license to
exploit a patented
invention.
A. Copyright,
Patent,
Trademark
Action for
infringement
INTER PARTES
PROCEEDINGS
CIVIL
PROCEEDINGS
Kinds
B. Trademark
1. Opposition against the
registration of a mark
published for opposition.
2. Petition to cancel the
registration of a mark.
B. Trademark
Action for
unfair
competition
Nature of Proceedings
Administrative Judicial
Jurisdiction
IPO (Bureau of Legal Affairs) Regular courts
Quantum of Evidence
Substantial evidence Preponderance
of evidence
Copyright
PRINCIPLES
1. Copyright is that system of legal protection an
author enjoys of the form of expression of
ideas (Intellectual Property Law, Comments and
Annotations, Aquino, 2003).
2. Relates to artistic creations, such as books,
music, paintings, and sculptures, films and
technology-based works as well as to the
main act which, in respect of literary and
artistic creations, may be made only by the
author or his authorization (Understanding
Copyright and Related Rights, World Intellectual Property
Organization).
3. Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as their content, quality or
purpose (Sec. 172.2).
4. The copyright of original literary and artistic
works belong to the author of the work (Sec.
178.1).
5. Copyright is not a right to do anything but to
stop others from doing something; it is
therefore a negative right (Copyright Under the
Intellectual Property Code, Amador, V., 1998ed).
6. Protection extends only to the expression of
the idea, not to the idea itself or to any
procedure, system, method or operation,
concept or principle, discovery, or mere data
(Sec. 175).
7. The copyright is distinct from the property in
the material object subject to it (Sec. 181).
8. Copyright, in the strict sense of the term, is
purely a statutory right. Being a mere
statutory grant, the rights are limited to what
the statute confers. It may be obtained and
enjoyed only with respect to the subjects and
by the persons, and on terms and conditions
specified in the statute. Accordingly, it can
cover only the works falling within the
statutory enumeration or description (Pearl &
Dean (Phil.) vs. Shoemart, GR No. 148222, August 15,
2003).
PRIMARY PURPOSE OF COPYRIGHT
Not to reward the labor of authors, but to promote
the progress of science and useful arts (Copyright
Under the Intellectual Property Code, Ibid).
REQUISITES FOR THE CREATION OF A
COPYRIGHTABLE WORK
1. ORIGINALITY
It does not mean novelty or ingenuity; neither
uniqueness nor creativity. It simply means that
the work "owes its origin to the author.
Constituents of originality:
a. The work is an independent creation of the
author;
b. It must NOT be copied; and
c. It must involve some intellectual effort.
2. EXPRESSION
There must be "fixation". To be "fixed", a work
must be embodied in a medium sufficiently
permanent or stable to permit it to be
per cei ved, r epr oduced, or ot her wi se
communicated for a period of more than
transitory duration.
Strictly speaking, there is no work for
copyri ght purpose, unl ess t here i s
something tangible.
It is fixation that defines the time from
when copyright subsists. Before the time
of fixation there can be no infringement.
It is the crucial event or act that allows the
author to invoke the law.
It must be when a work of authorship is at
least expressed in some determinate form,
i.e. fixation.
FORMALITIES
No formality is required for the author to be vested
with the rights of copyright (Principle of Automatic
Protection).
Note: Registration and Deposit with the National
Library and the Supreme Court Library of 2 copies
of the work within 3 weeks after first public
di ssemi nati on i s onl y for the purpose of
completing the records of these libraries. Failure
to do so after formal demand subjects the author
to a fine (Sec. 191).
OWNERSHIP OF COPYRIGHT
(Sec 178-179)
CREATOR TO WHOM BELONGS
Single
creator
Author of the work, his heirs or
assigns.
Joint
creation
If work consists of
UNIDENTIFIABLE parts: co-
authors jointly as co-owners, unless
there is agreement to the contrary.
If work consists of IDENTIFIABLE

parts: author of each part owns the
part that he has created.
Emplo-
yees
creation
If the creation is PART of his

regular duties: employer, unless
there is agreement to the contrary
If it is NOT: employee
Commis-
sioned
work
Work per se: person

commissioning
Copyright: creator, unless there is

a written stipulation to the contrary.
CREATOR TO WHOM BELONGS
Cinema-
tographic
works
For exhibition purposes: producer
For all other purposes: producer,

author of the scenario, composer,
film director, author of the work
Anony-
mous and
pseudo-
nymous
works
Publishers are deemed
representative of the author, unless:
i. the contrary appears;
ii. p s e u d o n y ms o r a d o p t e d
name leaves no doubt as to the
authors identity; or
iii. author discloses his identity.
Collective
works
Contributor is deemed to have
waived his right, unless he expressly
reserves it (Sec. 196).
Letters
Writer.
However, the court may authorize
their publication or dissemination if
the public good or the interest of
justice so requires (Art.723, New Civil
Code).
DURATION OF COPYRIGHT
(Sec. 213)
TYPE OF WORK DURATION
Single creation
Lifetime of the creator and
for 50 years after his death
Joint creation
Lifetime of the last
surviving co-creator and
for 50 years after his death
Anonymous or a
pseudonymous work
50 years after the date of
their first publication;
except where, before the
expiration of said period,
the authors identity is
revealed or is no longer in
doubt, the 1
st
two
mentioned rules shall
apply; or if unpublished, 50
years from their making
Work of applied art,
an artistic creation
with utilitarian
functions or
incorporated in a
useful article,
whether made by
hand or produced
on an industrial
scale (Sec. 171.10).
25 years from the date of
making
Photographic work,
audiovisual work
produced by
photography or
analogous processes
50 years from the
publication of the work, or
if unpublished, from
making the same
TYPE OF WORK DURATION
Newspaper article
Lifetime of the author and
50 years thereafter
Note: The term of protection shall be counted
from the 1
st
day of January of the year following
the death or of last publication (Sec. 214).
COLLECTIVE WORK JOINT WORK
Elements remain
unintegrated and disparate
Separate elements
merge into a unified
whole
Work created by 2 or more
persons at the initiative and
under direction of another
with the understanding that
it will be disclosed by the
latter under his own name
and that contributions of
natural persons will NOT
be identified
Work prepared by 2
or more authors with
the intention that
their contributions
be merged into
inseparable or
interdependent parts
of the unitary whole.
Each author shall enjoy
copyright to his own
contribution
Joint authors shall
be co-owners. Co-
ownership shall
apply
Unless the contributor
expressly reserves his
right, it is the putative
author to whom the work
will be attributed
Joint authors shall
be entitled both to
be acknowledged as
authors of the work
WORKS PROTECTED:
1. ORIGINAL WORKS
a. Books, pamphlets, articles and other
writings;
b. Periodicals and newspapers
Note: A pure news report no longer finds
protection under the new law, BUT a
column or published comment will. When
newspapers and periodicals include
works enjoying independent copyrights,
the works so included continue enjoying
the rights for duration proper to them.
c. Lec t ur es , s er mons , addr es s es ,
dissertations prepared for oral delivery,
whether or not reduced in writing or other
material form;
d. Letters;
e. Dr amat i c or dr amat i c o- mus i c al
compositions, choreographic works or
entertainment in dumb shows;
f. Musical compositions, with or without
words;
g. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works
of art;
h. Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and
other works of applied art;
i. Illustrations, maps, plans, sketches,
charts and three dimensional works
rel ati ve to geography, topography,
architecture or science;
j. Drawings or plastic works of a scientific or
technical character;
k. Photographic works including works
produced by a process analogous to
photography; lantern slides;
l. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any
pr ocess f or maki ng audi ovi sual
recordings;
m. Pictorial illustrations and advertisements;
n. Computer programs; and
o. Other literary, scholarly, scientific and
artistic works (Sec. 172).
2. DERIVATIVE WORKS
a. Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
b. Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of
t he sel ect i on or coor di nat i on or
arrangement of their contents (Sec. 173).
WORKS NOT PROTECTED:
1. I dea, pr ocedur e, syst em, met hod or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or embodied
in a work (Sec. 175);
Note: Format or mechanics of a television
show are not copyrightable. The law in
enumerating what are subject to copyright
refers to finished works and not to concepts
(Joaquin Jr. v. Drilon, GR 108946, January 28, 1999).
2. News of the day and other miscellaneous
facts having the character of mere items of
press information (Sec. 175);
3. Any official text of a legislative, administrative
or legal nature, as well as any official
translation thereof (Sec. 175);
4. Any work of t he Government of t he
Philippines;
Note: However, prior approval of the
government agency or office wherein the work
is created shall be necessary for exploitation
of such work for profit. Such agency or office
may, among other things, impose as a
condition the payment of royalties.
No prior approval or conditions shall be
required for the use of any purpose of
statutes, rules and regulations, and speeches,
l ect ur es, ser mons, addr esses, and
dissertations, pronounced, read or rendered
in courts of justice, before administrative
agencies, in deliberative assemblies and in
meetings of public character (Sec. 176).
The Government is not precluded from
receiving and holding copyrights transferred
to it by assignment, bequest or otherwise; nor
shall publication or republication by the
Government in a public document of any work
in which copyright is subsisting be taken to
cause any abridgement or annulment of the
copyri ght or to authori ze any use or
appropriation of such work without the
consent of the copyright owner.
5. Pleadings;
6. Decisions of courts and tribunals. They may
therefore be freely used or quoted.
Note: This pertains to the "original decisions"
not the SCRA published volumes since these
are protected under derivative works under
Sec. 173.1 (b).
RIGHTS CONFERRED BY COPYRIGHT (CMD)
1. Copyright or Economic rights (Sec. 177);
2. Moral rights (Sec. 193); and
3. Right to participate in the gross proceeds of
the sale or lease of the original work or droit
de suite (Sec. 200).
I. COPYRIGHT OR ECONOMIC RIGHTS
Exclusive right to (a) carry out, (b) authorize
or (c) prevent the following acts (CAP):
a. Reproduction of the work or substantial
portion of the work;
b. Dramatization, translation, adaptation,
abri dgment, arrangement or other
transformation of the work;
c. First public distribution of the original and
each copy of the work;
d. Rental of the original or a copy of an
audiovisual or cinematographic work;
e. Public display of the original or a copy of
the work;
f. Public performance of the work; and
g. Other communication to the public of the
work (Sec. 177);
h. Assignment of the copyright and/ or the
material object in whole or in part
Note: Economic rights allows the owner
to derive financial reward from the use of
his works by others (WIPO, Understanding
Copyright and Related Rights, p.9).
II. MORAL RIGHTS
a. Right of Paternity To require that the
authorship of the works be attributed to
him, in a prominent way on the copies,
and with the public use of the work;
b. To make any alterations of his work prior
to, or to withhold it from publication;
c. Right of Integrity To object to any
distortion, mutilation or other modification
of, or other derogatory action in relation
to, his work which would be prejudicial to
his honor or reputation; and
d. To restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work (Sec. 193).
These rights are distinct from economic

rights and remain with the author even
after he has transferred or assigned to
another other rights of copyright (WIPO,
215).
Moral rights allow the author to take

certain actions to preserve the personal
link between himself and the work (WIPO,
Understanding Copyright and Related Rights, p.9).
Term/ Duration
Lifetime of the author and 50 years after his
death.
NOT assignable or subject to license (Sec. 198).
These rights may be waived by:
1. by a written instrument (Sec. 195); or
2. by contribution to a collective work unless
expressly reserved (Sec. 196).
III. DROIT DE SUIT
Inalienable right to receive to the extent of 5%
of the gross proceeds of the sale or lease of a
work (Sec. 200).
Requisites:
1. Sale or lease of the work;
2. Original work;
3. Painting or sculpture, or manuscript;
and
4. Subsequent to the first disposition by the
author
Term/ Duration
Lifetime of the author and for 50 years after
his death.
Works NOT covered:
1. Prints;
2. Etchings;
3. Engravings;
4. Works of applied art; and
5. Similar works wherein the author primarily
derives gain from the proceeds of
reproductions (Sec. 201).
FIRST SALE DOCTRINE
After the first sale of the lawfully made copy of
the copyrighted work, anyone who is the
owner of that copy can sell or dispose of that
copy in any way without any liability for
copyright infringement. The first sale of an
authorized copy of the work exhausts the
authors right to control distribution of copies.
LIMITATIONS TO THE RIGHTS OF COPYRIGHT
1. General limitations (Sec. 184);
2. Fair use (Sec. 185);
3. In the case of a work of architecture, the right
to control the reconstruction or rehabilitation
in the same style as the original of the
building (Sec. 186);
4. Private reproduction of published work in a
single copy by a natural person for research
and private study (Sec. 187);
5. Reprographic reproduction in a single copy by
non- pr of i t l i br ar i es , under c er t ai n
circumstances (Sec. 188);
6. Reproduction, under certain circumstances, of
a computer program in one back-up copy by
the lawful owner of the program (Sec. 189);
7. Importation for personal purposes under
certain conditions (Sec. 190).
GENERAL LIMITATIONS
Acts that do not infringe copyright:
1. Recitation or performance of a work: (i) made
accessible to the public, (ii) privately done,
(iii) free of charge, (iv) strictly for a charitable
or religious institution;
2. Making of quotations from a published work:
(i) compatible with fair use, (ii) extent is
justified by the purpose, (iii) source and name
of the author, appearing on work, must be
mentioned;
3. Reproduction or communication to the public
by mass media of articles on current political,
social, economic, scientific or religious topic,
l ectures, addresses and other works,
delivered in public: (i) for information
purposes, (ii) not expressly reserved, and (iii)
source is already indicated;
4. Reproduction and communication to the
public of literary, scientific or artistic works as
part of reports of current events by means of
photography, cinematography or broadcasting
to the extent necessary for the purpose;
5. Inclusion of a work in a publication, broadcast
or other communication to the public, sound
recording or film if made by way of illustration
for teaching purposes compatible with fair use
and the source and the name of the author
appearing on work, must be mentioned;
6. Recording made in schools, universities, or
educational institutions of a work included in a
broadcast for the use of schools, universities
or educational institutions. Such recording
must be deleted with in a reasonable period;
such recording may not be made from audio-
visual works which are part of the general
cinema, repertoire of feature films except of
brief excerpts of the work;
7. Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means of its
work or facilities, (iii) for use in its own
broadcast;
8. Use made of a work by or under the direction
or control of the government for public interest
compatible with fair use;
9. Public performance or the communication to
the public of a work in a place where no
admission fee is charged by a club on
institution for charitable or educational
purpose only and the aim is not profit-making;
10. Public display of the original or a copy of the
work not made by means of a film, slide,
television, image or otherwise on screen or by
means of any other device or process either
the work has been published, sold, given
away, or transferred to another person by the
author or his successor in title; and
11. Use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner (Sec.
184).
FAIR USE
A privilege, of persons other than the owner of the
copyright, to use the copyrighted material in a
reasonabl e manner wi t hout hi s consent ,
notwithstanding the monopoly granted to the
owner by the copyright.
It is meant to balance the monopolies enjoyed by
the copyright owner with the interests of the public
and of society.
It does not constitute infringement.
Examples:
a. Criticizing, commenting, and news reporting;
b. Using for instructional purposes, including
producing multiple copies for classroom use,
for schol arshi p, research and si mi l ar
purposes
c. Decompilation the reproduction of the code
and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with
other computer programs (Sec. 185).
Criteria to determine whether use is fair or not:
1. Purpose and the character of the use;
2. Nature of the copyrighted work;
3. Amount and substantiality of the portions
used;
4. Effect of the use upon the potential market of
the copyrighted work (Sec. 185).
Note: Concept of fair use only applies to
copyrighted work and NOT to non-copyrightable
material.
Quotations from a published work if they are
compatible with fair use and only to the extent
justified by the purpose, including quotations from
newspaper articles, and periodicals in the form of
press summaries are allowed provided that the
source and the name of the author, if appearing
on the work, are mentioned (Habana v. Robles, GR No.
131522, July 19, 1999).
INFRINGEMENT OR PIRACY
Any violation of the owners exclusive rights
conferred by law (Pandect of Commercial Law and
Jurisprudence, Justice Jose Vitug, 2006ed).
An appropriation of a copyrighted work by another
who is not authorized (Blacks Law Dictionary).
The doing by any person, without the consent of
the owner of the copyright, of anything the sole
right to do which is conferred by statute to the
owner of the copyright (Habana v. Robles, Ibid; Columbia
Pictures v. CA, GR No. 131522, July 19, 1999).
Copying alone is not what is prohibited. The
copying must produce an injurious effect. The
authors work is the product of his long and
assiduous research and for another to represent
it, as ones own is injury enough (Habana v. Robles,
Ibid).
It is not necessary that the whole or even a large
portion of the work shall have been copied. If so
much is taken that the value of the original is
sensibly diminished, or the labors of the original
author are substantially and to an injurious extent
appropriated by another, that is sufficient in point
of law to constitute a piracy (Ibid.).
It is the overall appearance or impression that
establishes infringement. Trivial or minor changes
do not necessarily negate infringement (Boorstyn,
Copyright Law, 1981 Ed., 293, cited in Intellectual Property
Law, Comments and Annotations, Aquino, R., 1998ed).
A copy of a piracy is an infringement of the original
and it is no defense that the pirate in such cases
did not know whether or not he was infringing any
copyright; he at least knew that what he was
copying was not his and he copied at his peril
(Habana v. Robles, Ibid.).
PLAGIARISM
The act of appropriating the literary composition of
another, or parts or passages of his writings, or
the ideas or language of the same and passing
them off as the product of ones mind.
The incorporation in ones own work that of
another without the proper acknowledgement
thereof (Pandect of Commercial Law and Jurisprudence, Vitug,
2006ed).
REMEDIES FOR INFRINGEMENT:
1. JUDICIAL (Secs. 216-217)
a. Action for damages;
b. Criminal action;
Any person who at the time when
copyright subsists in a work has in his
possession an article which he knows, or
ought to know, to be an infringing copy of
his work for the purpose of:
1. Selling, letting for hire, or by way of
trade offering or exposing for sale, or
hire, the article;
2. Distributing the article for purpose of
trade, or for any other purpose to an
extent that will prejudice the rights of
the copyright owner in the work; or
3. Trade exhibit of the article in public,
shall be guilty of an offense and shall
b e l i a b l e o n c o n v i c t i o n t o
imprisonment and fine (Section
217.3).
c. Injunction;
d. Court order for impounding or destruction
of infringing materials;
e. Payment of moral and exempl ary
damages even in case of acquittal by the
accused;
f. Seizure and impounding of infringing
materials for the purpose of evidence
2. ADMINISTRATIVE
a. Administrative action;
b. Cease and desist order;
c. Forfeiture of paraphernalia used in
committing the offense;
d. Administrative fines
AFFIDAVIT EVIDENCE
An affidavit made before a notary public in actions
for infringement. In the affidavit, the owner of the
copyrighted work or his representative states that:
1. the work described therein is already
copyrighted;
2. the affiant or the person named therein is the
owner of the said copyright; and
3. the copy of the work or other subject matter
thereto is a true copy thereof, and shall be
admitted in any proceedings for infringement
and shall constitute prima facie proof of the
matters stated therein until the contrary is
proved (Sec. 218.1).
Note: As prima facie proof, the affidavit shifts
the burden of proof to the defendant, to prove
the ownership of the copyrighted work.
PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated on a
work in the usual manner as the author shall, in
the absence of proof to the contrary, be presumed
to be the author of the work. This is applicable
even if the name is a pseudonym, where the
pseudonym leaves no doubt as to the identity of
the author (Sec. 219.1).
The person or body corporate whose name
appears on an audio-visual work in the usual
manner shall, in the absence of proof to the
contrary, be presumed to be the maker of said
work (Sec. 219.2).
Related Parties
1. PARTIES
a. Plaintiff
v. Legal owner; or
vi. Beneficial owner; since they are
"parties in interest."
b. Defendant
vii. Direct infringer; or
viii.Contributory infringer (Sec. 217).
Note: A corner bookstore and magazine
store that vends pirated copies of a work
is in fact violating the copyright owner's
right to exclusively distribute his work.
Such store would therefore be infringing.
The printer who, though acting under
instructions from another, sets into motion
the illegal reproduction of protected
material would, in fact, be infringing
copyright.
2. PRESCRIPTIVE PERIOD
a. Action for
damages
4 years from the time
the cause of action
arose (Sec. 226)
b. Criminal action
subject to the general
rules of prescription
of crimes
c. Petition for
injunctive relief
none
d. Petition for the
impounding and
destruction of
infringing material
none
RELATED RIGHTS OR NEIGHBORING RIGHTS
OF COPYRIGHT (Secs. 202-211)
Rights akin to but different from copyright, granted
by the law to
1. Performers, who are :
a. Nationals of the Philippines;
b. NOT nationals of the Philippines but
whose performances:
i. Take place in the Philippines;
ii. Are incorporated in sound recordings
protected under the Intel l ectual
Property Code; and
iii. Which has not been fixed in sound
recording but are carried by broadcast
qualifying for protection under the
Code (Secs. 203-207).
2. Producers of sound recordings (Secs. 208-210),
which includes:
a. Sound recordings the producers of which
are nationals of the Philippines (Section
223.1);
b. Sound recordi ngs t hat were f i rst
published in the Philippines (Section 223.2);
c. Sound recordings which are to be
protected by virtue of and in accordance
with any international convention or other
international agreement to which the
Philippines is a party (Section 224.2).
3. Broadcasting organizations (Sec. 211)
Scope of Right: exclusive right to carry out,
authorize or prevent any of the following acts:
a. The r ebr oadc as t i ng of t hei r
broadcasts;
a. The recording in any manner including
the making of films or the use of video
tape, of their broadcasts for the purpose
of communication to the public of
television broadcasts of the same; and
b. The use of such records for fresh
transmissions or for fresh recording.
Application of rights:
1. Broadcasts of broadcasting organizations
the headquarters of which are situated in
the Philippines;
2. Broadcasts transmitted from transmitters
situated in the Philippines;
3. Broadcasts by organizations which are to
be prot ect ed by vi rt ue of and i n
accordance wi th any i nternati onal
convent i on or ot her i nt er nat i onal
agreement to which the Philippines is a
party (Section 224).
Patent
The right granted to an inventor by the State, or by
the regional office acting for several States, which
allows the inventor to exclude anyone else from
commercially exploiting his invention for a limited
peri od (Worl d Intel l ectual Pr operty Or gani zati on,
Understanding Industrial Property, p.5).
A patent is a statutory monopoly which protects
against unlicensed use of the patented device or
process even by one who discovers it properly
through independent research (60 Am Jur 2d, Patents,
Section 6).
Note: By granting an exclusive right, patents
provide incentives to individuals, offering them
recognition for their creativity and material reward
for their marketable inventions (World Intellectual
Property, Understanding Industrial Property, p. 5).
As an essential consideration for the granting of
the exclusive right, the inventor must disclose the
patented invention to the public, so that others can
gain the new knowledge and further develop it
(Ibid, pp. 5-6).
PURPOSES
1. The patent law seeks to foster and reward
invention;
2. It promotes disclosures of inventions to
stimulate further innovation and to permit the
public to practice the invention once the patent
expires;
3. The stri ngent requi rements for patent
protection seeks to ensure that ideas in the
public domain remain there for the free use of
the public (Pearl & Dean (Phil.)., Inc. v. Shoemart, Inc.,
GR No. 148222, August 15, 2003).
Note: In general, it is better and safer to try and
obtain a patent for the invention than try to keep
the invention a secret. The chances of not being
able to keep the invention a secret are generally
much greater than the risk of not getting a patent
for the invention that is patentable.
PRINCIPLES
1. Requisites of Patentable Inventions
(INIT)
(a) technical solution of a problem in any
field of human activity;
(b) new ;
(c) involves an inventive step; and
(d) industrially applicable (Sec. 21).
2. Test of Non-Obviousness If any person
possessing ordinary skill in the art was able to
draw the inferences and the constructs that
the supposed inventor drew from prior art,
then the latter did NOT really invent.
3. Unity of Invention The application shall
relate to one invention only or to a group of
inventions forming a single general inventive
step (Sec. 38.1).
4. An applicant may NOT file 2 applications for
the same subject, one for utility model
registration and the other for the grant of a
pat ent whet her s i mul t aneous l y or
successively (Parallel Application, Sec. 111).
5. Whatever right one has to the invention
covered by the patent arises alone from the
grant of patent (Creser Precision Systems vs. CA, GR
No. 118708, February 2, 1998).
6. Patents or application for patents and invention
to which they relate, shall be protected in the
same way as the rights of other property
under the Civil Code (Sec. 103.1).
PATENT COPYRIGHT
When a person, by
independent research
arrives at the same
product or that is already
patented, he is restrained
by the arm of the law from
exploiting such an
invention by reason of the
patent granted the earlier
discoverer.
It may be vested in a
work closely similar or
even identical to an
earlier, or already
patented work,
provided that the
former is truly original,
i.e., it owes its
existence to its creator.
Non-patentable
inventions may be
subject of a copyright.
CLASSES OF
PATENTABLE
INVENTIONS
NON-PATENTABLE
INVENTIONS
1. Useful machine
2. A product
3. A process
4. Improvement of
(1), (2), (3)
5. Micro-
organism
6. Non-biological
and
microbiological
process (Rule
201, Rules and
Regulations of
Inventions)
1. Discoveries, scientific
theories and mathematical
method;
2. Schemes, rules and methods
of performing mental acts,
playing games or doing
business, and programs for
computers;
3. Methods for treatment of the
human or animal body;
4. Plant varieties or animal
breeds of essentially
biological process for the
production of plants or
animals;
5. Aesthetic creations;
6. Anything which is contrary to
public order or morality (Sec.
22).
UTILITY MODEL INDUSTRIAL DESIGN
Any new model of
implements or tools
of any industrial
product even if not
possessed of the
quality of invention
but which is of
practical utility (Del
Rosario v. CA, GR No.
115106, March 15,
1996).
Any composition of lines or
colors or any three-
dimensional form whether
or not associated with lines
or colors provided that
such composition or form
gives a special
appearance to and can
serve as pattern for an
industrial product or
handicraft (Sec. 112.1).
PATENT
UTILITY
MODEL
INDUSTRIAL
DESIGN
Requisites
1. New (Novel) That
which does not
form part of a prior
art (Sec. 23);
2. Inventive An
invention involves
an inventive step if,
having regard to
prior act, it is not
obvious to a person
skilled in the art at
the time of the filing
date or priority date
of the application
claiming the
invention (Sec. 26).
3. Industrially
patentable An
invention that can
be produced and
used in any industry
(Sec. 27).
1.New
2.Industrially
Applicable
New
Has all of the 4
essential requisites
No inventive
step
No inventive
step and not
industrially
applicable
Term
20 years from the
filing date of the
application
7 years from
the filing
date of the
application;
non-
renewable
5 years from
the filing date
of the
application,
which is
renewable for
not more than
2 consecutive
periods of 5
years each
Applicable rules
Secs. 20-107 Secs.
108-111 and
provisions
on patents
applying
mutatis
mutandis
Secs. 112-120
and certain
provisions on
patents
applying
mutatis
mutandis
REQUISITES OF PATENTABILITY (Sec. 21)
1. TECHNICAL SOLUTION of a problem in any
field of human activity.
2. NEW (Novelty) an invention shall not be
considered new if it forms part of a prior art
(Sec. 23).
PRIOR ART (Sec. 24)
That which has been made available to the
public anywhere in the world BEFORE the
filing date or the priority date of the
application;
GENERAL RULE
That which forms part of an application
whether for patent, utility model or industrial
design, effective in the Philippines, provided
that:
a. the inventors or applicants are not the
same;
b. the contents of the application are
publ i shed i n accordance wi t h t he
requirements of patent application rules;
c. the filing date of the prior art is earlier
EXCEPTION
Non-prejudicial disclosure
a. Disclosure of information contained in the
application;
b. Made by:
i. The inventor;
ii. Patent office and the information was
contained: a) in another application
filed by the inventor and should not
have been disclosed by the office; or
b) in an application filed without the
knowledge or consent of the inventor
by a third party which obtained the
information directly or indirectly from
the inventor; or
iii. A third party which obtained the
information directly or indirectly from
the inventor (Sec. 25).
c. Made during the 12 months preceding the
filing date or the priority date of the
application.
3. I NVOLVES AN I NVENT I VE ST EP
(Inventiveness) an invention involves
inventive step if, having regard to prior art, it is
not obvious to a person skilled in the art at the
time of the filing date or priority date of the
application claiming the invention (Section 27).
4. INDUSTRIALLY APPLICABLE an invention
that can be produced and used in any
industry (Section 28).
PERSONS WHO MAY FILE AN APPLICATION
FOR A PATENT IN THE PHILIPPINES
As to nationality
As to the legal
personality of
the applicant
1. Filipino Nationals;
2. Foreign Nationals or those
domiciled or have a real and
effective commercial
establishment in a country
which is bound by treaty
(such as the Paris
Convention and the TRIPS
Agreement) to grant
Filipinos the same rights it
grants to its own nationals;
3. Foreign Nationals whose
country also accepts the
patent application of
Filipinos.
1. Inventor or
his attorney-
in-fact;
2. Assignee of
the inventor
Note: To be able to effectively and legally
preclude others from copying and profiting from
the invention, a patent is a primordial requirement.
NO PATENT, NO PROTECTION
The ultimate goal of a patent system is to bring
new designs and technologies into the public
domain through disclosure. Ideas, once disclosed
to the public without the protection of a valid
patent, are subject to appropriation without
significant restraint (Pearl & Dean (Phil.) v. Shoemart, GR
No. 148222, August 15, 2003).
FIRST-TO-FILE RULE/ SYSTEM
This is the system of patent registration adopted
under the IPC in lieu of the first-to-invent system.
Right to Priority of an earlier-filed foreign
application (Sec. 31)
Requisites:
1. The local application expressly claims priority;
2. It is filed within 12 months from the date of
the earliest foreign application;
3. Filing within 6 months from the certified copy
of the foreign application, with an English
translation, from the date of the local
application.
REQUIREMENTS FOR FILING APPLICATIONS
(Secs. 32-39)
1. The application shall relate to one inventive
step only or to a group of inventions forming a
single general inventive step.
2. The patent application shall be in Filipino or
English and shall consist of the following:
a. A request containing the following:
i. a petition for the grant of patent;
ii. name and other data of the applicant,
inventor (if he is not the applicant)
and the agent; and
iii. title of invention.
b. Disclosure of the invention in a manner
sufficiently clear and complete for it to be
carried out by a person skilled in the art;
c. Description of the invention;
d. Drawings;
e. One or more claims in clear and concise
language defining the matter for which
protection is sought;
f. An abstract of technical information
consisting of a concise summary of the
disclosure, claims and drawings in
preferably not more than 150 words;
g. A p p o i n t me n t o f a n a g e n t o r
representative in the Philippines by a
non-resi dent appl i cant upon whom
noti ces or process for j udi ci al or
administrative procedure relating to the
patent may be served; and
h. At the request of the Director, the
applicant shall furnish him with the date
and number of any application for a
patent filed by him abroad relating to the
same or essentially the same invention as
that claimed in the application filed with
the IPO and other documents relating to
such.
SITUATION
PERSON ENTITLED TO
PATENT
2 or more persons
invent separately
and independently
He who first files.
2 or more
applications filed for
the same invention
Applicant who has the
earliest filing date or earliest
priority date
Inventions created
pursuant to a
commission
Person who commissioned
the work, unless agreed
otherwise.
In case an
employee made the
invention in the
course of his
employment
1. Employee if invention
NOT part of his regular
duties even if he uses the
time, facilities and
materials of the employer;
2. Employer if the
invention is the result of
the performance of his
regularly assigned duties
unless agreed otherwise
(Sec. 30).
REQUIREMENTS TO GET A FILING DATE (Sec.
40)
On receipt of the application, an examiner checks
i f t he appl i cat i on i ncl udes t he f ol l owi ng
requirements:
I. Request for a Philippine patent;
II. Name and address of the applicant; and
III. Description and claims of the invention in
English or Filipino (the extent of protection
conferred by a patent is determined by the
claims).
Payment of the filling fee is not included.
The date of filling is very important because it
serves to determine who has the right to the
patent in case of a dispute with another
applicant for the same invention.
ANNUAL FEES
To maintain the patent application or patent, an
annual fee shall be paid upon the expiration of 4
years from the date the application was published,
and of its subsequent anniversary of such date.
Payment maybe made within 3 months before the
due date.
If the annual fee is not paid, the patent application
shall be deemed withdrawn or the patent
considered as lapsed from the day following the
expiration of the period with in which the annual
fees were due.
A grace period of 6 months shall be granted for
the payment of annual fee (Sec. 55).
CONCEPT OF DIVISIONAL APPLICATIONS
When two or more inventions are claimed in a
single application but are of such a nature that a
single patent may not be issued for them. The
applicant is thus required to divide or limit the
claims to whichever the invention he may elect,
whereas those inventions not elected may be
made the subject of separate applications which
are called divisional applications (Smith Kline
Beckman Corp. v. Court of Appeals, GR No. 126627, August
14, 2003, cited in Reviewer on Commercial Law, Sundiang and
Aquino, 2006ed).
RIGHTS CONFERRED TO AN APPLICANT
All the rights of a patentee in relation to the
invention claimed in the published patent
application if he had (1) a. actual knowledge that
the invention was the subject matter of a
published application; or b. received written notice
that the invention was the subject matter of a
published application; and (2) had not filed the
action until after the grant of a patent and within 4
years from the commission of the acts complained
of (Sec. 46).
RIGHTS CONFERRED BY PATENT (Sec. 71)
1. TO RESTRAIN/ PROHIBIT/ PREVENT;
a. Subject matter is PRODUCT
To restrain, prohibit, and prevent any
unauthorized person or entity from
making, using, offering for sale, selling or
importing that product;
b. Subject matter is PROCESS
To restrain, prevent or prohibit any
unauthorized person or entity from using
the process, and from manufacturing,
dealing in, using, selling or offering for
sale, or importing any product obtained
directly or indirectly from such process.
2. TO ASSIGN OR TRANSFER; and
3. TO CONCLUDE LICENSING CONTRACTS
LIMITATIONS ON RIGHTS CONFERRED BY
PATENT
1. GENERAL LIMITATIONS (Sec. 72)
The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the following acts:
a. Using of a patented product which has
been put on the market in the Philippines
by the owner of the product, or with his
express consent;
b. Exploitation of the patent if done privately
and on a non-commercial scale or
purpose;
c. Act of making or using the patent if for the
sole purpose of scientific research and
experiment;
d. Preparation for individual cases, in a
pharmacy or by a medical professional, a
medicine in accordance with a medical
prescription; and
e. Use of the patented product if it occurs in
vehicles in transit in the country.
2. USE BY PRIOR USER (Sec. 73)
A person other than the applicant, who have
started using in good faith the invention in the
Phi l i ppi nes, or under t aken ser i ous
preparations to use the same, before the filing
date or priority date of the application shall
have the right to continue the use thereof but
his right may only be transferred or assigned
further with his enterprise or business.
3. USE BY GOVERNMENT (Sec. 74)
The government or a third person authorized
by it may use the patent without authority of
the patent owner if:
a. Public interest so requires;
b. The manner of exploitation by the owner
of the patent is anti-competitive
CANCELLATION OF PATENT
Formalities
Upon petition, with notice and hearing.
Effect
Termination of rights conferred by the patent (Sec.
66).
Grounds:
1. What is claimed as the invention is not new or
patentable;
2. Patent does not disclose the invention in a
manner sufficiently clear and complete for it to
be carried out by any person skilled in the art;
and
3. Patent is contrary to public order or morality
(Sec. 61).
INFRINGEMENT (Sec. 76.1)
The making, using, offering for sale, selling, or
importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process without
the authorization of the patentee.
CONTRIBUTORY INFRINGER
One who actively induces the infringement of a
patent or provides the infringer with a component
of a patented product or of a product produced
because of a patented process knowing it to be
especially adopted for infringing and not suitable
for substantial non-infringing. He is jointly and
severally liable with the infringer.
DOCTRINE OF PATENT EXHAUSTION
It espouses that the patentee who has already
sold his invention and has received all the royalty
and consideration for the same will be deemed to
have released the invention from his monopoly.
The invention thus becomes open to the use of
the purchaser without further restriction (Adams v.
Burke, cited in Notes on Selected Commercial Laws: A Guide for
Bar Reviewees, Catindig, 2003ed).
TESTS OF PATENT INFRINGEMENT
1. ECONOMIC INTEREST TEST
When the process-discoverers economic
interests are compromised, i.e., when others
can import the products that result from the
process, an act is said to be prohibited.
2. LITERAL INFRINGEMENT TEST
Resort, in the first instance, must be had to
the words of the claim. If the accused matter
clearly falls within the claim, infringement is
made out and that is the end of it.
The claims of patent and the accused product
must be juxtaposed within the overall context
of claims and specification (Godines v. CA, GR
97343, September 13, 1993).
3. DOCTRINE OF EQUIVALENTS TEST
If two devi ces do the same work i n
substantially the same way, the same result,
and produce substantially the same result,
they are the same even though they differ in
name, form or shape (Godines v. CA, Ibid.).
The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by incorporating
its innovative concept and, although with
some modification and change, performs
subst ant i al l y t he same f unct i on i n
substantially the same way to achieve
substantially the same result (Smith Kline
Beckman Corp. v. CA, GR No. 126627, August 14,
2003).
Note: The doctrine of equivalents thus
requires satisfaction of the function-means-
and-result test, the patentee having the
burden to show that all three components of
such equivalency test are met (Ibid).
The doctrine of equivalents cannot be applied
when the infringing invention is clearly beyond
what is written in the claim (Reviewer on Commercial
Law, Sundiang and Aquino, 2006ed).
DOCTRINE OF FILE WRAPPER ESTOPPEL
Balances the doctrine of equivalents. Patentee is
precluded from claiming as part of patented
product that which he had to excise or modify in
order to avoid patent office rejection, and he may
omit any additions he was compelled to add by
patent office regulations.
DEFENSES IN ACTION FOR INFRINGEMENT
(Sec. 81)
1.Invalidity of patent or claim; and
2. Existence of ground for cancellation
REMEDIES FOR INFRINGEMENT
1. Action for damages;
Limitations:
a. Recoverable damages are limited to acts
of infringement committed within 4 years
before institution of action (Sec. 79);
b. Damages cannot be recovered if the
infringer did not know, or had no
reasonable grounds to know, of the
patent (Sec. 80).
2. Injunction (Sec. 76);
3. Disposal or destruction by courts order of
t he i nf r i ngi ng goods, mat er i al s and
implements, without compensation (Sec. 76);
4. Criminal action for repetition of infringement
(Sec. 84).
Note: The institution of an Inter Partes case
for cancellation of a mark with the Bureau of
Legal Affairs, IPO does not bar the adverse
party from filing a subsequent action for
infringement with the regular courts of justice
in connection with the same registered mark.
This is because the certificate of registration
upon which the infringement case is based,
remains valid and subsisting for as long as it
has not been cancelled by the Bureau (Shangri-
La International Hotel Mgt., Inc., v. Court of Appeals, GR
No. 111580. June 21, 2001).
REMEDIES OF PERSONS NOT HAVING THE
RIGHT TO A PATENT (Sec. 67)
If a person other than the applicant is declared by
final court order or decision as having the right to
the patent, he may within 3 months after such
decision has become final (a) prosecute the
application as his own; (b) file a new patent
application; (c) request that the application be
refused; or (d) seek cancellation of the patent.
Note: Applies to pending application and even
when patent is already granted.
Time to file: 1 year from date of publication of the
application (Sec. 70).
REMEDIES OF THE TRUE AND ACTUAL
INVENTOR (Sec. 68)
If a person, who was deprived of the patent
without his consent or through fraud is declared by
final court order or decision to be the true and
actual inventor, the court shall (a) order for his
substitution as patentee, or at the option of the
true inventor, (b) cancel the patent and award
actual and other damages in his favor if warranted
by the circumstances.
Note: Applies only when patent is already
granted.
Time to file: 1 year from date of publication of
grant of application (Sec. 70).
ASSIGNMENT AND TRANSFER
Inventions and any right, title, or interest in and to
patents and inventions covered thereby, may be
assigned or transmitted by inheritance or bequest
or may be the subject of a license contract (Section
103.2).
Form: (Sec. 105)
1. In writing;
2. Acknowledged before a notary public;
3. Certified under hand and seal by notary
public;
4. Registration with IPO (not for validity, but in
order to bind third persons).
LICENSING
May be Voluntary (Secs. 85-92, IPC) or Compulsory
(93-102, IPC).
I. VOLUNTARY (Secs. 85-92)
The grant by the patent owner to a third
person of the right to exploit a patented
invention.
Prohibited Clauses (Sec. 87)
1. Those which impose upon the licensee
the obligation to acquire from a specific
source capital goods, intermediate
products, raw materials, and other
t echnol ogi es, or of per manent l y
employing personnel indicated by the
licensor;
2. Those pursuant to which the licensee
reserves the right to fix the sale or resale
prices of the products manufactured on
the basis of the license;
3. Those that contain restrictions regarding
the volume and structure of production;
4. Those that prohibit the use of competitive
t echnol ogi es i n a non- excl usi ve
technology transfer arrangement;
5. Those that establish full or partial
purchase option in favor of the licensor;
6. Those that obligate the licensee to
transfer for free to the licensor the
inventions or improvements that may be
obtained through the use of the licensed
technology;
7. Those that require payment of royalties to
the owners of patents for patents which
are not used;
8. Those that prohibit the licensee to export
the licensed product unless justified for
the protection of the legitimate interest of
the licensor such as exports to countries
where exclusive licenses to manufacture
and/or distribute the licensed product(s)
have already been granted;
9. Those which restrict the use of the
technology supplied after the expiration of
the technology transfer arrangement,
except in cases of early termination of the
technology transfer arrangement due to
reason(s) attributable to the licensee;
10. Those which require payments for
patents and other industrial property
rights after their expiration or termination
of the technology transfer arrangement;
11. Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier;
12. Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local conditions
or to initiate research and development
programs i n connect i on wi t h new
products, processes or equipment;
13. Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it,
as long as it does not impair the
standards prescribed by the licensor; and
14. Those which exempt the licensor from
l i abi l i t y f or non- f ul f i l l ment of hi s
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed product
or the licensed technology; and
15. Other cases with equivalent effects.
Mandatory Provisions (Sec. 88)
1. That the laws of the Philippines shall
gover n t he i nt er pr et at i on of t he
agreement and in the event of litigation,
the venue shall be the proper court in the
place where the licensee has its principal
office;
2. Continued access to improvements in
techniques and processes related to the
technology shall be made available
during the period of the technology
transfer arrangement;
3. In the event the technology transfer
arrangement shall provide for arbitration,
the Procedure of Arbitration of the
Arbitration Law of the Philippines or the
Arbitration Law of the United Nations
Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation
and Arbitration of the International
Chamber of Commerce shall apply and
the venue of arbitration shall be the
Philippines or any neutral country; and
4. The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the
licensor.
II. COMPULSORY (Secs. 93-102)
The grant by the Director of Legal Affairs of a
license to exploit a patented invention even
without the agreement of the patent owner in
favor of any person who has shown his
capability to exploit the invention under
certain circumstances.
Terms and Conditions for Compulsory
License:
a. The scope and duration of such license
shall be limited to the purpose for which it
was authorized;
b. Non exclusive license;
c. Non assignable license;
d. Use of the subject matter of the license
shall be devoted predominantly to the
supply of the Philippine market;
e. May be terminated if the circumstances
which led to its grant have ceased; and
f. The patentee shall be paid adequate
remuneration.
Grounds:
1. Na t i o n a l e me r g e n c y o r o t h e r
circumstances of extreme emergency;
2. When public interest requires;
3. Manner of exploitation of patent is anti-
competitive;
4. Public non-commercial use of the patent;
and
5. Patented invention is not being worked in
the Philippines on a commercial scale
although capable of being worked.
PROCEDURE FOR APPLICATION OF PATENT
1. Application
Filed with the Bureau of Patents (BOP) of the
Intellectual Property Office (IPO) (Sec. 32).
2. Formality Examination
To determine whether the application form
has compl i ed wi t h t he I P Code and
Regulations, after the filing date has been
accorded and the required fees have been
paid (Sec. 42).
Note: The date of filing is very important
under the present first-to-file system
because it serves to determine, in case of a
dispute with another applicant for the same
invention, who has the right to the patent.
3. Classification and Search
An application which has complied with the
formal requirements shall be classified and a
search conducted to determine prior art (Sec.
43).
4. Publication in the OG
The search and the classification of the field
of technology to which the invention is
assigned will be published in the IPO Gazette
after the expiration of 18 months from the
filing date or priority date (Sec. 44).
Note: After the publication of the application,
any person may present observations in
writing concerning the patentability of the
i nvent i on. Such observat i on shal l be
communicated to the applicant who may
comment on them.
5. Request for Substantive Examination
Substantive examination is conducted upon
request . The request f or subst ant i ve
examination of the application must be filed
within six (6) months from the date of the
publication. The application is considered
withdrawn if no request is made within that
period (Sec. 48).
The Bureau shall notify the applicant of the
reason for refusal/rejection giving the
applicant the chance to defend or amend the
application.
6. Decision to Grant Patent Registration or
Decision of Refusal
If the examiner finds no reason for refusal of
the application, or if the notice of reason for
refusal is satisfactorily complied with by
amendment or correction, the examiner
issues a decision to grant the patent
registration. Otherwise, the examiner refuses
the application.
7. Inspection of Records
It shall be published in the IPO Gazette within
six (6) months. Any interested party may
inspect the complete description, claims, and
drawings of the patent on file with the Office.
APPEAL
Every applicant may appeal to the Director of
Patents the final refusal of the examiner to grant
the patent within two (2) months from the mailing
date of the final refusal. The decision or order of
the Director shall become final and executory
fifteen (15) days after receipt of a copy by the
appellant unless within the same period, a motion
for reconsideration is filed with the Director or an
appeal to the Director General is filed together
with the payment of the required fee.
The decision of the Director General may be
appealed to the Court of Appeals. If the applicant
is still not satisfied with the decision of the Court of
Appeals, he may still appeal to the Supreme
Court.
Trademark, Service Marks and Tradenames
The IPC does NOT anymore provide for prior use
as a condition for ownership of a mark (Sec. 122).
Registration is the sole basis. However, a trade
name or business name may be acquired by prior
use and need not be registered.
PRINCIPLES
1. The right to the mark is separate and distinct
from the business using such mark (Sec. 149.1).
2. The right of registration belongs to the owner
of the mark (Unno Commercial Enterprises, Inc. v.
General Milling Corp., GR 28554, February 28, 1983).
TRADEMARK
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods. In relation thereto, a trade
name means the name or designation identifying
or distinguishing an enterprise (Elidad Kho v. Court of
Appeals, GR No. 115758, March 11, 2002).
Basic Requirements:
1. There must be a visible sign; and
2. It must be capable of distinguishing the goods
of an enterprise.
Functions:
1. To point out distinctly the origin or ownership
of the goods and to which it is affixed;
2. To secure him, who has been instrumental in
bringing into the market a superior article of
merchandise, the fruit of his industry and skill;
3. To assure the public that they are producing
the genuine article;
4. To prevent fraud and imposition; and
5. To prot ect t he manuf act urer agai nst
substitution and sale of an inferior and
different article as its product (Mirpuri v. CA, GR
114508, November 19, 1998).
Acquisition:
Acquired through registration. Registration is
necessary before one can file an action for
infringement (Reviewer on Commercial Law, Sundiang and
Aquino, 2006ed).
Prior use in the Philippines is not required before
registration. However, there must be an actual
use after registration because Sections 142.2 and
151[c] of the Intellectual Property Code requires
that the registrant shall file a declaration of actual
use of the mark with evidence within 3 years from
the filing date of application, otherwise, it would be
cancelled.
For the requirement of "actual use in commerce in
the Philippines" before one may register a
trademark, trade-name and service mark under
the law pertains to the territorial jurisdiction of the
Philippines and is not only confined to a certain
region, province, city or barangay (McDonalds
Corporation v. McJoy Fastfood Corporation, GR No. 166115,
February 2, 2007).
Registration is not necessary to file a case for
unfair competition (Sec. 168.1 & 2).
What may NOT be registered (Sec. 133):
1. Immoral and deceptive matter;
2. National flag or insignia;
3. Name, portrait or signature of living person or
deceased President;
4. Mark or trade name infringing another;
5. Mar k c ons t i t ut i ng r epr oduc t i on of
internationally well-known mark, whether or
not registered here;
6. Mark identical with well-known mark, on non-
competing goods, registered here;
7. Mark likely to mislead the public;
8. Mark consisting exclusively of signs generic
for the goods or services;
9. Mark consisting exclusively of signs or of
indications which are customary or usual to
designate goods or services in everyday
language or bona fide and established trade
practices;
10. Mark consisting of signs or of indications used
in trade;
11. Mark consisting of shapes;
12. Mark consisting of color alone, unless defined
by form;
13. Contrary to public order or morality.
Note: Mere geographical names are ordinarily
regarded as common property, and it is a general
rule that the same cannot be appropriated as the
subject of an exclusive trademark or trade name
(Ang Si Heng v. Wellington Department Store, GR No. L-4531,
January 10, 1953).
TRADE NAME
Any individual name or surname, firm name,
devi ce or word used by manuf act urers,
industrialists, merchants, and others to identify
their businesses, vocations or occupations (Converse
Rubber Corp., v. Universal Rubber Products, Inc., GR No.
L-27425, L-30505, April 28, 1980).
TRADEMARK
SERVICE
MARK
COLLECTIVE
MARK
Any visible
sign which is
adopted and
used to
identify the
source of
origin of
goods, and
which is
capable of
distinguishing
them from
goods
emanating
from a
competitor.
Any visible
sign capable
of
distinguishin
g the
services of
an enterprise
from the
service of
other
enterprises.
Any visible sign
designated as
such in the
application for
registration and
capable of
distinguishing the
origin or any other
common
characteristic,
including the
quality of goods or
services of
different
enterprises which
use the sign under
the control of the
registered owner
of the collective
mark.
TRADEMARK TRADE NAME
Separate Existence
Has an existence distinct
from the existence of the
proprietor or juridical
person doing business
and producing the goods
or the services offered by
such person or enterprise
Attached to the
natural or juridical
person who does
business and
produces the goods
or services
Purpose
Designates the goods or
services offered by person
or enterprise
Identifies and
distinguishes an
enterprise
Registration
Must be registered in
order to secure protection
for them
No need to register in
order to secure
protection for them
Transferability
May be transferred with or
without transfer of the
business (Sec. 149.1)
Change of ownership
of trade name must
be made with transfer
of enterprise or part
thereof (Sec. 165.4)
TRADEMARK GOODWILL
Right which protects
the interests of
producers in their
marks and in the
goodwill earned.
Reputation and public
confidence that a business
venture has earned through
a period of creditable
dealings.
TRADEMARK LABEL
Designed to identify
the user or origin.
Merely names what is
within the container or
package; may or may not
be trademark.
Note: In practice, a word, a name or a phrase,
coupled with indicators of business organization,
such as Inc., Corp. or Co. will NOT be
registered as trademarks or service marks.
REQUIREMENTS TO GET A FILING DATE
On receipt of the application, an examiner checks
i f t he appl i cat i on i ncl udes t he f ol l owi ng
requirements:
1. Request for a Philippine registration of mark;
2. Identity of applicant;
3. Indications sufficient to contact the applicant;
4. Reproduction of the mark; and
5. List of goods or services
Note: No filing date until the required fee is paid.
PRIORITY RIGHT
An application for registration of mark filed in the
Philippines by a person who qualifies under the
reciprocity rule and who previously filed an
application for registration of the same mark in
one of those countries shall be considered as filed
as of the day the application was first filed in the
foreign country(Sec. 131).
Significance of Priority Right
A Philippine application filed by another applicant
after the priority date but earlier than the foreign
appl i cant s act ual f i l i ng may be ref used
registration if it is identical to the mark with a
priority date (The Law on Trademark, Infringement and
Unfair Competition, Agpalo, 2000ed).
Conditions:
1. The application must be filed within 6 months
from the date of earliest foreign application.
Its certified copy passed within 3 mos. from
the date of filing in the Philippines.
2. The following should concur: (a) the foreign
country / country of origin has allowed the
mark and (b) the country of origin is the
applicants domicile or has a bona fide
commercial establishment.
3. The owner of the Philippine Registration may
not sue pri or to the granti ng of the
registration, unless the mark is considered
well-known as provided for the IP Code.
4. The priority right may not be based upon a
foreign application that has been withdrawn,
abandoned, or otherwise disposed of in the
country of origin (Rule 202, Trademark Laws).
CERTIFICATE OF REGISTRATION
It shall be a prima facie evidence of:
1. Validity of registration;
2. Registrants ownership of the mark; and
3. The registrants exclusive right to use the
same in connection with the goods or services
and those that are related thereto (Sec. 138).
GENERAL RULE
The trademark protection extends only to
goods or services related to those specified in
the certificate.
EXCEPTION
Expansion of Business Rule also to those
goods or services that are related thereto
specified in the certificate (Sec. 138).
All cases in which the use by the junior
appropriator is likely to lead to a
confusion of source as where prospective
buyers would be misled into thinking that
the complaining party has extended his
business into another field (Sta. Ana v.
Maliwat, GR 23023, August 31, 1968).
Note: A certificate of registration shall remain in
force for 10 years provided that the registrant shall
file a declaration of actual use or non-use within 1
year from the 5
th
anniversary of the date of the
registration of the mark (Sec. 145).
This declaration of actual use is different from the
declaration of actual use which the applicant is
required to file within 3 years from the filing date of
the application (Sec. 124.2).
RIGHTS CONFERRED BY A TRADEMARK
In case of registered marks, in general:
Exclusive right to restrain/ prohibit/ prevent third
persons from using identical or similar signs for
identical or similar goods or services (Sec. 147.1).
In case of a registered well-known mark:
Exclusive right to restrain/ prohibit/ prevent third
persons from using identical or similar signs even
for dissimilar or unrelated goods or services,
provided that the use will indicate a connection
between the goods and the owner of the mark and
that the interest of the owner would likely be
damaged (Sec. 147.2).
DOCTRINE / PRINCIPLE OF RELATED GOODS
OR SERVICES
There is infringement when there is use of similar
marks on goods that are so related that the public
may be, or is actually deceived, and misled that
the goods come from the same maker or
manufacturer (Esso Standard Eastern Inc. v. CA, 116
GRN 29971, August 31, 1982).
An EXCEPTION to this doctrine is the additional
right granted to a registered well-known mark.
WELL-KNOWN MARK
A mark which a competent authority of the
Philippines has designated to be well-known
internationally and in the Philippines.
In determining whether a mark is well-known, the
knowledge of the relevant sector of the public,
rather than the public at large, including
knowledge in the Philippines which has been
obtained as a result of the promotion of the mark,
shall be pertinent.
Determinants:
1. The duration, extent and geographical area of
any use of the mark;
2. The market share in the Philippines and other
countries of the goods/services to which the
mark applies;
3. The degree of the inherent or acquired
distinction of the mark;
4. The quality-image or reputation acquired by
the mark;
5. The extent to which the mark has been
registered in the world;
6. The exclusivity of the registration attained by
the mark in the world;
7. The extent of use of the mark in the world;
8. The exclusivity of use in the world;
9. The commercial value attributed to the mark
in the world;
10. The record of successful protection of the
rights in the mark;
11. The outcome of litigations dealing with the
issue of whether the mark is well-known; and
12. The presence or absence of identical or
similar marks validly registered or used on
other similar goods (Rule on Trademarks, Rule 102).
Rights:
1. Right to be protected whether or not it is
registered in the Philippines;
2. If registered, extension of protection to goods
and services which are not similar to those in
respect of which the mark is registered,
provided that:
a. The use of the mark in relation to
unrelated or dissimilar goods or services
would indicate a connection between
those goods or services and the owner of
the mark; and
b. The interests of the owner of the
registered mark are likely to be damaged
by such use. (Exception to the doctrine of
related goods)
NICE CLASSIFACTION
The system by which trademark applications are
classified.
There are 34 classes of goods and 8 classes of
businesses or services.
DIVISIONAL APPLICATIONS
An initial application may be divided by the
applicant into two or more applications. However,
a single class shall not be subdivided.
The divisional application must be submitted
within 2 months from the mailing date of the 1
st

action of the Bureau of Trademarks. A new
application number shall be issued, and the
priority right of the initial application shall be
preserved.
An existing registration may also be subdivided
upon request by oath and writing. A new certificate
shall be issued but a single class shall also not be
subdivided (Sec. 129).
DOCTRINE OF SECONDARY MEANING
While as a general rule, generic, indicative or
descriptive marks ([j], [k], [l] of Sec. 123.1) are
non-registrable, when such kind of mark has
become di sti ncti ve, because of i ts l ong,
continuous and exclusive use for 5 years, as used
in connection with the applicant's goods or
services in commerce and in the mind of the
public indicates a single source to consumers, it
may be registered (Sec. 123.2).
DOCTRINE OF DILUTION
Copying which, while not sufficiently confusing to
divert sales in the short run, will tend to divert
them i n the l ong run by weakeni ng the
instantaneous favorable associations the public
makes with highly regarded products.
OPPOSITION
Any person who believes that he would be
damaged by the registration of a mark may, upon
payment of the fee file an opposition to
application.
Form:
1. In writing
2. Verified
3. Specified grounds
4. Statement of facts
Time to file: 30 days after publication of
application; if unverified, the verified opposition
must be filed within 2 months from such filing
BUT It may be extended for 1 month and
maximum period does not exceed 4 months from
publication of application (Sec. 134).
CANCELLATION (Sec. 151)
Formalities: Upon petition, with due notice and
hearing
Grounds:
Within 5 years
from registration
At any time
Belief that the
registered mark
has damage or
will damage the
petitioner
1. Becoming the generic
name for the goods or
services for which it is
registered;
2. Abandonment;
3. Illegal or fraudulent
registration;
4. Use by, or with the
permission of the registrant
so as to misrepresent the
source of the goods or
services in connection with
which the mark is used;
5. Non-use for an
uninterrupted period of 3
years without legitimate
reason
Note: Actual use may be done by substantial
compliance (Sec. 152.2-4).
Exempting circumstances: those arising
independently of the will of the trademark
owner (Sec. 152.1), such as prohibition of sale by
government regulation, military coup, or
political changes that impede commerce.
Note: Registration is an administrative act
declaratory of a pre-existing right that does not,
of itself, perfect a trademark. It is actual use
which perfects a trademark.
NON-USE OF A MARK WHEN EXCUSED
1. I f caused by ci r cumst ances ar i si ng
independently of the will of the owner. Lack of
funds not excused.
2. A use which does not alter its distinctive
character though the use is different from the
form in which it is registered.
3. Use of mark in connection with one or more of
the goods/services belonging to the class in
which the mark is registered.
4. The use of a mark by a company related to
the applicant/registrant.
5. The use of a mark by a person controlled by
the registrant (Sec. 152).
INFRINGEMENT (Sec. 155)
1. Reproduction or colorable imitation of a
registered mark or a dominant feature thereof
and application of such reproduction or
imitation of labels, etc., intended to be used in
commerce, or use in commerce of any
reproduction or colorable imitation of a
registered mark or a dominant feature thereof
in connection with the sale or advertising of
goods or services;
2. Likelihood to cause confusion or mistakes in
the mind of the public or deceive purchasers.
Note: This is presumed in case of the use
of an identical sign for identical goods or
services.
There is infringement of trademark when the
use of the mark involved would be likely to
cause confusion or mistake in the mind of the
public or to deceive purchasers as to the
origin of the source of the commodity (Fruit of
the Loom, Inc., v. Court of Appeals and General Garments,
Corp., GR No. L-32747).
Factors to consider:
1. Value of the Goods (Emerald Garment
Manufacturing Corp. vs. CA, GR 100098, December
29, 1995);
2. Common Trade Channel (Ang vs. Teodoro,
GR 48226, December 14, 1942);
3. Type of Consumers (Mead Johnson vs.
McCullough, GR No. 6217, December 26, 1911);
4. Necessary Expansion of the Business
(Sta. Ana vs. Maliwat, GR 23023, August 31,
1968; Ang vs. Teodoro, GR No. 48226, December
14, 1992).
ELEMENTS OF INFRINGEMENT
a. Registration of trademark in IPO; and
b. Tr ademar k i s r epr oduc ed, c opi ed,
counterfeited or colorably imitated.
Colorable Imitation
Such similarity in form, content, words, sound,
meaning, special arrangement or general
appearance of the mark or trade name with
that of the other mark or trade name in their
overall presentation or in their essential,
substantive or distinctive parts as would likely
mislead or confuse persons in the ordinary
course of purchasing the genuine article.
Denotes such a close ingenious imitation as
to be calculated to deceive ordinary persons,
or such a resemblance to the original as to
deceive an ordinary purchaser, giving such
attention as a purchaser usually gives, and to
cause him to purchase the one supposing it to
be the other (Etepha A.G. v. Director of Patents and
Westmont Pharmaceuticals, Inc., GR No. L-20635, March
31, 1966).
c. It is used in connection with the sale, or it is
offering for sale or advertising of goods,
services or business or applied to labels,
signs, wrappers, etc intended to be used in
connection with such goods, services or
business.
d. There is, in the use or application a likelihood
of confusion.
e. Lack of consent on the part of the registered
owner or their assignee (The Law on Trademark,
Infringement and Unfair Competition, Agpalo, 2000ed).
CONFUSION OF
GOODS/ SERVICES
CONFUSION OF
BUSINESS/ ORIGIN
A persons goods or
services are
purchased as those
of another and the
poorer quality of the
former reflects
adversely on the
latters reputation.
Exists when one partys
product or service though
different from that of
another, is such as might
reasonably be assumed to
originate from the latter
and the public would then
be deceived into the belief
that there is some
connection between the
parties, which in fact is
absent.
Confusingly similar
marks are used on
the same kinds of
goods/services.
Confusingly similar marks
are employed in different
or non-competing goods/
services.
IDEM SONAMS RULE
Two trademarks used on identical or related
goods may be confusingly similar if they have
similar sound or pronunciation.
Note: Similarity of sound or pronunciation and
spelling may be sufficient to make two marks
confusingly similar when applied to merchandise
of the same descriptive properties. Example:
Salonpas and Lionpas both for medical plaster
(Marvex Commercial Co. v. Petra Hawpia and Co., GR 19297,
December 22, 1966).
Likelihood of confusion or mistake is greater when
identical or closely similar marks are used on non-
competing but related and common household
items because they are purchased by ordinary
purchasers who usually know them by their
names or trademarks.
Infringement of Name and Mark of Ownership Stamp
on Containers (R.A. No. 623 as amended by R.A. No. 5700)
GENERAL RULE
It is unlawful for any person, without written
consent of the manufacturer, bottler or seller who
has registered the mark of ownership to fill such
bottles, boxes, kegs, barrels or other containers
so marked and stamped, for the purpose of sale,
dispose of, or wantonly destroy the same, whether
filled or not, to use the same for drinking vessels
or drain pipes, foundation pipes, for any other
purpose than that registered (Sec. 2, RA 623).
The use of the same, without apparent permission
from the trademark owners thereof, shall be prima
facie presumption that such possession or use is
unlawful (Sec 3, RA 623).
EXCEPTIONS
1. Use of the bottles as containers for sisi,
bagoong, patis and similar native products (Sec
6, RA 623); and
2. Persons in whose favor the containers were
sold (Distilleria Washington, Inc. v. LA Tondea
Distillers, GR 120961, October 2, 1997).
Note: The general rule is that in the sale of
beverages, it already includes the containers,
unless there is an agreement to the contrary (Law
on Trademarks, Agpalo, R., 2000ed).
The exemption under Sec. 6, RA 623 covers not
only criminal but also civil liability (Twin Ace Holding
Corp. v. CA, GR No. 123248, October 16, 1997).
Dominancy Test v. Holistic Test
DOMINANCY TEST
HOLISTIC/
TOTALITY TEST
Focuses on the similarity of the
main, essential, dominant, or
prevalent features of a mark.
Exact duplication or imitation is
not necessary.
This test is incorporated in the
Intellectual Property Code and
is controlling.
Mandates that
the entirety of
the marks in
question must be
considered in
determining
confusing
similarity.
Examples of Cases explaining the TESTS:
DOMINANCY TEST
CASE ISSUE
1.E. Spinner and Co. vs.
Neuss Hesslein Corp. (G.R
No. 31380, January 13, 1930)
The use of Wigan
for khaki
2.Lim Hoa vs. Dir of Patents
(GR No. L-8072, October 31,
1956)
Hen Brand vs. Marka
Manok
3.Sta. Ana vs. Maliwat (GR
No. L-23023, August 31, 1968)
Florman vs. Flormen
4.Philippine Nut Industry vs.
Std Brands (GR No.L-23035,
July 31, 1975).
Planters Cocktail
Peanuts vs. Phil
Planters Cordial
Peanuts
5.Converse Rubber Corp vs.
Universal Rubber (GR No.
L-27906, January 8, 1997)
Universal Converse
Deice vs. Converse
Rubber Corp.
6.Asia Brewery , Inc., vs.
Court of Appeals (GR No.
103543, July 5, 1993)
Asia Brewery inc.s
label of BEER PALE
PILSEN and its use
of the steinie bottle
vs. SMBs PALE
PILSEN with
Rectangular Malt
and Hops Design
7.Amigo Manufacturing
Inc., vs. Cluelett
Peabody Co., Inc. (GR
No. 139300, March 14, 2001)
Gold Toe vs. Gold
Top
8.Societe Des Produits
Nestle, S.A. vs. Court of
Appeals (GR No. 112012,
April 4, 2001)
Master Roast and
Master Blend vs.
Flavor Master
9.McDonalds Corporation
and McGeorge Food
Industries, Inc. vs. L.C.
Big Mak Burger, Inc. (GR
No. 143993, August 18, 2003)
Big Mac vs. Big Mak
10.McDonalds Corporation
vs. MacJoy Fastfood
Corporation (GR No.
166115, February 2, 2007)
McDonalds vs.
MacJoy
HOLISTIC TEST
CASE ISSUE
1.Emerald Garment Mfg
Corp. vs. CA (GR No.
100098, December 29, 1995)
The use of LEE in
the manufacture of
pants
2.Bristol Myers vs. Dir of
Patents (GR No. L-21587,
May 19, 1966)
Bioferin vs. Bufferin
both for medicine
3.American Cyanamide Co.
vs. Dir of Patents (GR
No.L-23954, April 29, 1977)
Sulmetine vs.
Sulmet both for
veterinary medicine
4.Mead Johnson vs. NVJ
Van Dorp (GR No. L-17501,
April 27, 2963)
Alaska for milk and
Alacta for powdered
half-skim milk
REMEDIES FOR INFRINGEMENT
1. Action for damages;
GENERAL RULE
Only those acts of infringement committed
from registration onwards may be sued upon.
EXCEPTION
In case of infringement of a well-known mark.
2. Injunction;
3. Impounding of sales invoices and other
documents;
4. Double damages in case of actual intent to
defraud or to misled (Sec. 156);
5. Court order for the disposal or destruction
of the infringing goods (Sec. 157);
6. Criminal action;
7. Administrative sanctions
In any suit for infringement, the owner of the
registered mark shall not be entitled to
recover damages or profits unless the acts
have been committed with knowledge that
such imitation is likely to cause confusion, or
to cause mistake or to deceive (Sec. 158).
The infringement case can and should
proceed independently from the cancellation
case with the Bureau so as to afford the
owner of the certificates of registration
redress and injunctive writs (Shangri-La
International Hotel Mgt., Inc., v. Court of Appeals, GR
No. 111580. June 21, 2001).
Any foreign national, who qualifies under the
principle on reciprocity and does not engage
in business in the Philippines, whether or not
it is licensed to do business in the Philippines,
may bring civil or administrative action for:
a. Opposition
b. Cancellation
c. Infringement
d. Unfair competition
e. False designation of origin or false
description (Sec. 160).
LIMITATIONS ON ACTION FOR INFRINGEMENT
(Sec.159)
1. Right of Prior User Registered mark shall
be without effect against any person who, in
good faith, before the filing or priority date,
was using the mark for purposes of his
business.
2. Relief against Printer Injunction against
future printing against an innocent infringer
who is engaged solely in the business of
printing the mark.
3. Relief against newspaper Injunction
against the presentation of advertising matter
in future issues of the newspaper, magazine
or in electronic communications in case the
infringement complained of is contained in or
is part of paid advertisement in such
materials.
UNFAIR COMPETITION
The employment by a person of deception or any
other means contrary to good faith by which he
passes off the goods manufactured by him or in
which he deals, or his business or services, for
those of another person who has established
goodwill in the goods such person manufactures
or deals in, or his business or services, or who
shall commit any acts calculated to produce said
result, whether or not registered mark is employed
(Section 168.2).
In particular, the following shall be deemed guilty
of unfair competition:
a) Ant person who is selling his goods and gives
them the general appearance of goods of
another manufacturer or dealer or who
otherwise clothes the goods with such
appearance as shall deceive the public and
defraud another of his legitimate trade, or any
subsequent vendor of such good or any agent
of any vendor engaged in selling such goods
with a like purpose;
b) Any person who by any artifice, or device or
who employs any other means calculated to
induce the false belief that such person is
offering the services of another who has
identified such services in the mind of the
public or;
c) Any person who shall make any false
statement in the course of trade or who shall
commit any other act contrary to good faith of
a nature calculated to discredit the goods,
business or services of another (Section 168.3).
TEST: Whether certain goods have been
intentionally clothed with an appearance which is
likely to deceive the ordinary purchaser exercising
ordinary care, and not whether a certain limited
class of purchasers with special knowledge not
possessed by the ordinary purchaser could avoid
mistake by the exercise of this special knowledge
(U.S. v. Manuel, 7 Phil 221, GR 1999, December 27, 1906).
INFRINGEMENT OF
TRADEMARK
UNFAIR COMPETITION
Definition
Unauthorized use of
a trademark
The passing off of ones
goods as those of another
Fraudulent intent
Fraudulent intent is
unnecessary
Fraudulent intent is
essential
Registration
Prior registration of
the trademark is a
prerequisite to the
action
Registration is not a
prerequisite to an action.
Scope
Limited scope Wider scope
Goods involved
Same class of goods
or services must be
involved
Different classes of goods
or services may be
involved
Note: An action for infringement of a mark cannot
be brought at the same time with an action for
unfair competition because the element of fraud
and deceit, which is essential to the latter, is
absent in the former (Clarke v. Manila Candy Co., 36
Phil. 100, GR 10487, January 23, 1917).
A foreign corporation not engaged in and licensed
to do business in the Philippines may maintain an
action for unfair competition. This is so because
the crime of unfair competition punishable under
Article 189 of the Revised Penal Code is a public
crime. It is essentially an act against the State
and it is the latter which principally stands as the
injured party. The complainants capacity to sue in
such case becomes immaterial (Melbarose Sasot, et al.,
vs. People of the Philippines, GR No. 143193, June 29, 2005).
While foreign corporations may have the capacity
to sue for infringement irrespective of lack of
business activity in the Philippines but the
question of whether they have an exclusive right
over the symbol as to justify issuance of an
injunctive writ will depend on actual use of their
trademarks in the Philippines. To be entitled to an
injunctive writ, a foreign corporation must show
that there exists a right to be protected and that
the fact against which injunction is directed are
violative of such right (Philip Morris, et al., vs. Fortune
Tobacco Corporation, GR No. 158589, June 27, 2006).
Sale is not an indispensable element in an action
for infringement or unfair competition (Pro Line Sports
v. CA, GR 118192, October 23, 1997).
Distinctions on Copyright Patent and Mark
COPYRIGHT PATENT MARK
Definition
It is that system of legal protection an
author enjoys in the form of
expression of ideas (World Intellectual
Property Organization [WIPO]).
An intangible, incorporeal right
granted by statute to the author or
originator of certain literary or artistic
productions, whereby he is invested,
for a limited period, with the sole
exclusive privilege of multiplying
copies of the same and publishing
and selling them (Blacks Law Dictionary).
An exclusive right acquired over an
invention, to sell, use and make the
same whether for commerce or
industry.
Refers to either the grant of rights,
OR the instrument (sometimes called
letters patent) containing the grant,
giving an inventor a monopoly on the
inventors invention for a limited
period.
Any visible sign capable of distinguishing
the goods of an enterprise (trademark) or
the services of an enterprise (service
mark), and includes a stamped or marked
container of goods (Sec. 121.1).
Purposes
1. To stimulate artistic creativity for
the general public good; and
2. To promote the progress of
science and useful arts.
1. Not only to reward the individual,
but the advancement of the arts
and sciences;
2. To add to the sum of useful
knowledge; and
3. To encourage dissemination of
information concerning
discoveries and inventions.
1. To indicate origin or ownership of
articles to which they are attached;
2. To guarantee that those articles
come up to a certain kind of quality;
3. To advertise articles they symbolize;
4. To assure the public that they are
producing genuine article; and
5. To protect the manufacturer against
substitution and sale of an inferior and
different article.
COPYRIGHT PATENT MARK
Requirements
1.Originality; and
2.Expression
Any technical solution of a problem
in any field of human activity which
is:
1. New or novel;
2. Inventive; and
3. Industrially applicable
(Sec. 21)
1. Upon application:
Must be registrable (Sec. 123.1):
a.Absolutely non-registrable (a-i) &
(m) of Sec. 123.1
b.Qualifiedly registrable (j), (k), (l) of
Sec. 123.1; Doctrine of secondary
meaning (Sec. 123.2)
2. Within 3 years from application:
Declaration and evidence of actual

use (Sec. 124.2)
Term
See Table on Duration of Copyright 20 years from the filing date of the
application (Sec. 54).
10 years from the filing date of the
application, provided the registrant shall
file a declaration of actual use within a
year from the 5
th
anniversary of
registration date (Sec. 145), and renewable
for another 10 years (Sec. 146).
How created/acquired
From the moment of creation
(fixation)
First-to-file system Valid registration
General limitations
1. Duration/temporal The owner is limited by the terms of their property rights.
2. Territorial/geographical The owner is protected by the law of the country where the violation is committed.
3. For violations in another country, resort must be made to the law of the other country, subject to the principle of
reciprocity in Sec. 3.
(Notes on Selected Commercial Laws A Guide for Bar Reviewees, Tristan Catindig, 2003ed)
! LAW ON INTELLECTUAL PROPERTY "
COMMERCIAL LAW
SPECIAL LAWS
SPECIAL LAWS
Bulk Sales Law (BSL)
(Act No. 3952, as amended)
Bulk Sales Law
PURPOSE
To prevent the defrauding of creditors by the
secret sale or disposal or mortgage in bulk of all or
substantially all of a merchants stock of goods in
bulk until the creditor of the seller shall have been
paid in full.
The justification of the law is the police power

of the State (Liwanag v. Mengraj, GR No. L-47588,
June 20, 1941).
The law is penal in nature and in derogation

of the right to alienate property without
restriction. Thus, its provisions must be strictly
construed against the State and liberally in
favor of the accused (Comments and Cases on Sales
and Lease, Hector S. De Leon, 2005).
SALE IN BULK
Any sale, transfer, assignment, or mortgage,
regardless of intent, whether done in good or bad
faith: (FOB)
of a stock of goods, wares, merchandise,

provisions, or materials other than in the
Ordinary course of trade or business;
of all or substantially all of the Business or

trade;
of all or substantially all of the Fixtures and

equipment used in the business (Sec. 2; Philippine
Law on Sales, C. Villanueva, 1998ed).
Note: BSL applies only to merchants and NOT to
manufacturers or those involved in lease of
services (People v. Wong, 50 OG 4867).
FORMAL REQUIREMENTS (SPINR)
The general scheme of the law is to declare such
bulk sales fraudulent and void as to creditors
of the vendor UNLESS specified formalities are
observed, to wit:
1. Sworn written statement of the names and
addresses of all creditors of the seller and
respective amounts of debts to be furnished
EXECUTIVE COMMITTEE
COMMERCIAL LAW
the buyer/ mortgagee and submitted to
Bureau of Domestic Trade before receiving
the purchase price (Sec. 3 & 9);
2. Pro-rata application of the Proceeds to the
bona fide claim of creditors as shown in the
verified statement (Sec 4);
3. Detailed Inventory of stock to be sold or
mortgaged (Sec. 5);
4. Notice to the creditors at least 10 days before
the sale or transfer (Sec. 5);
5. Registration of the documents in Bureau of
Domestic Trade/DTI.
Note: Non-compliance with requirements 1 or 2 is
with criminal consequence. Non-compliance with
3, 4 or 5 is without criminal consequence.
EXEMPT TRANSACTIONS (JOWIE)
1. Sale by virtue of a Judicial order (Sec. 8);
2. Sale or mortgage is made in the Ordinary
course of business;
3. When accompanied with a Written waiver by
all the seller/ mortgagors creditors (Sec. 2);
4. Sale by assignee in Insolvency or those
beyond the reach of creditors.
5. Sale of properties Exempt from attachment or
execution (Rule 39, Sec.13, Rules of Court).
GOODS CONTEMPLATED
1. STOCK
The common use of the term stock when
applied to goods in a mercantile house refers
to that which are kept for sale (Albercht v.
Cudikee, 79 Pac. 628).
2. MERCHANDISE
It must be construed to mean such things as
are usually bought and sold in trade by
merchants (Peoples Savings Bank v. Ban Allsburg, 131
N.W. 101.).
It means something that is sold everyday, and
is constantly going out of the store and being
replaced by other goods (Boise Credit Mens Assoc.
v. Ellis, 133 Pac. 6).
3. FIXTURES
It refers to such articles of merchandise
usually possessed and annexed to the
premises occupied by merchants to enable
them better to store, handle, and display their
wares although removable without material
injury to the premises at or before the end of
tenancy (Brown v. Quigley, 130 N.W. 690).
Note: Lands and buildings are NOT goods,
merchandise and fixtures and therefore not
covered by the BSL (Comments and Cases on Sales, De
Leon, H., 2000ed).
CREDITORS
All of the sellers creditors at the time of the sale/
mortgage
Need not be judgment creditors
The claim need not be due
Creditors whose claims came into existence

subsequent to the sale are entitled to the
benefits of the statute (37 C.J.S. 1532, 1535).
Effects of False Statements in the Schedule of
Creditors:
FALSE
STATEMENT
EFFECT
Without
knowledge of
buyer
If the statement is fair upon its
face, the buyer will be
protected. The creditors
remedy is NOT against the
goods but to prosecute the
seller criminally
With knowledge
or imputed
knowledge of
buyer
The vendee accepts it at his
peril. The sale is VALID
between the vendor and the
vendee but VOID as against
the creditors.
With names of
certain creditors
without notice
omitted
The sale is VOID as to such
creditors, whether that
omission was fraudulent or
not.
With respect to
an innocent
purchaser for
value from the
original
purchaser
Purchaser shall be protected.
The creditor of the vendor
does not have the right to
pursue the property in
whosever hands it may fall.
EFFECTS OF VIOLATION OF BSL
1. Between the parties VALID CONTRACT
2. Between persons OTHER
than the creditors
VALID CONTRACT
3. As to affected creditors of
the seller/mortgagor
VOID CONTRACT
4. Purchaser acts as a TRUSTEE OR
RECEIVER for the benefit of the creditors of
the seller.
5. CRIMINAL LIABILITY, if expressly provided
Other Violations:
1. Transfer in bulk without consideration or for a
nominal consideration only (Sec. 7).
2. Incomplete or false or untrue sworn written
statement (Sec. 6).
Special Laws
SELLER/
MORTGAGOR
BUYER/
MORTGAGEE
CREDITORS OF
SELLER/
MORTGAGOR
Rights
1. To recover
property sold
or mort-
gaged
1. To recover
the price
delivered
plus
damages
2. Has no right
in the
property as
against the
seller/ mort-
gagors
creditors
1. To be justly
paid in full
2. File action
against the
seller/
mortgagor-
debtor based
on the BSL
3. To collect on
the credit
against the
debtor and to
attach on the
property
fraudulently
sold/
mortgaged
since the
same still
pertains to the
debtor (People
v. Mapoy, 73
Phil. 678,
1942)
Obligations
1. To return to
buyer/
mortgagee
the price
delivered
2. To comply
with the
formal
require-
ments under
BSL
1. To hold the
property in
trust for the
seller or
mortgagor
Liabilities
1. Criminally
liable
1. Personally
liable for its
value, if he
disposed of
the property
in trust
2. Possible
criminal
liability
REMEDIES AVAILABLE TO CREDITORS:
1. The creditors proper remedy is one against
the goods to subject them to payment of a
debt, such as executi on, attachment,
garnishment or by a proceeding in equity (37
C.J.S. 1356).
2. An ordinary action to obtain money judgment
against the purchaser by the creditors in
violation of BSL IF purchaser has disposed of
the property held in trust.
REMEDIES AVAILABLE TO SELLER/
MORTGAGOR IN CASE OF SALE IN BULK TO
AVOID LIABILITY UNDER BSL:
1. Comply with the formalities specified under
BSL; or
2. Obtain a written waiver from ALL creditors.
FRAUDULENT
CONVEYANCE
UNDER BSL
TRANSFER IN FRAUD OF
CREDITORS UNDER CIVIL
CODE (Art 1381 - 1989)
Null and void Rescissible valid until set
aside by competent court
Warehouse Receipts Law (WRL)
Warehouse Receipts Law
PURPOSES
1. To regulate the status, rights and liabilities of
the parties in a warehousing contract.
2. To protect those who, in good faith and for
value, acquire negotiable warehouse receipts
by negotiation.
3. To render the title to, and right of possession
of, property stored in warehouses more easily
convertible.
4. To facilitate the use of warehouse receipts as
documents of title.
5. In order to accomplish these, to place a much
greater responsibility on the warehouseman.
APPLICABILITY
The WRL applies to ALL warehouses, whether
public or private, bonded or not.
In all other cases where receipts are not issued by
a warehouseman, the CIVIL CODE (Arts.
1507-1520) applies.
WAREHOUSEMAN
A person lawfully engaged in the business of
storing goods for profit (Sec 58[a]).
A duly authorized officer or agent of a

war ehouseman may val i dl y i ssue a
warehouse receipt (National Bank v. Producers
Warehouse Association, GR No. L-16510, January 9,
1922).
WAREHOUSE
The building or place where goods are deposited
and stored for profit
WAREHOUSE RECEIPT (WR)
Written acknowledgement by a warehouseman
that he has received and holds certain goods
therein described in his warehouse for the person
to whom it is issued.
Under Art. 1636, NCC, WR is a document of
title to goods, and as such it has three functions,
to wit:
1. It is a CONTRACT simple contract
evidencing the underlying contract of deposit
or of carriage.
2. Evidence of RECEIPT of goods.
3. Represents the goods and therefore operates
as transferable DOCUMENT OF TITLE that
carries with it control over the goods (Reviewer
on Commercial Law, Sundiang and Aquino, 2006ed).
Note: The Supreme Court in a number of cases
limited the functions to the two-fold functions, that
is, it is a contract and a receipt (Telengtan Bros. & Sons
v. CA, GR No. L-110581, September 21, 1994).
WR is NOT a negotiable instrument because it
does not comply with Sec. 1 (b) of the NIL (Act
2031), which requires an unconditional promise or
order to pay a sum certain in money. However, the
receipt may be issued in negotiable form.
NEGOTIABLE
INSTRUMENT
NEGOTIABLE WAREHOUSE
RECEIPT
Subject
Money Merchandise
Object of value
Instrument itself
Goods deposited
Liability of intermediate parties
Secondary (NIL)
None (for failure to deliver the
goods)
Effect of deliberate alteration
Null and void
Valid, but enforceable only in
accordance with its original
tenor
Conversion from bearer to order
A originally bearer
instrument will
always be such
Converted to an order WR if
specially endorsed
Significance of holder in due course
May obtain a
better title
Obtains only the title which
the party negotiating had over
the goods
ESSENTIAL TERMS OF WR (L
2
ORDS SIN)
1. Location of the warehouse where the goods
are stored;
2. Date of Issue of receipt;
3. Consecutive Number of receipt;
4. Statement whether goods will be delivered to
the bearer, to a specified person or to a
specified person or his order;
5. Rate of storage charges;
6. Description of the goods or the packages
containing them;
7. Signature of the warehouseman or his
authorized agent;
8. Warehousemans Ownership of or interest in
goods;
9. Statement of advances made and liabilities
incurred for which the warehouseman claims
as Lien.
The WR indicates prima facie (1) the DATE when
the contract of deposit is perfected and when the
storage charges shall begin to run against the
depositor and (2) the PERSON or persons who
are entitled lawfully to the possession of the
goods deposited (Comments and Cases on Credit
Transactions, De Leon, 2005ed).
The mere fact that the goods deposited are
incorrectly described does not make ineffective
the receipt when the identity of the goods is fully
established by evidence. Thus, its indorsement
and delivery shall constitute a sufficient transfer of
the title of the goods (American Foreign Banking Corp. v.
Herridge, GR No. L-21005, December 20, 1924).
Effects of omission of any of the essential
terms: (VDNC)
1. Validity of receipt not affected;
2. Warehouseman liable for Damages;
3. Negotiability of receipts not affected;
Special Laws
4. Contract is Converted to ordinary deposit
(Gonzales v. Go Fiong & Luzon Surety Co., GR No.
91776, Aug. 30, 1958).
Terms that cannot be included:
1. Those contrary to the provisions of the WRL.
2. Those which may impair the obligation of the
warehouseman to exercise that degree of
care in the safekeeping of the goods
entrusted to him which a reasonably careful
man would exercise in regard to similar goods
of his own.
3. Those contrary to law, morals, good
customs, public order or public policy.
4. Those exempting the warehouseman from
liability for misdelivery or for not giving
statutory notice in case of sale of goods.
5. Those exempting the warehouseman from
liability for negligence.
KINDS OF WR:
1. NEGOTIABLE where the goods are
deliverable to bearer or to the order of the
person specified (Sec. 5).
A provision in a negotiable WR that the

instrument is non-negotiable is VOID (Sec. 5).
When more than one negotiable receipt is

issued for the same goods, the word
Duplicate shall be plainly placed upon the
face of every such receipt, EXCEPT the first
one issued. A warehouseman shall be liable
for all damages caused by his failure to do
so t o any one who purchased t he
subsequent receipt for value supposing it to
be an original, even though the purchase is
made AFTER the delivery of the goods by
the warehouseman to the holder of the
original receipt (Sec 6).
2. NON-NEGOTIABLE the goods received will
be delivered to the depositor or to any
specified person (Sec. 4).
The receipt should be stamped on its face

non-negoti abl e, otherwi se a hol der
believing it to be negotiable may treat the
receipt as negotiable (Sec. 7).
NEGOTIABLE WR
NON-NEGOTIABLE
WR
May be acquired through
negotiation
May be acquired
through transfer or
assignment
NEGOTIABLE WR
NON-NEGOTIABLE
WR
Rights of the person to
whom it is negotiated
(holder):
1.Title to the goods of the
person negotiating the
receipt and title of the
person to whose order
the goods were to be
delivered;
2.Direct obligation of the
warehouseman to hold
possession of the goods
for him, as if the
warehouseman directly
contracted with him.
Rights of the
transferee:
1.Title of the goods,
as against the
transferor (merely
steps into the
shoes);
2.Right to notify the
warehouseman of
the transfer and
acquire the direct
obligation of the
warehouseman to
hold the goods for
him.
Negotiation defeats the lien
of the seller of the goods
(Sec. 49)
Goods represented cannot
be subject to attachment or
levy by execution, unless in
proper circumstances
(Sec. 25)
Goods represented
can be subject to
attachment or levy
by execution
(Sec. 42)
Effect of Failure to Mark Negotiable or Non-
negotiable:
1. Failure to mark negotiable does not render it
non-negotiable if it contains words of
negotiability (Sec. 5).
2. Failure to mark non-negotiable shall make it
negotiable (if the holder purchased it for value
supposing it to be negotiable).
NEGOTIATION AND TRANSFER OF WR:
A. NEGOTIABLE WR
1. How negotiated:
a. By Delivery (Sec 37)
When the goods are deliverable to the
BEARER, or where deliverable to a
specified person or order and the latter
or subsequent indorsee indorses it in
BLANK or to BEARER.
Note: A bearer document of title is NOT
ALWAYS A BEARER DOCUMENT in
the sense that a special indorsement
has the effect of converting the bearer
instrument into an order instrument
(Reviewer on Commercial Law, Sundiang and
Aquino, 2006ed).
b. Indorsement coupled with delivery
(Sec 37)
If the receipt is indorsed to a specified
person, it becomes an order receipt and
negotiation can only be effected by the
indorsement of such person in blank, to
bearer or to another specified person.
Delivery alone is not sufficient.
Note: If the indorsement is necessary
but the negotiable receipt was only
delivered:
the transferee acquires title against

the transferor;
there is no direct obligation of the

warehouseman; and
the transferee can compel the

transferor to complete the negotiation
by indorsing the instrument (Sec 43).
Negotiation takes effect on the date of
indorsement only.
9. Who may negotiate:
a. Owner thereof; or
b. Any person to whom the possession or
custody of the recei pt has been
entrusted by the owner, if, by the terms
of the receipt, the goods are deliverable
to the order of the person to whom the
possession or custody of receipt has
been entrusted or in such form that it
may be negotiated by delivery (Sec 40).
Note: Under paragraph (b) of above,
even a thief of the receipt or one who
defrauds another can negotiate the
receipt but it should be in such a form
that he need NOT forge any signature
(Reviewer on Commercial Law, Sundiang and
Aquino, 2006ed).
To illustrate:
O (owner) deposited certain goods with
W (warehouseman) for which the latter
issued a negotiable WR deliverable to
BEARER. The receipt was stolen by R
(robber) who delivered the same to P
(purchaser) who has no knowledge of
the theft. In this case P who is a bona
fide transferee may be protected under
Secs. 40 & 47, WRL.
The conclusion would be different if the
receipt is deliverable to the ORDER of
O for it will be necessary for R to forge
the signature of O to negotiate the
instrument to P. Hence, the transfer to
P would be inoperative if it is based on a
forged indorsement (1989 Bar).
3. Effects of Negotiation:
a. Negotiation of the document has the
effect of manual delivery so as to
constitute the transferee the owner of
the goods.
b. Negotiation carries with it both the title
to and possession of the property
(Philippine Trust Company v. National Bank, GR
No. L-16483, December 7, 1921).
4. Rights Acquired by Indorsee:
e. Such title to the goods as the person
negotiating had or such title as the
depositor had the ability to convey.
f. Th e d i r e c t o b l i g a t i o n o f t h e
warehouseman to hold possession of
the goods for him.
5. Warranties on Sale of WR: (GLKM)
A person who, for value, negotiates or
transfers a receipt by indorsement or
delivery, including one who assigns for
value a claim secured by a receipt, unless
a contrary intention appears warrants:
a. That the receipt is Genuine;
b. He has a Legal right to negotiate or
transfer it;
c. He has no Knowledge of defects that
may impair the validity or worth of the
receipt;
d. He has a right to transfer title to the
goods and t hat t he goods ar e
Merchantable or fit for a particular
purpose whenever such warranties
would have been implied, if the contract
of the parties had been to transfer
wi t hout a recei pt of t he goods
represented thereby (Sec. 44).
The indorser does NOT guarantee that the
warehouseman will comply with his duties
(Sec.45).
A holder for security of a receipt who in
good faith accepts payment of debt from a
person does not warrant the genuineness
of the receipt nor the quality or quantity of
the goods described therein (Sec 46).
PLEDGE OF RECEIPT
Negotiation of a receipt may also be by way of
pledge. The SC ruled in BPI v. J.R. Herridge
(GR Nos. L-21000, 21002-21004, and 21006, December
20, 1924), that as to the legal title to the property
covered by a WR, a pledgee is on the same
footing as a vendee except that the former is
under obligation of surrendering his title over
the goods upon payment of the debt secured
(Reviewer on Commercial Law, Sundiang and Aquino,
2006ed).
However, the SC ruled in PNB v. Sayo, Jr. (GR
No. 129198, July 9, 1998), that where a WR is
transferred to secure payment of a loan by way
of pledge or mortgage, the pledgee or
mortgagee does not automatically become the
owner of the goods but merely retains the right
to keep and with the consent of the owner to
sell them so as to satisfy the obligation from
Special Laws
the proceeds for the simple reason that the
transaction is not a sale but only a mortgage or
pledge. Likewise, if the property is lost without
the fault or negligence of the mortgagee or
pledgee, then said goods are to be regarded
as lost on account of the real owner, mortgagor
or pledgor.
VENDORS LIEN
Transfer of title to the purchaser in good faith
and for value is not affected by the rights of a
vendor (Sec 49).
Illustration: S (seller) sold on credit certain
goods to B (buyer), who deposited the same to
W (warehouseman) for which the latter issued
a negotiable WR. B subsequently negotiated
the receipt to P (purchaser in good faith and
for value). In such case, P has a better right
over the goods against the unpaid S because
Sec. 49 provides that no sellers lien or right of
stoppage in transitu shall defeat the rights of
any purchaser for value in good faith to whom
such receipt has been negotiated.
W cannot be obliged to deliver the goods to an
unpaid seller unless the receipt is first validly
surrendered for cancellation (Sec 49). (1993 Bar)
B. NON-NEGOTIABLE WR
It states that the goods received will be
delivered to the DEPOSITOR or to any other
SPECIFIED person (Sec. 4).
A non-negotiable receipt shall have plainly
placed upon its face by the warehouseman
issuing it non-negotiable or not negotiable. In
case of warehousemans failure to do so, a
holder of the receipt who purchased it for value
supposing it to be negotiable, may, at his
option, treat such receipt as imposing upon the
warehouseman the same liabilities he would
have incurred had the receipt been negotiable
(Sec. 7).
A non-negotiable WR cannot be negotiated but
it can be transferred or assigned by delivery to
the transferee accompanied by a deed of
assignment, donation or other form of transfer.
Effect: Transferee of assignee acquires only
the rights stated in Sec. 42 and even if the
receipt is indorsed, the transferee acquires no
additional right (Sec. 39).
Rights of Transferee of Non-Negotiable WR
(Sec. 42):
1. acquires title of the goods subject to the
terms of the agreement with the transferor;
2. the right to notify the warehouseman of the
transfer to him of such receipt; and
3. the right, thereafter, to acquire the
obligation of the warehouseman to hold
the goods for him according to the terms
of the receipt.
Note: Pri or to the noti fi cati on of the
warehouseman by the transferor or transferee
of a non-negotiable receipt, the title of the
transferee to the goods and the right to acquire
the obligation of the warehouseman may be
defeated:
by levy of an attachment or execution upon

the goods by a creditor of the transferor; or
by a notification to the warehouseman by the

transferor or a subsequent purchaser from
the transferor of a subsequent sale of the
goods by the transferor.
RULES ON ATTACHMENT/ EXECUTION OF
GOODS DEPOSITED:
1. NEGOTIABLE RECEIPT
The goods cannot be attached or levied in
execution UNLESS:
a. The receipt is first surrendered; or
b. Its negotiation is enjoined; or
c. The receipt is impounded by the court. (Sec.
25)
Creditors remedies:
a. seek ATTACHMENT of the receipt; or
b. compel the debtor to deliver the receipt by
INJUNCTION or otherwise (Sec. 26).
Not applicable:
a. If the depositor is not the owner of the
goods (thief) or one who has no right to
convey title to the goods binding upon
the owner;
b. Actions for recovery or manual delivery
of goods by the real owner; or
c. Where attachment is made prior to the
issuance of receipt.
The rights acquired by attaching creditors
cannot be defeated by the issuance of a
negotiable receipt of title thereafter (International
Breeding Co. v. Terminal Warehouse Co., 126 Atl. 902).
2. NON-NEGOTIABLE RECEIPT
The goods can be attached, provided it is done
prior to the notification of the warehouseman of
the transfer (Sec. 42).
Reason: Absent such notice, both the
warehouseman and the sheriff have a right to
assume that the goods are still owned by the
person whose name appears in the receipt.
RIGHTS AND OBLIGATIONS OF THE
WAREHOUSEMAN
RIGHTS OBLIGATIONS
1. To be paid;
2. In case of
non-payment,
to exercise his
lien on the
goods
deposited;
and
3. To refuse
delivery in
proper legal
circumstances
.
1. To issue a WR in the
required form for goods
received;
2. To take care of the goods
deposited with ordinary and
reasonable diligence;
3. To deliver the goods to the
person lawfully entitled;
4. Not to commingle the goods
deposited, unless goods are
fungible and of the same
kind and grade, giving rise
to co-ownership over
commingled mass;
5. To insure the goods in proper
circumstances;
6. To mark a non-negotiable
WR as such;
7. To mark as such the
duplicates of a negotiable
WR;
8. To give the proper notice in
case of sale of the goods as
provided in the WRL; and
9. To take up and cancel the
WR when the goods are
delivered.
OBLIGATIONS OF THE WAREHOUSEMAN
DUTY TO DELIVER
Upon a DEMAND made by the holder of a receipt
or by the depositor, unless there is a legal excuse;
if such demand is accompanied with:
1. Offer to satisfy the warehousemans lien;
2. Offer to surrender the receipt, if negotiable,
wi t h such endorsement as woul d be
necessary for the negotiation of the receipt;
and
3. Readiness and willingness to sign an
acknowl edgment when the goods are
delivered, if such signature is requested by
the warehouseman (Sec. 8).
GENERAL RULE
A demand shoul d be made on t he
warehouseman in order that the duty to
deliver the goods will arise.
EXCEPTION
When the warehouseman has rendered it
beyond his power to deliver the goods,
demand may be dispensed with (Art. 1169[3],
NCC).
Person to whom goods must be delivered:
1. Person lawfully entitled to possession of
goods or his agent (person to whom a
competent court has ordered delivery of
goods; attaching creditor; purchaser);
2. Person entitled to delivery under a non-
negoti abl e recei pt or wi th wri tten
authority; or
3. Person in possession of a negotiable
receipt.
Instances when warehouseman may
legally refuse to deliver goods:
(CRIS-BAG-FALL)
1. When the holder of the receipt does NOT
satisfy the Conditions prescribed in
Section 8 of the Act;
2. When the warehouseman has Legal title
in himself on the goods, such title or right
being derived directly or indirectly from
the transfer made by the depositor at the
time or subsequent to the deposit for
storage, or from the warehousemans lien
(Sec. 16);
3. I f t he war ehouseman had been
Requested by a person lawfully entitled to
a right of property or possession in the
goods not to make delivery to any person
(Sec. 10);
4. If he had Information that the delivery to
be made was to one not lawfully entitled
to the possession of the goods (Sec. 10);
5. Where the goods have already been
lawfully Sold to 3
rd
persons to satisfy the
warehousemans lien or disposed of
because of their perishable or hazardous
nature (Sec 36);
6. In case of Adverse claimant/s (Secs. 17 &
18);
7. I n t h e v a l i d e x e r c i s e o f t h e
warehousemans Lien (Sec. 31);
8. Delivery to a claimant with a Better right ;
9. Attachment or levy of the Goods by a
cr edi t or wher e t he document i s
surrendered or its negotiation is enjoined
or the document is impounded (Sec. 25);
10. Where the document of title is Attached
by a creditor (Sec. 26); and
11. Failure was not due to any fault on the
part of the warehouseman (67 C.J. 532)
CONVERSION
An unauthorized assumption and exercise of the
right of ownership over goods belonging to
another through the alteration of their condition or
Special Laws
the exclusion of the owners right (Bouviers Law
Dictionary).
Instances when warehouseman is liable for
conversion:
1. Where the delivery is otherwise than as
authorized by subsections (b) and (c) of
Section 9 (Sec. 10);
2. Even if delivered to persons entitled under
Section 9, he may still be liable for conversion
if prior to delivery:
a. He had been requested not to make such
delivery; or,
b. He had received notice of the adverse
claim or title of a third person (Sec. 10).
Effects of Alteration (Sec. 13):
ALTERATION EFFECT
1. Alteration
Immaterial
Whether fraudulent or not,
authorized or not,
warehouseman is liable on
the altered receipt according
to its ORIGINAL tenor.
2. Alteration
Material But
Authorized
Liable according to its terms
as ALTERED.
3. Material
Alteration
Innocently
Made
Liable according to its
ORIGINAL tenor.
4. Material
Alteration
Fraudulently
Made
Liable according to the
ORIGINAL tenor to a
purchaser of receipt for
value without notice and
even to the alterer and
subsequent purchasers with
notice (except that liability
with respect to the alterer
and subsequent purchasers
with notice is limited only to
delivery as he is excused
from any liability).
Note: A fraudulent alteration cannot divest the
title of the owner of the stored goods and
warehouseman is liable to return them to the
owner (Comments and Cases on Credit Transactions, De
Leon, H., 2006ed).
LOSS/ DESTROYED WR
Where a negotiable receipt has been lost or
destroyed, a court of competent jurisdiction may
order the delivery of the goods only:
(1) upon proof of the loss or destruction of the
receipt; and
(2) upon the giving of a bond with sufficient
sureties to be approved by the court.
However, the warehouseman is still liable to a
holder of the receipt for value without notice of
the proceedings or of the delivery of the goods
since the warehouseman can secure himself
on the bond given (Sec 14).
DUTY TO INSURE GOODS
i. Where the law provides;
ii. Where it was an inducement for the depositor
to enter into the contract;
iii. Established practice; or
iv. Where the WR contains a representation to
that effect.
RIGHT TO BE PAID
1. EXTENT OF WAREHOUSEMANS LIEN
a. al l l awful charges for storage and
preservation of the goods;
b. all lawful claims for money advanced; and
c. all reasonable charges and expenses for
notice and advertisement of the sale, and
the sale of goods (Sec. 27).
In case of a NEGOTIABLE receipt, the

charges that are present at the time of the
issuance of the receipt MUST BE STATED
in the receipt with the amounts thereof
specified; otherwise, the warehouseman
shall have no lien thereon, EXCEPT only
for charges for storage of those goods
subsequent to the date of the receipt (Sec
30).
2. ENFORCEMENT OF WAREHOUSEMANS
LIEN:
a. By refusing to deliver the goods until his
lien is satisfied (Sec. 31); or
b. By causing extrajudicial sale of the
property and applying the proceeds to the
value of the lien (Secs. 33 & 34).
Effects of sale of goods:
The warehouseman is not liable for

non-delivery even if the receipt given
for the goods were negotiated (Sec. 36);
Where the sale was made without the

publication required and before the time
provided by law, such sale is void and
the purchaser of the goods acquires no
title in them (Eastern Paper Mills Co., Inc. v.
Republic Warehousing Corp., GR No. 85497,
February 24, 1989).
c. By the other means allowed by law to a
creditor against his debtor (Sec. 32); OR
such other remedies allowed by law for the
enforcement of a lien against personal
property (Sec. 35).
3. PROPERTY SUBJECT TO LIEN
a. Against the goods of the depositor who is
liable to the warehouseman as debtor
whenever such goods are deposited; and
b. Against goods of other persons stored by
the deposi tor who i s l i abl e to the
warehouseman as debtor with authority to
make a valid pledge.
4. LOSS OF THE LIEN
a. By surrendering possession thereof; or
b. By refusing to deliver the goods when a
demand is made with which he is bound to
comply (Sec. 29).
The warehousemans lien is possessory in nature
(PNB v. Se, Jr., GR No 119231, April 18, 1996).
Involuntary parting with possession of goods
ordinarily does not result in loss of his lien by a
warehouseman (93. C.J.S. 59).
A warehouseman who has released his lien by the
surrender of the goods may not thereafter claim a
lien on other goods of the same depositor for
unpaid charges on the goods surrendered if the
goods were delivered to him under different
bailments (covered by separate receipts).
The loss of the warehousemans lien does not
necessarily mean the extinguishment of the
depositors obligation to pay the warehousing fees
and charges which subsists to be a personal
liability.
What Warehouseman Can Do in Case of
Adverse Claimants (Secs. 17 & 18):
1. REFUSE to deliver the goods to anyone of
them until he has had reasonable time to
ascertain the validity of the various claims; he
is not excused from liability in case he makes a
mistake (Comments and Cases on Credit Transactions, De
Leon, 2006ed).
2. Or i gi nal act i on or count er cl ai m f or
INTERPLEADER, whichever is appropriate. In
such case, the warehouseman will be relieved
from liability in delivering the goods to the
person found by the court to have a better right
(Ibid).
Note: Section 18 does not apply to cases
where the warehouseman himself makes a
claim to the goods (67 C.J. 536).
LIABILITIES OF A WAREHOUSEMAN
CIVIL CRIMINAL
Warehouseman or his agent
For
damages
suffered by
reason of
failure to
comply with
legal duties
1.Issuance of receipts for goods
not received (Sec. 50);
2.Issuance of receipt containing
false statement (Sec. 51);
3.Issuance of duplicate negotiable
WR not marked as such (Sec.52);
4.Issuance of a negotiable WR for
goods of which he is an owner
without stating such fact of
ownership (Sec. 53);
5.Delivery of goods without
obtaining negotiable WR (Sec.54)
Third persons
Negotiation of WR issued for
mortgaged goods with intent to
deceive (Sec. 55)
Other Acts for Which Warehouseman is Liable:
1. Failure to stamp duplicate on copies of
negotiable receipt (Sec. 6);
2. Failure to place non-negotiable or not
negotiable on a non-negotiable receipt (Sec. 7);
3. Misdelivery of the goods (Sec. 10);
4. Failure to effect cancellation of a negotiable
receipt upon delivery of the goods (Sec. 11);
5. Issuing receipt for non-existing goods or
misdescribed goods (Sec. 20);
6. Failure to take care of the goods (Sec.21);
7. Failure to give notice in case of sale of goods
to satisfy lien (Sec. 33) or because the goods
are perishable or hazardous (Sec 34).
Special Laws
General Bonded Warehouse Act
(GBWA) (Act No. 3893, as amended by RA 247)
General Bonded Warehouse Act
PURPOSES
1. To protect depositors by giving them a direct
recourse against the bond filed by the
warehouseman in case of the latters
insolvency.
2. To regulate the business of receiving
commodities for storage.
3. To encourage the establishment of more
warehouses.
WRL VIS--VIS GBWA (Bar Review Materials in
Commercial Law, Jorge Miravite, 2007ed)
WRL GBWA
Prescribes the mutual duties and
rights of a warehouseman who
issues warehouse receipts, and
his depositor, and covers all
warehouses whether bonded or
not
Regulates
and
supervises
warehouses
which put up
a bond
APPLICABILITY
The GBWA applies to a warehouseman engaged
in the business of receiving commodity for
storage, including contracts or transactions:
1. Wherein the warehouseman is obligated to
return the very same commodity delivered to
him or to pay its value;
2. Wherein the commodity delivered is to be
milled for and on account of its owner; or
3. Wherein commodity delivered is commingled
with commodity delivered by or belonging to
other persons, and the warehouseman is
obligated to return commodity of the same
kind or to pay its value (Sec. 2).
Note: The kinds of commodity to be
deposited must be those, which may be
traded or dealt in openly and legally. Thus,
illegal and prohibited goods may not be
validly received (Sec. 2).
SALIENT FEATURES:
1. License from the Bureau of Domestic Trade
required;
2. Amount of bond is 33 1/3% of the value of the
goods intended to be stored in the warehouse;
3. Depositor given a direct recourse against the
bond filed by the warehouseman; and
4. All goods are insured against fire for their full
value.
Note: Compliance with the WRL is NOT
mandatory and indispensable. A mere formal
defect or absence of a warehouse receipt in
accordance with the WRL does not preclude the
application of the GBWA. However, it is desirable
that a bonded warehouseman issue a warehouse
receipt which conforms to provisions of the WRL
(Gonzales v. Go Tiong, GR No. L-11776, August 30, 1958).
DUTIES OF A COVERED WAREHOUSEMAN:
(SBIRRO)
1. Secure the required license from DTI (Sec. 3);
2. Give the necessary Bond which is of the
following nature (Sec. 4):
a. The bond may either be a cash bond or a
bond secured by real estate, or a bond
issued by a duly authorized bonding
company;
b. The amount of the bond must NOT be less
than 33 1/3% of the market value of the
maximum quantity of the commodity to be
received by the warehouseman; and
c. It shall be so conditioned as to respond for
the market value of the commodity actually
delivered and received at any time by the
warehouseman in case the latter is unable
to return the commodity or to pay its value.
3. Insure against fire the commodity received and
stored (Sec. 6);
4. Recei ve, wi t hout di scr i mi nat i on, any
commodity for storage provided:
a. They are of the kind specified in his
license;
b. They are in a suitable condition for
warehousing; and
c. There is sufficient space in the warehouse
to accommodate the same (Sec. 8).
Penalty: Fine for double the market value of
the commodity so received in excess of the
authorized quantity (Sec.12).
5. Keep a complete Record of all commodities
received by him, of the receipts issued
therefore, of the withdrawals, of the liquidation,
and of all receipts returned to and canceled by
him;
6. Observe rules and regulations of the Bureau of
Domestic Trade (Sec. 9).
Note: A person injured by the breach of the
warehouseman may sue on the bond put up by
the warehouseman to recover damages he may
have sustained on account of such breach. In
case the bond is insufficient to cover the full
market value of the commodity stored, he may
sue on any pr oper t y or asset s of t he
warehouseman not exempt by l aw f rom
attachment and execution (Sec. 7).
CIVIL & CRIMINAL LIABILITIES
CIVIL CRIMINAL
Breach of
obligations
secured
by the
bond
Engaging in business covered by

the GBWA in violation of the
license requirement (Sec. 11);
Receiving a quantity of commodity

greater than its capacity or that
specified in the license, if the
goods deposited are lost or
destroyed (Sec. 12); and
Connivance with a
warehouseman for the purpose of
evading license requirement
(Sec. 13)
Trust Receipts Law (TRL) (PD No. 115)
Trust Receipts Law
PURPOSES
1. To punish the dishonesty and abuse of
confidence in the handling of money or goods
to the prejudice of another regardless of
whether or not the latter is the owner (Colinares
v. CA, GR No. 90828, Sept. 5, 2000).
2. To encourage and promote the use of TR as
an additional and convenient aid to commerce
and trade;
3. To regulate trust receipt transactions in order
to assure the protection of the rights and the
enforcement of the obligations of the parties
involved therein
4. To declare the misuse or misappropriation of
goods or the proceeds realized from the sale
of goods released under trust receipts as an
offense punishable under Art. 315 of the RPC
(Sec. 2);
The Court consistently declared that TRL

does not violate the constitutional
proscription against imprisonment for
non- payment of debt s. TRL i s a
declaration by the legislative authority
that, as a matter of public policy, the
failure of a person to turn over the
proceeds of the sale of goods covered by
a TR or to return said goods if not sold is
a public nuisance to be abated by the
imposition of penal sanctions (Tiomico v.
CA, GR No. 122539, March 4, 1999).
The TRL does not seek to enforce

payment of the loan. The practice of
banks of making borrowers sign trust
receipts to facilitate collection of loans
and place them under the threats of
criminal prosecution should they be
unable to pay it may be unjust and
inequitable, if not reprehensible (Colinares v.
CA, Ibid).
TRUST RECEIPT
A written or printed document signed by the
entrustee in favor of the entruster whereby the
latter releases the goods to the possession of the
former upon the entrustees promise to hold said
goods in trust for the entruster, to sell or dispose
of the goods, and to return the proceeds thereof to
the extent of the amount owing to the entruster; or
to return the goods, if unsold or not otherwise
disposed of (Sec. 4).
Special Laws
FORM & CONTENTS OF TR:
Trust receipt need not be in any particular form,
but every such receipt must substantially contain:
(UVD)
1. A Description of the goods, documents or
instruments subject of the trust receipt;
2. The total invoice Value of the goods and the
amount of the draft to be paid by the entrustee;
3. An Undertaking or a commitment of the
entrustee:
a. To hold in trust for the entruster the goods,
document s or i nst r ument s t her ei n
described;
b. To dispose of them in the manner provided
for in the trust receipt; and
c. To turn over the proceeds of the sale of the
goods, documents or instruments to the
entruster to the extent of the amount owing
to the entruster or as appears in the trust
receipt or to return the goods, documents or
instruments in the event of their non-sale
within the period specified therein (Sec. 5).
TRUST RECEIPT TRANSACTION
A separate and independent security transaction
intended to aid in financing importers and retail
dealers who do not have sufficient funds to
finance the importation/purchases and who may
not be able to acquire credit except through
utilization, as collateral, of the merchandise
imported/ purchased (Nacu v. CA, GR No. L-108638,
March 11, 1994).
A tripartite arrangement under which the buyer
(entrustee) purchases goods from a seller, with
the financing carried by a lender (entruster) (68A
Am. Jur.).
The antecedent acts in a trust receipt transaction
consist of the application and approval of the letter
of credit, the making of the marginal deposit and
the effective importation of goods through the
efforts of the importer (Sia v. People, GR No. 149695,
April 28, 2004).
Nature of a Trust Receipt Transaction
The nature of a trust receipt can best be illustrated
in a letter of credit-trust receipt arrangement,
where a bank extends to a borrower a loan
covered by the letter of credit, with the trust
receipt as security of the loan. It has a dual
feature, namely, a loan feature and a security
feature (Nacu v. CA, Ibid., Vintola v. IBAA, GR No.
78671, March 25, 1988). The money from the loan will
then be used by the entrustee to purchase goods
from a seller in a separate contract of sale.
No agency relationship established
An entrustees breach of trust, however, subjects
him to criminal and civil liability for estafa.
The enactment of PD 115 with its penal sanction
is, in reality, merely confirmatory of existing
jurisprudence on situations covered by Art. 315(1)
(b) of the RPC. Thus, an entrustee who failed to
account for the proceeds of the goods sold or to
return the goods, as the case may be, is guilty of
estafa even where the offense was committed
before promulgation of PD 115 on June 29, 1973
(People v. Cuevo, GR No. 27607, May 7, 1981).
Coverage of TR Transaction
The TRL applies to items:
a. destined for sale;
b. processed as a component of a product
ultimately sold (manufacture); and
c. used to repair and maintain equipment used in
business (Allied v. Ordonez, GR No. 82495, December
10, 1990).
The law does NOT cover the sale of goods,

documents or instruments by a person in
the business of selling goods, documents
or instruments for profit who has general
property rights in such goods, documents
or installments OR who sells the same to
the buyer on credit, retaining title or other
interest as security for the payment of the
purchase price (Sec 4).
There i s no TR t ransact i on i f t he
arrangement is for mere consignment of
goods with the obligation on the part of the
person to whom it is delivered to remit
proceeds of the sale or to return the same
when unsold (Robles v. CA, GR No. 59640,
1991).
Goods
Include chattels and personal property other than:
money, things in action, or things so affixed to land
as to become a part thereof.
Security Interest
A property interest in goods, documents or
instruments to secure performance of some
obligations of the entrustee or of some 3
rd
persons
to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in
substance taken or retained for security only.
TRUST RECEIPT TRANSACTION VIS--VIS
OTHER TRANSACTIONS (Notes on Selected Commercial
Laws A Guide for Bar Reviewees, Tristan Catindig, 2003ed)
OTHER TRANSACTIONS
TRUST
RECEIPT
TRANSACTION
PLEDGE
Financer
possesses
the property
Person financed
possesses the
property
OTHER TRANSACTIONS
TRUST
RECEIPT
TRANSACTION
CONDITIONAL
SALE
There is a
sale of the
property
from the
seller to the
buyer
There is no sale
of the property
from the
entruster to the
entrustee
CHATTEL
MORTGAGE
Subjects the
property to a
lien
No lien is
created over the
property
CONSIGNMENT
1. Bipartite
2. Consignor
retains
ownershi
p of the
property
1. Tripartite
2. Seller does
not retain title
to the
property
PARTIES IN A TR TRANSACTION
1. ENTRUSTER
Lender/financier
Person holding title over the goods,

documents or instruments subject of a
trust recei pt transacti on; rel eases
possession of the goods upon execution
of trust receipt.
Not the owner of the goods, but merely

a holder of security interest.
If it is made to appear in the trust receipt

as the owner of the goods purchased, it is
merely theoretical, an artificial expedient
and more of fiction than fact (Vintola v.
IBAA, GR No. 78671, March 25, 1988; PNB v.
Pineda, GR No. 46658, May 13, 1991).
Note: See, however, the contrary view of
Prof. Catindig and the rulings in Colinares v.
CA (GR No. 90828, Sept. 5, 2000) and Prudential
Bank v. IAC (GR No. 74886, December 8, 1992).
Professors Sundiang and Aquino, however,
adhere to the view that the entruster merely
has a security interest in the goods and that
the ownership of the entruster over the goods
is by virtue of a legal fiction.
2. ENTRUSTEE
Borrower/ buyer/ importer
Person to whom the goods are delivered

for sale or processing in trust, with the
obligation to return the proceeds of sale
of the goods or the goods themselves to
the entruster.
The owner of the goods purchased. In

fact, the law imposes on him the risk of
loss of the goods under the doctrine of
Res perit domino.
3. SELLER OF THE GOODS
Not strictly and actually a party to the trust
receipt transaction; but a party to the
contract of sale with the buyer/ importer
(entrustee).
RIGHTS AND OBLIGATIONS OF PARTIES
ENTRUSTER ENTRUSTEE
Rights
1. Entitled to the proceeds
from the sale of goods,
documents or
instruments;
2. Entitled to the return of
goods, etc. in case of non-
sale;
3. To enforce all other rights
conferred on him under
the TRL;
4. Extent of security interest:
a. As against innocent
purchaser for value
NOT preferred (Sec 11)
b. As against creditors of
entrustee preferred
(Sec. 12)
5. To cancel the trust, take
possession of goods, and
to sell the goods in a
public sale in case of
default;
6. May purchase at the
intended public sale.
(Sec. 7)
1. To receive the
surplus from the
public sale
(Sec. 7)
2. To have
possession of
the goods as a
condition for his
liability under
the TRL (Ramos v.
CA, GR No.
108121, May 10,
1994).

Obligations
1. To give possession of the
goods to the entrustee;
2. To give at least 5 days
notice to the entrustee of
the intention to sell the
goods at an intended
public sale.
1. To hold the
goods or the
sale proceeds in
trust for the
entruster;
2. To comply with
his alternative
obligation;
3. To insure
against loss the
goods for their
total value.
4. To keep the
goods or sale
proceeds
separate and
identifiable;
5. To observe all
the conditions of
the trust receipt
not contrary to
the provisions of
the TRL.
Special Laws
ENTRUSTER ENTRUSTEE
Liabilities
Not liable as principal or
vendor under any sale or
contract to sell made by the
entrustee. (Sec. 8)
Risk of loss of the
goods (Sec. 10)
Alternative Obligations of Entrustee:
1. Obligation to return to the entruster the
PROCEEDS of the sale of the goods
(entregarla); or
2. Obligation to return the GOODS themselves
to the entruster, in case the goods are not
sold or disposed of (devolvera).
Effect of non-compliance:
a. criminal liability for ESTAFA under both the
TRL and the RPC;
b. liable for DAMAGES under Art. 33 of the NCC,
without need of proving intent to defraud
because it is malum prohibitum (Prudential v. IAC,
Ibid)
Effect of compliance:
a. Before criminal charge no criminal liability.
b. Af t er char ge, bef or e convi ct i on
extinguishment of criminal liability.
P.D. 115 expressly allows the bank to take

possession of the goods covered by the trust
receipts. Thus, even though the bank took
possession of the goods covered by the trust
receipts, the entrustees REMAINED liable for
the entire amount of the loans covered by the
trust receipts (Phil. Blooming v. CA, GR No. 142381,
October 15, 2003).
In the event of default by the entrustee, it is

not necessary that the entruster cancel the
trust and take possession of the goods to be
able to enforce his rights thereunder. He has
the discretion to avail of such right or seek
any separate action, such as third party claim
or separate civil action (South City Homes v. BA
Finance Corp., GR No. 135462, Dec 7, 2001).
The breach of obligation under a trust receipt

agreement is separate and distinct from any
cr i mi nal l i abi l i t y f or " mi suse and/ or
misappropriation of goods or proceeds
realized from the sale of goods, documents or
instruments released under trust receipts",
punishable under Section 13 of the Trust
Receipts Law (P.D. 115) in relation to Article
315 (1), (b) of the Revised Penal Code. Being
based on an obligation ex contractu and NOT
ex delicto, the civil action may proceed
independently of the criminal proceedings
instituted against petitioners regardless of the
result of the latter (Sarmiento, Jr. v. CA, GR No.
122502. December 27, 2002).
If the entrustee is a corporation, the law

makes the officers or employees of other
persons responsible for the offense liable to
suffer the penalty of imprisonment. However,
the person signing the trust receipt for the
corporation is not solidarily liable with the
entrustee-corporation for the civil liability
arising from the criminal offense (Edward Ong v.
CA, GR No. 119858, April 29,2003).
Chattel Mortgage Law (CML)
(Act No. 1508)
Chattel Mortgage Law
CHATTEL MORTGAGE
A contract by virtue of which personal property is
recorded in the Chattel Mortgage Register as
security for the performance of an obligation (Art.
2140, NCC).
The old view that a chattel mortgage is a
conditional sale was expressly repudiated by Art.
2140 NCC (Serra v. Rodriguez, GR No. L-25546, April 22,
1974).
CHATTEL MORTGAGE PLEDGE
Delivery
Delivery of the property to
the mortgagee is NOT
necessary
Delivery of the
property to the
pledgee is necessary
Registration
Registration in the Chattel
Mortgage Register is
necessary for validity
Registration in the
Registry of Property is
NOT necessary
Procedure for Sale
Procedure for the sale is
found in Sec. 14 of Act No.
1508
Procedure is found in
Art. 2112 of the Civil
Code
CHATTEL MORTGAGE PLEDGE
Excess
If the property is
foreclosed, the excess
over the amount due goes
to the debtor
Debtor is not entitled
to the excess unless
it is otherwise
agreed or except in
the case of a legal
pledge
Deficiency
Creditor may recover any
deficiency except if CM is
a security for the purchase
of personal property in
installments
Creditor CANNOT
recover deficiency
even if agreed upon
Subject Matter and Ownership
Both are similar in that their subject matter is
MOVABLE property. Also, OWNERSHIP of the
mortgagor is an essential requirement of a valid
chattel mortgage contract (Art 2085[2]).
CHATTEL
MORTGAGE
PACTO DE RETRO SALE
Nature
Accessory contract Principal contract
Transfer of Title
Title to the thing
mortgaged is NOT
transferred
Title to the subject matter
is transferred to the
vendee a retro but subject
to the redemption by the
vendor.
Affidavit of Good Faith
Affidavit in good faith
is required
Affidavit in good faith is
NOT required
CHATTEL
MORTGAGE
REAL ESTATE
MORTGAGE
Subject Matter
Thing mortgaged must
be a personal or
movable property
Thing mortgaged must be
real or immovable property
Alienation
Mortgagor cannot
alienate the thing
mortgaged without the
written consent of the
mortgagee
Mortgagor can alienate the
thing mortgaged without the
consent of the mortgagee
and any such prohibition is
void
Right of Redemption
NO right of redemption
There can be right of
redemption in extrajudicial
foreclosure and in judicial
foreclosure by banks
Affidavit of Good Faith
Affidavit of good faith
is required
Affidavit of good faith is
NOT required
CHARACTERISTICS OF CM: (FUA)
1. ACCESSORY CONTRACT the purpose of
which is to secure the performance of a
principal obligation;
2. FORMAL CONTRACT registration in the
Chattel Mortgage Register is indispensable;
and
3. UNILATERAL CONTRACT it produces only
obligations on the part of the creditor to free
the thing from the encumbrance upon
fulfillment of the obligation (Comments and Cases on
Credit Transactions, De Leon, 2006ed).
ESSENTIAL REQUISITES: (SAFP)
1. It must be constituted to Secure the fulfillment
of a principal obligation (Art 2085, NCC).
GENERAL RULE
CM can cover only obligations existing at the
constitution of mortgage.
EXCEPTION
Promise expressed in a CM to cover debts yet
to be contracted (future debts) may be binding
BUT security itself arise only AFTER a CM
agreement covering the newly contracted
debt is executed by concluding a fresh CM or
by amending the old contract conformably
with the form prescribed by the Chattel
Mortgage Law (Acme Shoe Rubber and Plastic Corp.
v.CA, GR No. L-56718, January 17, 1985).
A mortgage that contains a stipulation in

regard to future advances in the credit will
take effect only from the date the same are
made and not from the date of the
mortgage (Jaca v. Davao. Lumber Co., GR No.
L-25771, March 29, 1982).
2. Mortgagor is Absolute owner of the thing
mortgaged.
Note: Third persons who are not parties to
the principal obligation may secure said
obligation by pledging or mortgaging their own
property. The liability of the third-party
mortgagors extends only to the property
mortgaged. Should there be any deficiency,
the creditor has recourse on the principal
debtor (Cerna v. CA, GR No. L-48359, March 30,
1993).
3. Mortgagor has Free disposal of his property
or he is legally authorized for the purpose.
4. The property must be Personal property such
as: (SIMS_VMB)
Shares of stock in a corporation;
Interest in business;
Machinery treated by the parties as

personal property subsequently installed on
leased land ONLY if any of the following is
Special Laws
ABSENT: (1) installed by the owner, (2)
intended by the owner of the tenement for
an industry or work being carried on in a
building or piece of land and (3) which tend
directly to meet the needs of the said
industry or works (Art. 415 (b), NCC). Thus,
machinery installed by the lessee on the
leased premises may be the subject of a
chattel mortgage (Davao Sawmill v. Castillo, GR
No. L-40411, August 7, 1935).
Standing crops considered under CML as

personal property;
Vessels where mortgage is recorded with

the Maritime Industry Authority to be
effective as to third persons; not necessary
to be recorded in the Office of the Registry
of Deeds;
Motor Vehicles where mortgage registered

in LTO (for vehicles used for public
services);
Buildings as a rule, they cannot be proper

subject of a CM. However, a CM over a
building is valid as between the parties on
the basis of estoppel but NOT against 3
rd

persons (Evangelista v. Alto Surety & Ins. Co., GR
No. L-11139, April 23, 1958).
GENERAL RULE
CM shall be deemed to cover ONLY property
described therein and NOT like or substituted
property thereafter acquired (Sec.7 (4); Tsai v. CA,
GR No. 120098, October 2, 2001).
EXCEPTIONS: (PRE)
1. Goods which are Perishable or subject to
inevitable wear and tear (Peoples Bank and
Trust Co. v. Dahican Lumber Co., GR No. 17500,
May 16, 1967);
2. When such future property is a Renewal
of, or in substitution for goods on hand
when the mortgage was executed, or is
purchased with the proceeds of sale of
such goods. This is exemplified in stores
open to public for retail business where
the goods are constantly sold and
substituted with new stock (Torres v. Limjap,
GR No. 34386, September 21, 1931);
3. Those contemplated in an Express
stipulation and in a supplement to the
mortgage subsequently executed in strict
compliance with the CML.
SPECIAL REQUISITES: (RA)
1. The mortgage must be Registered in the
Chattel Mortgage Registry in the registry of
deeds (ROD) of the province where:
The mortgagor resides;
The property is situated if he is a non-

resident;
BOTH, if the property is situated in a

different province from that in which the
mortgagor resides (Sec 4, CML)
Effects of registration:
It creates a real right or a lien which, being

recorded follows the chattel whenever it
goes; and
I t adds not hi ng t o t he i nst rument ,

considered as a source of title and affects
nobodys rights except as a species of
notice (Standard Oil Co. of New York v. Jaramillo,
GR No. L-20329, March 16, 1923).
Note: Unregistered mortgage is binding
between the parties but NOT on 3
rd
persons
(Filipinas Marble Corp. v. IAC, GR No. L-68010, May
30, 1986). There is no law expressly requiring
the recording of the assignment of a
mortgage. While such assignment may be
recorded, the law is permissive and not
mandatory (Comments and Cases on Credit Transactions,
De Leon, 2006ed).
2. The parties are required to execute an
Affidavit of good faith.
Affidavit of Good Faith - An oath in a
contract of chattel mortgage wherein the
parties severally swear that the mortgage is
made for the purpose of securing the
obligation specified in conditions thereof, and
for no other purpose and that the same is just
and valid obligation and one not entered into
for the purpose of fraud (Sec. 5).
Purposes for requiring an Affidavit of
Good Faith:
a. To guard against the making of fraudulent
or fictitious mortgages which would
enabl e t he mor t gagor t o r et ai n
possession of the property and set his
creditors.
b. It merely gives the mortgage a preferred
status, enjoys preference of the claim of
third persons.
Note: The absence of the affidavit vitiates a
mortgage ONLY as against third persons
without notice, like creditors and subsequent
encumbrancers (Lilius v. Manila Railroad Co., GR
No. 42551 September 4, 1935).
EQUITY OF REDEMPTION under CML
The right of the mortgagor or a person holding a
subsequent mortgage or a subsequent attaching
creditor to extinguish the mortgage by paying or
delivering to the mortgagee the amount due on
such mortgage and the reasonable costs and
expenses incurred.
The Right of Redemption applies to real
properties, NOT to personal properties, sold on
execution (Paray v Rodriguez, GR No. L-132287, January
24, 2006). Thus, there is NO right of redemption in
CM. There is only an equity of redemption.
a. Period within which equity of redemption
may be exercised
From the date the condition of the CM is
broken but BEFORE the foreclosure sale of
the collateral thereof.
The 30-day period to foreclose a CM is the

minimum period after violation of the
mortgage condition for the mortgage
creditor to cause the sale at public auction
of the mortgaged chattel AND is a period
of grace for the mortgagor to discharge the
mortgage obligation (Cabral v Evangelista, GR
No. 26860, July 30, 1969).
b. Amount to be Paid
(i) the amount due on such mortgage; &
(ii) the costs and expenses incurred by such
breach of condition before the sale thereof
(Sec. 13, Act No. 1508).
c. Persons entitled to redeem
i) Mortgagor;
ii) A person holding a subsequent mortgage;
After a CM is executed, there remains in

t he mor t gagor a mer e r i ght of
redemption and only this right passes to
the second mortgagee in case of a
second mortgage.
iii) A subsequent attaching creditor.
If the only leviable or attachable

interest of a chattel mortgagor is his
right of redemption, it follows that the
judgment creditor who purchased the
property could not acquire anything
except such right of redemption. He is
not entitled to the actual possession
and delivery of the property without
first paying the mortgage debt
(Northern Motors, Inc. v. Coquia, GR No. 40018,
March 21, 1975). Thus, an attaching
credi t or who redeems shal l be
subrogated to the ri ghts of the
mortgagee and entitled to foreclose the
mortgage (Sec. 13).
REMEDIES OF MORTGAGEE IN CASE OF
DEFAULT BY THE MORTGAGOR
These remedies are ALTERNATIVE; that is, a
resort to one is a waiver of the other remedy.
a. Original action for collection of money; or
b. Extra judicial Foreclosure (Rule 68, Rules
of Court not applicable)
RIGHT OF MORTGAGEE TO POSSESSION
i. Before default mortgagee is NOT entitled
to possession upon execution of the CM;
otherwise, it becomes a pledge.
ii. After default when default occurs and the
creditor desires to foreclose, the right of the
creditor to take the mortgaged property is
implied from the provisions giving him the
right to sell.
iii. Where mortgagor refuses to surrender
possession the creditors remedy is to
institute an action either:
a. To effect a judicial foreclosure directly,
i .e. to fi l e an acti on for speci fi c
performance against the debtor with an
application for preliminary attachment
over the chattel; or
b. To secure possession as a preliminary to
the sale contemplated in Sec. 14 of Act
No. 1508, i.e. to file an action for replevin
(Comments and Cases on Credit Transactions, De
Leon, 2006ed).
P R O C E D U R E I N E X T R A J U D I C I A L
FORECLOSURE OF CM
1. Applications for extra-judicial foreclosure of
mortgage whether under the direction of the
sheriff or a notary public shall be filed with the
Executive Judge through the Clerk of Court.
2. Period: AFTER 30 days from the time of the
condition broken, the mortgagee may cause
the mortgaged property to be sold at public
auction by a public officer (Sec. 14, Act No. 1508).
a. The chattel may be sold at either a:
i. Public Sale if the mortgagor defaults
in the payment of the secured debt or
otherwise fails to comply with the
conditions of the mortgage, the creditor
is permitted only to recover his credit
from the proceeds of the sale of the
property at public auction.
ii. Private Sale there is nothing illegal,
immoral, or against public order in an
agreement for the private sale of the
personal properties covered by the
chattel mortgage (Comments and Cases on
3. There must be at least 10-days notice
previous to the sale to the mortgagor or
person holding under him, and persons
holding subsequent mortgages of the time
and place of sale either by notice in writing:
Directed to him; or
Left at his abode, if within the municipality;

or
Special Laws
Sent by mail if he does not reside in such

municipality (Sec 14, CML).
4. At least 10 days notice of the time, place and
purpose of such sale must be posted at two
or more public places in such municipality (Sec
14, CML)
Note: If these notice requirements are NOT
complied with, the sale will be VOID.
5. Notice of auction sale shall be published in a
newspaper of general circulation.
6. The sale shall be made in a public place in
the municipality where the mortgagor resides
or where the property is located. However, the
parties may stipulate on where the sale will be
made.
Note: If the sale was made in a different
place, the sale will be VOID.
7. Filing fees shall be paid to the clerk of court,
who shall in turn issue a certificate of payment
and an official receipt.
If the mortgaged properties are located in

different areas, only one filing fee shall be
collected.
8. Certificate of sale issued by the Clerk of
Court must be approved by the executive
judge or in his absence, the vice executive
judge. No certificate of sale shall be issued in
favor of the highest bidder until all fees shall
have been paid.
Name/s of bidders shall be reported to the

Clerk of Court before issuance of the
certificate of sale.
9. The officer making the sale shall, within 30
days thereafter, make in writing a return of his
doings and file it with the Registry of Deeds
where mortgage is recorded and such
Registry shall record the same.
RULE ON RECOVERY OF DEFICIENCY AFTER
FORECLOSURE
GENERAL RULE
Action for recovery of deficiency in all mortgages
ALLOWED.
Reason: Mortgages as accessory contracts serve
only as securities and not for the satisfaction of
the principal obligation.
Prescriptive period: 10 years, under Article 1142
of the Civil Code from the time the cause of action
accrues even if not upon a written contract
because the obligation to pay deficiency is one
created by law and the action is in the nature of a
mortgage action intended to enforce the mortgage
action (DBP v. Tomeldan, GR No. L-51269, November 17,
1980).
EXCEPTION
When the mortgaged chattel is subject of the sale
on installment by mortgagee to the mortgagor,
foreclosure of the chattel mortgage on the thing
sold shall BAR recovery of any deficiency (Articles
1484 & 1485 of the Civil Code / RECTO LAW).

APPLICATION OF PROCEEDS OF SALE
The proceeds of the sale are to be applied for
payment in the following order: (COSMo)
1. Costs and expenses of keeping and sale;
2. Payment of the obligation secured by the
mortgage;
3. Claims of persons holding subsequent
mortgages in their order; and
4. The balance, if any, shall be paid to the
mortgagor, or person holding under him (Sec.
14, Act No. 1508).
CRIMINAL LIABILITY
1. Knowingly removing any personal property
mortgaged under the Chattel Mortgage Law to
any province or city other than the one in
which it was located at the time of the
execution of the mortgage without the written
consent of the mortgagee;
2. Selling or pledging personal property already
mortgaged or any part thereof under the
terms of the Chattel Mortgage Law without the
consent of the mortgagee written on the back
of the mortgage and duly recorded in the
chattel mortgage register (Art. 319, Revised Penal
Code).
Note: The mortgagor is not relieved of
criminal liability even if the mortgage
indebtedness is thereafter paid in full (U.S. v.
Kilayko, GR No. L-10891, August 18, 1916), or the
mortgagor-seller informed the purchaser that
the thing sold had been mortgaged (People v.
Alvares, GR No. L -70446, January 31, 1989).
Recto Law (Articles 1484 & 1485, NCC)
Recto Law
PURPOSE
To protect debtors from abuses committed by
creditors.
APPLICABILITY
1. Sale of personal property, the price of which is
payable in 2 or more installment;
2. Contracts purporting to be leases of personal
property with option to buy (Art. 1485, NCC).
Note: There must be a sale of personal property
(a) payable in installments and there has been (b)
failure to pay two or more installments. It does not
contemplate a sale on straight term in which the
balance, after payment of initial sum, should be
paid in its totality at the time specified in the
promissory note (Levy Hermanos Inc. vs. Lazaro Blas
Gervaci, GR No. 46306, October 27, 1939).
The law is aimed at those sales where the price is
payable in several installments as such generally
consist in relatively small amounts, constituting a
great temptation for improvident purchasers to buy
beyond their means. There is no such temptation
where the price is to be paid in cash or partly in
cash and partly in one term for in the latter case,
partial payments are not so small as to place
purchasers off their guard and delude them to
miscalculation of their ability to pay (Ibid).
SELLERS REMEDIES IN CASE OF BUYERS
DEFAULT
1. ACTION FOR SPECIFIC PERFORMANCE
Exact fulfillment of the obligation, should the
vendee fail to pay.
GENERAL RULE
He can no longer seek for rescission or
foreclosure of the chattel mortgage (Vertical
Barring Rule).
EXCEPTION
Even if he had chosen specific performance,
but the same has become impossible, the
seller may still choose rescission pursuant to
the provisions of Art. 1191 of the Civil Code
(Philippine Law on Sales, Villanueva, 2004ed).
Note: The vendor who has chosen this
remedy is NOT limited to the proceeds of the
sale of the mortgaged goods. He may still
recover from the purchaser the unpaid
balance of the price, if any (Tajanlangit v. Southern
Motors, Inc., GR No. 10789, May 28, 1957).
2. RESCISSION
Cancel the sale, should the vendees failure
to pay cover two or more installments.
The vendee can demand the return of

payment already made unless there is a
stipulation about forfeiture (Art 1486,
NCC).
It was also held that by this act, the

vendor exercised its option to cancel the
contract of sale, barring it from exacting
payment of the balance of the purchase
price (Nonato vs. Intermediate Appellate Court, GR
No. L -67181, November 22, 1985).
3. FORECLOSURE
Foreclose the chattel mortgage on the thing
sold, should the vendees failure to pay cover
2 or more installments.
The vendor is NOT obliged to return to

t he vendee t he amount of t he
installments already paid should there be
an agreement to that effect. But he shall
have NO further action against the
vendee for the recovery of any unpaid
balance of the price remaining after the
foreclosure and actual sale of the
mortgaged chattel, and any agreement to
the contrary is VOID (Zayas, Jr. v. Luneta
Motor Company, GR No. L -30583, October 23,
1982).
Nei ther can the vendor after the

foreclosure of the chattel mortgage
proceed against the guarantor (Cruz v.
Filipinas Investment, GR No. 24772, May 27,
1968).
NOTE: The three remedies are ALTERNATIVE
and are subject to the VERTICAL/HORIZONTAL
BARRING RULE. The Vertical Barring Rule
generally states that recourse to any of the
remedies shall bar the vendor from availing of the
OTHER two, i.e.: recourse to #1 bars recourse to
#2 or #3 (up/down).
The Horizontal Barring Rule applies only to
remedies #2 and #3, wherein rescission or
Special Laws
foreclosure bars the vendor from FURTHER
recovering the balance of the purchase price.
However, recovery of property through a replevin
case preparatory to foreclosure will NOT bar the
other remedies if there was NO actual foreclosure
(Reviewer on Commercial Law, Sundiang & Aquino, 2006ed). If
seller-mortgagee opts to exercise alternative #1,
he shall be deemed to have waived his right as a
mortgagee but may still levy on the mortgaged
property (Ibid).
RECOVERY OF DEFI CI ENCY AFTER
FORECLOSURE
1. In case there is no other security, actual
foreclosure BARS recovery of any deficiency.
Reason: To prevent mortgagees from seizing
the mortgaged property, buyi ng i t at
foreclosure sale for a low price and then
bringing suit against mortgagor for deficiency
judgment. The almost invariable result of this
procedure was that the mortgagor found
himself minus the property and still owing
practically the full amount of his original
indebtedness (Bachrach Motors Co. v. Milan, GR No.
42256, April 25, 1935).
2. In case there is an additional security other
than the chattel mortgage, e.g. real property
mortgage or chattel mortgage not covered by
the Recto Law:
a. Foreclosure of additional security does
NOT bar recovery of deficiency because
the seller-mortgagee is in effect availing of
the remedy of exacting fulfillment of the
obligation rather than foreclosure of
mortgage (Reviewer on Commercial Law, Sundiang
and Aquino, 2006ed).
b. 1
st
foreclosure on the main chattel
mortgage covered by the Recto Law
PROHIBITS 2
nd
forecl osure on the
additional security (Cruz v. Filipinas Investment,
GR No. L-24772, May 27, 1968; Pascual v.
Universal Motors, GR No. L-27862, November 20,
1974).
Maceda Law/Realty Installment
Buyer Protection Act (RIBPA)
(RA 6552)
Maceda Law/Realty Installment Buyer Protection Act
PURPOSE
To protect buyers of real estate on installment
payments against onerous and oppressive
conditions (Sec. 2).
APPLICABILITY
In all transactions or contracts involving sale or
financing of real estate on installment payments
including residential condominium apartments but
EXCLUDING industrial lots, commercial buildings
and sales to tenants under Comprehensive
Agrarian Reform Law (CARL).
Note: This Act recognizes the vendors right to
cancel the sale upon the buyers default in case of
sales on installments under CARL.
RIGHTS OF A BUYER IN CASE OF DEFAULT
O F P AY M E N T O F S U C C E E D I N G
INSTALLMENTS:
A. WHERE BUYER HAS PAID AT LEAST 2
YEARS OF INSTALLMENT
a. To pay, without additional interest, the
unpaid installments due within the total
grace period earned by him fixed at the
rate of 1 month grace period for every 1
year of installment payments made.
This right shall be exercised ONLY

once in every 5 years of the life of the
contract and its extensions, if any.
b. If the contract is cancelled, the seller shall
refund to the buyer the cash surrender
value of the payments on the property
equivalent to 50% of the total payments
made and, after 5 years of installments,
an additional 5% every year but NOT to
exceed 90% of the total payments made
Actual cancellation of contract shall

take place:
a. AFTER 30 days from receipt by
buyer of the notice of cancellation
OR the demand for rescission of
the contract by a notarial act AND
b. upon FULL payment of the cash
surrender value to the buyer.
c. To sell his right or to assign the same or to
reinstate the contract by updating the
account during the grace period and
before actual cancellation of the contract
(Sec. 5);
d. To pay in advance any unpaid installment
anytime without interest and to have such
full payment of the purchase price
annotated in the certificate of title covering
the property (Sec. 6).
Note: Down payments, deposits or
options on the contract shall be included
in the computation of the total number of
installment payments made.
B. WHERE BUYER HAS PAID LESS THAN 2
YEARS OF INSTALLMENTS
a. To pay, without additional interest, the
unpaid installments due within a grace
period of 60 days from the date the
installment became due.
If buyer fails to pay the installments

due at the expiration of the grace
period, the seller may cancel the
contract AFTER 30 days from receipt
by t he buyer of t he not i ce of
cancel l ati on or the demand for
rescission of the contract by a notarial
act.
b. To sell his right or to assign the same or to
reinstate the contract by updating the
account during the grace period and
before actual cancellation of the contract
(Sec. 8);
c. To pay in advance any unpaid installment
anytime without interest and to have such
full payment of the purchase price
annotated in the certificate of title covering
the property (Sec. 6).
NOTE: Any stipulation in any contract contrary to
provisions of RIBPA shall be NULL and VOID.
Real Estate Mortgage Law (REM)
Real Estate Mortgage Law
PURPOSE
To regulate the sale of property under special
powers inserted in or annexed to a real estate
mortgage (REM), and redemption thereof.
APPLICABILITY
1. If a special power to extrajudicially foreclose
the mortgage is inserted or attached to REM
contract, Act No. 3135 applies.
2. If the REM contract is silent as to the manner
of foreclosing the mortgage, Rule 68 of Rules
of Court applies.
REAL ESTATE MORTGAGE
A contract whereby the debtor secures to the
creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable
property or real rights over immovable property
which obligation shall be satisfied with the
proceeds of the sale of said property or rights in
case the said obligation is not complied with at the
time stipulated.
EFFECTS OF REM
1. Creates a real right It follows the property,
such that i n subsequent transfers by
mortgagor, the transferee must respect the
mortgage. A registered mortgage lien is
considered inseparable from the property
inasmuch as it is a right in rem.
2. Creates merely an encumbrance REM
does not i nvol ve transfer, cessi on or
conveyance of property but only constitutes a
lien. It does NOT give the mortgagee a right
Special Laws
to the possession of property UNLESS it
contains a provision to that effect.
EFFECTS OF INVALIDITY OF MORTGAGE
1. Principal obligation remains valid.
2. Mortgage deed remains as evidence of
personal obligation.
REMEDIES OF MORTGAGEE IN CASE OF
DEFAULT BY THE MORTGAGOR
These remedies are ALTERNATIVE i.e. resort to
one is a waiver of the other remedy.
A. If mortgagor is ALIVE: (CF)
1.Ordinary action for Collection of money;
2.Judicial OR Extrajudicial Foreclosure of
mortgaged property.
B. If mortgagor is DEAD: (WE-JR)
1. Waive the mortgage and claim the entire
debt from the estate of the mortgagor as an
ordinary claim against the estate. (Rule 86, Sec
7, ROC);
2. Judicial foreclosure and claim the deficiency
from the estate (Ibid);
3. Rely on the mortgage and foreclose the
same at anytime within the period of the
statute of limitations without right to claim for
the deficiency (Ibid);
4. Extrajudicial foreclosure under Act 3135
before it is barred by prescription without
right to file a claim for any deficiency (Vda. De
Jacob v. CA, GR No. L-88602, April 6, 1990).
FORECLOSURE
A remedy available to the mortgagee where he
subj ect s t he mort gaged propert y t o t he
satisfaction of the obligation to secure for which
the mortgage was given.
Note: In foreclosure of mortgage, the mortgagee
enforces his lien and does not levy on the
property. Levy is an act of an officer where he sets
apart the judgment debtors property for purposes
of prospective execution sale on a money
judgment.

PROCEDURE FOR EXTRAJUDICIAL
FORECLOSURE SALE OF REM
1. Fi l i ng of application for extraj udi ci al
foreclosure with the Executive Judge through
the Clerk of Court who is also the Ex-officio
Sheriff (A.M. No. 99-10-05-00).
Filing fees shall be paid to the clerk of

court, who shall in turn issue a certificate of
payment and an official receipt.
If the mortgaged properties are located in

different areas, only one filing fee shall be
collected.
Application shall be raffled among all

sheriffs.
2. Venue: place where each of the mortgaged
property is located.
It cannot be held outside the province

where the property is situated.
Should a place within the province be a

subject of stipulation, the sale shall be held
at the stipulated place OR in the municipal
building of the municipality where the
property or part thereof is situated (Sec. 2,
Act 3135).
If the stipulation of the parties as to venue

does NOT contai n restri cti ve words
i ndi cati ng excl usi vi ty of venue, the
stipulated place is considered only as an
additional, not a limiting venue (Langkaan v
UCPB, GR No. L-139437, December 8, 2000).
3. Publication and Posting of Notice
Notice shall be given by POSTING notices

of sale for NOT less than 20 days in at least
3 public places of the municipality or city
where property is situated (Sheriffs Office,
Assessors Office, Register of Deeds). If the
property is worth more than P400.00, such
notice shall also be PUBLISHED once a
week for at least 3 consecutive weeks in a
newspaper of general circulation in the city
or municipality (Sec. 3, Act 3135). The Clerk of
Court must see to it that there has been
compliance with this requirement.
Contents of notice: correct number of the

certificate of title and correct technical
description of the property.
NO personal notice is required because an

extrajudicial foreclosure is an action in rem,
requiring only notice by publication and
posting in order to bind parties interested
(New Sampaguita v. PNB, GR No. L-148753, July 30,
2004).
Failure to post a notice is NOT per se a

ground for invalidating the sale provided
that the notice thereof is duly published in a
newspaper of general circulation (Development
v. Aguirre, GR No. L-144877, September 7, 2001).
The purpose of the written notice required

by law is to remove all uncertainties as to
the sale, its terms and its validity, and to
quiet any doubts that the alienation is not
definitive (Planters v. Garcia, GR No. L-93073,
December 21, 1972).
The object of the notice is to inform the

public of the sale and to secure as many
bidders as possible to get the best price for
the property.
Waiver of publication and notice would be

inconsistent with the intent and letter of the
Act, which would result in converting into a
private sale what ought to be a public
auction (PNB vs. Nepomuceno Productions, Inc., G.R.
No. 139479, December 27, 2002).
Republication in the manner prescribed by

Act No. 3135 is NECESSARY for the
validity of a POSTPONED extrajudicial
foreclosure sale. The absence of such
republication invalidates the foreclosure
sale. (Development v CA, GR No. 110053, October
16, 1995)
EXCEPTION: (CFW)
(a) If the prior notice of auction sale clearly
Contains the rescheduled date of
auction, WON the parties agreed to
such rescheduled date, there is NO
more need for reposting or republication
(Ibid).
(b) If the sale was NOT Finished that day
and it will continue the following the day.
(c) If there is a Waiver.
Note: Parties to the mortgage contract are
NOT precluded from exacting additional
notice requirements.
4. Public Auction Sale
It shall be made between 9:00AM and

4:00PM under the direction of the:
a. Sheriff of the province; or
b. Municipality or auxiliary municipal judge
of the municipality in which the sale has
to be made; or
c. Notary public of said municipality (Sec. 4).
At the sale, the creditor, trustee or any

person authorized to act for the creditor,
may parti ci pate i n the bi ddi ng and
purchase, as any other bidder, unless the
contrary is expressly provided in the
mortgage or trust deed under which the
sale is made (Sec. 5).
NO auction sale shall be held unless there

are at least 2 participating bidders (in case
of second sale, if there is only 1 bidder, the
sale shall proceed).
The inadequacy of price would not nullify

the sale unless the price is so inadequate
so as to shock the conscience of the court.
In fact, the property may be sold for less
than its fair market value precisely because
the lesser the price the easier for the owner
to effect a redemption (Valmonte v. CA, GR No.
41621, February 18, 1999).
If the proceeds of the sale are in excess of

the amount claimed by the mortgagee, the
excess must be turned over to the
mortgagor.
5. Certificate of sale issued by the Clerk of
Court must be approved by the Executive
Judge or in his absence, the Vice-Executive
Judge. No certificate of sale shall be issued in
favor of the highest bidder until all fees shall
have been paid.
Name/s of bidders shall be reported to the

Clerk of Court before issuance of the
certificate of sale (A.M. No. 99-10-05-00).
6. Filing of certificate of sale with the Register
of Deeds who s hal l mak e a br i ef
memorandum on the certificate of title.
In case of redemption, the deed of

redemption shall be filed with the Register
of Deeds, who shal l make a bri ef
memorandum on the certificate of title of
the mortgagor.
In case of non-redemption, the purchaser

shall file with the Register of Deeds, either
a final deed of sale executed by an
authorized person or a sworn statement
attesting to fact of non-redemption, where
the Register of Deeds shall issue a new
certificate of title in favor of the purchaser
AFTER the owners duplicate certificate
shall have been previously delivered and
cancelled (Sec. 63[b], P.D. No. 1529).
7. After the redemption period has expired, the
clerk of court shall archive the records.
RULES ON RECOVERY OF DEFICIENCY
Where the proceeds of the sale are insufficient to
cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the
deficiency from the debtor.
The mortgagee, in extrajudicial foreclosure, has

the right to recover deficiency judgment within
10 years from the time the right of action
accrues. EXCEPTION: When the mortgagor is
not the debtor. The action for the recovery of
such deficiency must be directed against the
debtor.
REDEMPTION
A transaction by which the mortgagor reacquires
or buys back the property which may have passed
under the mortgage or divests the property of the
lien which the mortgagee may have created
Kinds of Redemption:
1. EQUITY OF REDEMPTION right of the
mortgagor in case of judicial foreclosure to
recover the mortgaged property after his
default in the performance of the conditions of
Special Laws
the mortgage but before the confirmation of
the sale of the mortgaged property.
2. RIGHT OF REDEMPTION right of the
mor t gagor i n case of ext r aj udi ci al
foreclosure to redeem the mortgaged
property within a certain period after it was
sold for the satisfaction of the mortgage debt.

EQUITY OF
REDEMPTION
RIGHT OF REDEMPTION
Governing law
Governed by Rule 68
of the Rules of Court
Governed by Section 29 to
31 of Rule 39
Applicability
1. in judicial
foreclosure of
REM; and
2. in extrajudicial
foreclosure of
REM involving a
bank as
mortgagee and a
juridical person
as mortgagor
1. in judicial foreclosure
of REM involving a
bank as mortgagee,
whether the mortgagor
is a natural or juridical
person and;
2. in extrajudicial
foreclosure of REM;
However, no right of
redemption exists if it
involves a bank as
mortgagee and a juridical
person as mortgagor
To whom conferred
Conferred by law
only to the mortgagor
but acquired by
second mortgagee
since his right is
subordinate to the
first mortgagee
Conferred by law to the
mortgagor, his successors-
in-interest or any judgment
creditor of the mortgagor
Period
Can be exercised
within a period of not
less than 90 nor
more than 120 days
from entry of
judgment or even
after foreclosure of
sale but prior to
confirmation
Can be exercised within 1
year from date of
registration of certificate of
sale
When exercised
Can be exercised
after entry of
judgment but before
foreclosure sale AND
after foreclosure sale
but prior to
confirmation of sale
Can be exercised ONLY
after foreclosure sale
Redemption price
Redemption price
depends on the
judgment of the court
as to the amount due
to plaintiff upon
mortgage debt with
interest and other
charges approved by
the court and costs
(Sec. 2, Rule 68, ROC)
Redemption price depends
on the purchase price as
fixed in Sec. 28, Rule 39,
ROC EXCEPT in cases
under Sec. 78, Gen.
Banking Law, the amount
and interest to be paid by
the mortgagor will be the
amount due and rate
stipulated in the mortgage
loan NOT the purchase
price and legal interest
under the ROC
RULES ON RIGHT OF REDEMPTION
1. Period within which to exercise right: One
year from the date of registration of certificate
of sale with the appropriate Registry of Deeds.
Exception: In the case of Ibaan Rural Bank
vs. Court of Appeals (G.R. No. 123817, December
17, 1999), the sheriff placed a 2 year
redemption period in the certificate of sale,
which the bank did not question. It was held
that the silence of the bank meant that it
consented to the 2 year redemption period.
Redemption is liberally interpreted in favor of
the owner of the property.
2. Effect of failure to exercise right: the
purchaser has the absolute right to a writ of
possession.
3. Effect of exercise of right: elimination from
his title thereto of the lien created by the levy
or attachment or judgment or registration of
the mortgage thereon.
4. Where mortgaged property sold to 3
rd

party: transfers only the right to redeem the
property and the right to possess, use and
enjoy the same during the said period (in case
of sale to a 3
rd
person by the mortgagee after
the foreclosure, the mortgagor may redeem it
at the amount of the principal obligation plus
interest until time of actual redemption and not
the purchase price).
5. Where sale NOT registered and made
without the consent of mortgagee: the
mortgagee need not recognize the redemption
made by the 3
rd
party.
6. Where extrajudicial foreclosure effected
with fraud: NULL and VOID ab initio.
REQUISITES FOR A VALID REDEMPTION
1. The redemption must be made within 1 year
from the date of the registration of the
certificate of sale.
2. Payment of the purchase price of the
property plus 1% interest per month together
with the taxes thereon, if any, paid by the
purchaser and the amount of his prior lien, if
any with the same rate of interest computed
from the date of registration of the sale up to
the time of redemption.
3. Written notice of the redemption must be
served on the officer who made the sale and
a duplicate filed with the proper Registry of
Deeds.
4. Tender of payment must be for the full
amount of the purchase price, otherwise, to
allow payment by installments would be to
al l ow t he i ndef i ni t e ext ensi on of t he
redemption period (Estanislao, Jr. vs. Court of
Appeals, GR No. 143687, July 31, 2001).
PURCHASERS RIGHT OF POSSESSION OVER
MORTGAGED REAL PROPERTY SOLD UNDER
ACT NO. 3135
1. During the redemption period:
Purchaser is allowed to take possession of

the foreclosed property upon filing of an ex
parte application and approval of a bond in
the amount equivalent to the use of the
property for a period of 12 months (Sec. 7).
Upon approval of the bond, the court shall

order the issuance of a writ of possession
(Ibid). However, a writ of possession may be
issued in an extrajudicial foreclosure of
REM, only if the debtor is in possession and
no 3
rd
party had intervened (Philippine National
Bank v. CA, GR No. 97995, January21, 1993). Thus,
as a rule, if theres a tenant in possession of
the property and the lease has not yet
expired, a buyer can obtain a writ of
possession against that tenant EXCEPT
when he has actual knowledge of the lease
OR when the lease was annotated on the
title. In such cases, the lease shall be
respected.
The bond is required to protect the rights of

the mortgagor so that he may be indemnified
in case it is shown that the foreclosure sale
was not justified.
Note: The debtor may, in the proceedings in
which possession was requested, not later
than 30 days after the purchaser was given
possession, petition to set aside the sale AND
cancel the writ of possession specifying the
damages suffered by him because the
mortgage was not violated or the sale was not
made in accordance with Act 3135. If the
petition is meritorious, the bond shall be
disposed of in favor of the debtor. Either party
may appeal the order of the judge in
accordance with PD 1529 but the order of
possession shall continue in effect during the
pendency of the appeal (Sec. 8).
2. After the lapse of redemption period:
Mortgagor is divested of his rights to the

mortgaged property and the vendees right of
possession of the property becomes final.
Consolidation of title becomes a matter of
right on the part of purchaser and the
issuance of certificate of title in his favor
becomes ministerial upon the Registry of
Deeds.
To obtain possession, the purchaser may

either ask for a writ of possession or bring an
independent action such as a suit for
ejectment (Javelosa v. CA, GR No. L-124292,
December 10, 1996).
Insolvency Law (IL)
Insolvency Law
PURPOSES
1. To effect an equitable distribution of assets of
an insolvent debtor among his creditors;
2. To benefit the individual debtor in discharging
him from his liabilities and enabling him to
start anew with the property set apart to him
as exempt (Moraza v. Alforque, GR No. L-27944,
May 28, 1974).
Note: Insolvency is primarily governed by the Civil
Code and subsidiarily by the Insolvency Law. For
the Insolvency Law to apply there must be
proceedings in insolvency in the proper RTC. The
law does not apply to all insolvent debtors.
CONCEPTS OF INSOLVENCY
1. A state of inability of a person to pay his debts
at maturity (equity test).
2. The relative condition of a debtors assets and
liabilities that the former, if all made
immediately available, would not be sufficient
to discharge the latter (balance sheet test).
Special Laws
3. The insufficiency of the entire property and
assets of an individual to pay his debts.
REMEDIES OF AN INSOLVENT DEBTOR
UNDER THE INSOLVENCY LAW (SD)
1. To petition the court to Suspend payments of
his debts; or
2. To be Discharged from his debts and liabilities
by voluntary or involuntary insolvency
proceedings (Sec. 1).
SUSPENSION OF
PAYMENT
INSOLVENCY
PROCEEDINGS
Applicability
The debtor has
enough assets to meet
his liabilities, but
cannot meet them as
they fall due.
The debtor has more
obligations than assets.
By whom initiated
Always initiated by the
debtor
May be initiated by
creditors or other
persons in which case it
is involuntary or by the
debtor himself in
voluntary proceedings
Purpose
To suspend or delay
payment of debts in
order to provide the
debtor a given period
to convert some of his
properties to cash.
To compel presentment
of all debts, whether due
or not, and to secure a
complete discharge from
such debts
Amount of Debt
The amount of
indebtedness is not
affected, only the time
for paying them is
postponed.
The creditors usually
receive less than what
they are entitled to, or
some creditors may not
even receive anything
Number of Creditors
The number of
creditors is immaterial
In case of involuntary
insolvency, 3 or more
creditors are required
A. SUSPENSION OF PAYMENTS
A remedy available to the debtor who,
possessing sufficient property to cover all his
debts foresees the impossibility of meeting
them when they respectively fall due, and,
therefore, presents a proposal to pay his
obligations on dates later than due dates.
Basis: The probability of the debtors inability
to meet his obligations when they respectively
fall due, despite the fact that he has sufficient
assets to cover all his liabilities.
Not e: Suspensi on of payment s i s
i nconsi st ent wi t h i nsol vency. When
suspension of payments had been judicially
declared, a declaration of insolvency is not
legally possible unless proceedings for
suspension have been terminated. The
condition of suspension of payments is in law
incompatible with that of simultaneous
bankruptcy (Decision of Supreme Court of Spain,
August 4, 1989).
When suspensive effect commences
Upon the filing of the petition
Who may file the petition:
1. Individual debtor; or
2. Corporation, Partnership, or Association
debtor (C.P.A.)
INDIVIDUAL C.P.A.
Governing law
Act No.1956
Act No.
1956
PD 902-A
Jurisdiction
RTC (Act No.
1956)
RTC (Act
No. 1956)
RTC (R.A. No. 8799)
Grounds
Debtor has
sufficient
property but
foresees the
impossibility
of meeting
them when
they
respectively
fall due
C.P.A.
debtor has
sufficient
property
but
foresees
the
impossibili
ty of
meeting
them
when they
fall due
a.C.P.A. which
possesses
sufficient
property to cover
all its debts but
foresees the
impossibility of
meeting them
when they
respectively fall
due; OR
b.C.P.A. has no
sufficient assets
to cover its
liabilities but is
under
management of
a Rehabilitation
Receiver or
Management
Committee (Sec
5[d], P.D.902-A).
STEPS IN SUSPENSION OF PAYMENTS:
(FIP-MAO-I)
1. Filing of the petition by the debtor (Sec. 2);
The petition is to be filed by a debtor
(a) possessing sufficient property to
cover all his debts, (b) foreseeing the
impossibility of meeting them when
they respectively fall due, and (c)
petitioning that he be declared in the
state of suspension of payments
It must include as annex (a) a
statement of assets and liabilities, (b)
a proposed agreement with creditors,
(c) a verified inventory of assets with
its value, location and encumbrances,
and (d) a verified and detailed
schedule of debts, amounts and due
dates with list of creditors (Sec. 2).
Effects of filing the petition: (DPE)
a. No Disposition in any manner of his
property may be made by the
petitioner except insofar as concerns
the ordinary operations of commerce
or of industry in which he is engaged
(Sec. 3 par. 2);
b. No Payment may be made by
petitioner except in the ordinary
course of his business or industry;
c. Upon request to the court, all pending
Executions against the debtor shall
be suspended except execution
a g a i n s t p r o p e r t y e s p e c i a l l y
mortgaged (Sec. 6).
Note: The rule is different with
respect to secured creditors (i.e.,
mortgagees) of corporations under
PD No. 902-A. All claims are now
suspended including the claims of
secured creditors. Thus even
foreclosures are suspended (BPI v.
CA, GR No. 97178, January 10, 1994).
2. Issuance by the court of an order calling a
meeting of creditors (Sec. 3);
The court order is issued upon the
filing of the petition and is for the
purpose of calling a meeting of
creditors who are in the schedule;
Creditors who are NOT affected by
order of suspension of payments:
a. Those having claims for personal
labor, maintenance, expenses of the
last illness and funeral of wife or child
of debtor, incurred during the 60 days
immediately preceding the filing of
the petition; and
b. Those having legal or contractual
mortgages (Sec. 9).
Onl y credi t ors i ncl uded i n t he
schedule filed by the debtor shall be
cited to appear and take part in the
meeti ng of credi tors. They are
required to bring proof of their
respective claims; otherwise, they are
not allowed to participate (Sec.5).
3. Publication of the order and service of
summons (Sec. 4).
4. Meeting of creditors for the consideration
of the debtors proposition;
To hold a valid meeting, the creditors
representing at least 3/5 of the
liabilities of the debtor must be present
(Sec. 8).
5. Approval by the creditors of the debtors
proposition (Sec. 8);
A majority vote shall rule. To obtain a
majority vote, it is necessary that:
a. at least 2/3 of the quorum must
vote on the same proposition;
and
b. the claims represented by said
2/3 amount to at least 3/5 of the
total liabilities of the debtor (Sec.
8[e]).
Note: Also called the Double Majority
Rule.
To illustrate: The proposal is for payment
of debt in 2 years. Assuming there are 10
creditors, and the borrower owes them a
total of P1M. There should be 2/3, so at
least 7 creditors must agree to that, and
those who agree must represent at least
3/5 of the entire debt, meaning P600k.
6. Objections, if any, to the decision which
must be made within 10 days following
the meeting (Sec. 11); and
Grounds for objection: (DCC)
a. Defects in the call for the meeting, in
the holding thereof, and in the
deliberations which prejudiced the
rights of the creditors;
b. Fraudulent Connivance between one
or more creditors and the debtor to
vote i n favor of the proposed
agreement; and
c. Fraudulent Conveyance of claims for
the purpose of obtaining a majority
(Sec. 12).
7. Issuance of court order directing that the
agreement be carried out in case the
decision is declared valid, or when no
objection to said decision has been
presented.
Special Laws
When petition for suspension of payments
deemed REJECTED (Sec. 10):
a. When t he number of c r edi t or s
representing at least three-fifths of the
liabilities does NOT attend (Sec. 8 and 10);
or
b. When the two majorities required are not
in favor of the proposed agreement.
If the decision of the meeting be
unf avor abl e t o t he pr oposed
agreement or if no decision is had in
default of such number or of such
majorities, the proceeding shall be
terminated without recourse. In such
case, the parties concerned shall be at
liberty to enforce the rights which
correspond to them (Sec. 11).
SUSPENSION OF PAYMENTS UNDER:
INSOLVENCY LAW PD 902-A
Debtor
Applies to either
individual or C.P.A.
debtors
Applies ONLY to
C.P.A. debtors
Coverage
Suspensive effect
covers unsecured
creditors ONLY, and
not secured creditors
Suspensive effect
covers secured and
unsecured creditors
Period of Suspension
Absent any
agreement among
creditors, automatic
stay expire after 3
months
No time limit as long
as C.P.A. debtor is
under management
committee/
rehabilitation receiver
Approval of Creditors
Agreement is subject
to qualifying majority
votes
No need to obtain
approval of creditors
B. INSOLVENCY PROCEEDINGS
1. Voluntary Insolvency the state of a
debtor who, having debts exceeding
P1,000.00, cannot discharge all of them
with all of his existing assets and who as
a consequence voluntarily goes to court
to have himself declared as an insolvent
so that his assets may be equitably
distributed among his creditors.
2. Involuntary Insolvency the state to
which a debtor may be placed by the
petition of 3 or more creditors, none of
whom became creditor by assignment
within 30 days prior to filing of petition
and whose aggregate credit is not less
t han P1, 000. 00, because of hi s
commission of one or more acts of
insolvency set forth in Sec. 20.
VOLUNTARY
INSOLVENCY
INVOLUNTARY
INSOLVENCY
Filed by whom
Filed by the
debtor
Filed by 3 or more
creditors
Number of creditors
Only one creditor
is required
3 or more creditors are
required
Requirements
No requirement
for creditors
Requirements for
creditors:
a. Residents of the
Philippines;
b. their credits or demand
must have accrued in
the Philippines; and
c. must not have been a
creditor by assignment
within 30 days prior to
the filing of the petition
Venue
Place where he
has resided 6
mos. prior to the
filing of petition
Place where the debtor
has residence or has his
principal place of business
Acts of insolvency
No need for the
commission of
any of the acts of
insolvency
Debtor must have
committed any of the acts
of insolvency
Amount of indebtedness
Amount of
indebtedness
must exceed
P1,000
Amount of indebtedness
must not be less than
P1,000
When considered insolvent
Debtor deemed
insolvent through
an order of
adjudication after
filing of the
petition;
adjudication may
be granted ex
parte
Debtor considered
insolvent upon the
issuance by the court of
an order after due hearing
declaring him insolvent;
adjudication granted only
after hearing
Bond
Bond is not
required
Bond is required
Voluntary Insolvency
STEPS IN VOLUNTARY INSOLVENCY:
(FIP-MC-LCD-OA)
1. Filing of the petition by the debtor praying for
the declaration of insolvency (Sec. 14);
2. Issuance of an order of adjudication declaring
the petitioner insolvent (Sec. 18);
3. Publication and service of order (Sec. 19);
4. Meeting of the creditors to elect the assignee
in insolvency (Sec. 30);
5. Conveyance of debtors property by the clerk
of court to the assignee (Sec. 32);
6. Liquidation of the debtors assets and
payment of his debts (Sec.33);
7. Composition, if agreed upon (Sec. 63);
8. Discharge of the debtor on his application
(Sec. 64), except a corporation (Sec. 52);
9. Objection, if any, to the discharge (Sec. 66); and
10. Appeal to the Supreme Court in certain cases
(Sec. 62).
Requi si t es of Pet i t i on f or Vol unt ar y
Insolvency:
The petition, which must be verified (Sec. 17) is to
be filed:
1. By an insolvent debtor;
2. Owing debts exceeding in amount the sum of
P1,000.00;
3. In the Regional Trial court of the province or
city in which he has resided for six months
next preceding the filing of such petition, and
4. Setting forth in his petition the following:
a. His place of residence;
b. The period of his residence therein
immediately prior to filing said petition;
c. His inability to pay all his debts in full;
d. His willingness to surrender all his
property, estate, and effects not exempt
from execution for the benefit of his
creditors; and
e. An application to be adjudged an
insolvent (Sec. 14).
EFFECT OF FILING OF PETITION
It ipso facto takes away and deprives the
petitioner of the right to do or commit any act of
preference as to creditor, pending the final
adjudication (Phil. Trust Co. v. National Bank, GR NO
16483, December 7, 1921).
EFFECT OF COURT ORDER DECLARING
DEBTOR INSOLVENT
1. All the assets of the debtor not exempt from
execution are taken possession of by the
sheriff until the appointment of a receiver or
assignee;
2. The payment to the debtor of any debts due
to him and the delivery to the debtor or to any
person for him of any property belonging to
him, and the transfer of any property by him
are forbidden;
3. All civil proceedings pending against the
insolvent debtor shall be stayed; and
4. Mortgages or pledges, attachments or
executions on property of the debtor duly
recorded and not dissolved are not affected
by the order (Sec. 59).
Involuntary Insolvency
STEPS IN INVOLUNTARY INSOLVENCY:
(FISA-HIP-MC-LCD-OA)
1. Filing of the petition by three or more creditors
(Sec. 20);
2. Issuance of order requiring the debtor to show
cause why he should not be adjudged
insolvent (Sec. 21);
3. Service of order to show cause (Sec 22);
4. Filing of Answer or motion to dismiss (Sec. 23);
5. Hearing of the case (Sec. 24);
6. Issuance of order or decision adjudging debtor
insolvent (Sec. 24);
7. Publication and service of order (Sec. 25);
8. Meeting of creditors for election of an assignee
in insolvency (Sec. 30);
9. Conveyance of debtors property by clerk of
court to the assignee (Sec. 32);
10. Liquidation of assets and payment of debts
(Sec. 33);
11. Composition, if agreed upon (Sec. 63);
12. Discharge of the debtor on his application (Sec.
64), except a corporation (Sec. 52);
13. Objection, if any, to the discharge (Sec. 66); and
14. Appeal to the Supreme Court in certain cases
(Sec. 62).
Special Laws
Who may petition for involuntary insolvency:
They must possess two things:
1. Qualifications required by the Insolvency Law;
and
2. Credits must be those contemplated by the
Insolvency Law.
Requi si t es of Pet i t i on f or I nvol unt ary
Insolvency:
The petition is to be filed by:
1. Three or more creditors;
2. None of whom has become such a creditor by
assignment, within thirty days prior to the filing
of said petition;
3. Residents of the Philippines;
Resident corporations must be joined by
at least 2 residents in presenting the
petition to the insolvency court (State
Investment House, Inc. vs. Citibank, N.A., GR No.
79926-27, October 17, 1991).
4. Whose credits accrued in the Philippines;
5. The total amount of which credits is not less
that P1,000.00; and
6. In the Regional Trial Court of the province or
city in which the debtor resides or has his
principal place of business;
The petition:
1. Must be verified by at least three of the
petitioning creditors;
2. Must set forth one or more acts of
insolvency mentioned in the law; and
3. Must be accompanied by a bond, approved
by the court with at least two sureties, in
such penal sum as the court shall direct (Sec.
20).
Note: An insane, not being qualified to be a
merchant, cannot be declared an insolvent, as
there would be no occasion for the conditions of
insolvency to arise to him. Where the insane,
however, was a merchant before he became
insane, and is allowed by his guardianship court to
continue his business through a guardian, he may
be declared insolvent if the required conditions are
present (Bar Review Materials in Commercial Law, J. Miravite,
2005ed).
ACTS OF INSOLVENCY (MAID FID C
3
AT)
1. Absence from the Philippines to defraud
creditors;
2. Intention to depart from the Philippines to
defraud creditors;
3. Allowing Default judgment in favor of a creditor
to defraud other creditors;
4. Concealment of debtor himself to avoid legal
processes;
5. Concealment or removal of his property to
avoid legal processes;
6. Confession of judgment in favor of any creditor
to defraud other creditors;
7. Allowing his property to be taken under legal
process in preference of a particular creditor to
defraud other creditors;
8. Making conveyance, assignment or transfer of
his property to defraud his creditors;
9. Default of a merchant or tradesman to pay his
current obligations for a period of thirty days
after demand;
10. Failure to pay money on deposit or received in
a fiduciary capacity for a period of 30 days;
11. Insufficiency of property to satisfy an execution
issued against him (Sec. 20); and
12. Transferring his property in contemplation of
insolvency;
EFFECTS OF ADJUDICATION OF INSOLVENCY
(Secs. 18 & 24)
On Actions
1. Suits pending in court:
a. Secured obligations - suspended until
assignee is appointed
b. Unsecured obligations - suspended
except to fix the amount of obligation
c. Forecl osure pendi ng i n court may
continue.
2. Suits not yet filed:
Cannot be filed anymore, but the claims may
be presented to the assignee as soon as he is
appointed.
FORBIDDEN ACTS
1. Payment to the debtor of any debts due him;
2. Delivery to the debtor or to any person for him
any property belonging to him; and
3. Transfer of any property by the debtor;
ASSIGNEE IN INSOLVENCY
A person selected in both voluntary and involuntary
insolvency proceedings either by the creditors or
by the court, to whom an insolvent debtor, by legal
mandate, makes an assignment of his properties
for the benefit of creditors (Comments and Cases on Credit
Transactions, De Leon, H., 2002ed).
Note: The assignee must be a person elected by
majority of the creditors who have proven their
claims, such majority being in number and amount.
CREDITORS NOT ENTITLED TO VOTE IN THE
ELECTION OF ASSIGNEE
1. Those who did not file their claims at least two
days prior to the time appointed for such
election (Sec. 29);
2. Those whose claims are barred by the statute
of limitations;
3. Secured creditors unless they surrender their
security or lien to the sheriff or receiver or
unless they shall first have the value of such
security fixed as provided in Section 59; and
4. Holders of claims for unliquidated damages
arising out of pure tort (Schall v. Comors, 215 U.S.
239).
DATE OF CLEAVAGE
The date when the petition is filed, from which we
count backward or forward, in determining the
effects provided for under the Insolvency Law
(Commercial Law Review, C. Villanueva, 2004ed).
Application:
1. A creditor by assignment of credit made within
30 days from date of cleavage shall be
disqualified as petitioning creditor (Sec. 20);
2. Attachment levied upon within a period of 30
days before the date of cleavage may be set
aside by the assignee (Sec. 32);
3. Judgment on cases filed and decided within 30
days prior to the date of cleavage may be set
aside by the assignee (Sec. 32);
4. Judgments on cases filed before 30 days from
the date of cleavage but decided within 30
days because of confession of judgment or
declaration of default by debtor may be set
aside by action of assignee;
5. Properties acquired after date of cleavage,
after discharge of debtor in good faith shall not
be liable for debts incurred prior to the date of
cleavage;
6. Fraudulent preferences made within 30 days
prior to the date of cleavage may be set-aside
in action brought by assignee.
POWERS OF THE
ASSIGNEE
DUTIES OF THE ASSIGNEE
1. To sue and
possess all
assets and
uncollected
credits of the
debtor;
2. To sell at
auction said
assets;
3. To redeem all
mortgages;
4. To settle all
accounts with
the insolvents
debtors; and
5. To recover
properties
fraudulently
conveyed by
the debtor.
1. To register the assignment
to him of the real estate of
the debtor;
2. To inventory the property;
3. To collect all assets;
4. To convert all assets to
cash;
5. To account for money
received and paid out;
6. To distribute the dividends
as he may be required.
7. To petition the court to
allow the private sale of
the debtors property if it
appears that it is for the
best interest of the estate;
and
8. To file final account within
1 year from date of order
of adjudication.
EFFECTS OF ASSIGNMENT
1. The assignee takes the property in the plight
and conditions that the insolvent held it.
2. Upon appointment, the legal title to all the
property of the insolvent is vested in the
assignee and the control of the property is
vested in the court.
3. All actions to recover all the estate, debts and
effects of the insolvent shall be brought by the
assignee and not by the creditors.
4. The assignment shall---
a. Dissolve any attachment levied within 30
d a y s i m m e d i a t e l y p r i o r t h e
c o mme n c e me n t o f i n s o l v e n c y
proceedings;
b. Vacate and set aside judgment entered in
any action commenced within 30 days
immediately prior to the commencement
of insolvency proceedings;
c. Vacate and set aside any execution issued
thereon; and
d. Vacate and set aside any judgment
entered by default or consent of the debtor
within 30 days prior to the commencement
of insolvency proceedings.
Special Laws
PROPERTIES OF
INSOLVENT
THAT PASS TO
THE ASSIGNEE
PROPERTIES OF
INSOLVENT THAT DO NOT
PASS TO THE ASSIGNEE
1. All real and
personal
property, estate
and effects of
the debtor
including all
deeds, books
and papers in
relation
thereto;
2. Properties
fraudulently
conveyed;
3. Right of action
for damages to
real property;
4. The undivided
share or
interest of the
insolvent
debtor in
property held
under co-
ownership;
5. Choses in
action as well
as corporeal
property
ordinarily pass
to the assignee
1. Property exempt from
execution;
2. Property held in trust;
3. Property of the conjugal
partnership or absolute
community so long as
said partnership or
community exists except
insofar as the insolvent
debtors obligations have
redounded to the benefit
of the former;
4. Property over which a
mortgage or pledge exists
unless the creditor
surrenders his security or
lien;
5. After-acquired property
except fruits and income
of property owned by the
debtor and which had
passed to the assignee in
insolvency;
6. Non-leviable assets like a
life insurance policy which
does not have any cash
surrender value;
7. Right of action for tort
which is purely personal
in nature
DOUBLE INDEMNITY AGAINST EMBEZZLER
OF PROPERTY
Any person who embezzles or disposes of the
property of the debtor knowing that insolvency
proceeding have commenced or has reason to
believe that they will be filed, shall be liable for
double the value of the property.
DIVIDEND IN INSOLVENCY
A parcel of the fund arising from the assets of the
estate, rightfully allotted to a creditor entitled to
share in the fund whether in the same proportion
with other creditors or in a different proportion (2
A.F. Agbayani) and it is paid by the assignee only
upon order of the court (Sec. 43, 44).
ORDER OF DISTRIBUTION
1. Equitable claims under section 48 such as:
a. Paraphernal property belonging to the wife
of the insolvent;
b. Property held by the insolvent on deposit,
administration, lease or usufruct;
c. Merchandise held by the debtor on
commission;
d. Negotiable instruments for collection or
remittance;
e. Money held by the debtor for remittance;
f. Amounts due the insolvent for sales or
merchandise on commission;
g. Merchandise bought by the insolvent on
credit where no delivery is made or where
the right of ownership or possession has
been retained by the seller; and
h. Goods or chattels wrongfully taken by the
insolvent or the amount of the value
thereof;
2. Preferred claims with respect to specific
movable property and specific immovable
property under Art. 2241 and 2242 of the Civil
Code, respectively;
3. Preferred claims as to unencumbered property
of the debtor which shall be paid in the order
named in Art. 2244;
4. Common or ordinary credits which shall be
paid pro rata regardless of dates under Art.
2245.
PARTNERSHIP
WHEN PARTNERSHIP MAY BE DECLARED
INSOLVENT
A partnership may be adjudged insolvent during
the continuation of the partnership business or
after its dissolution but before the final settlement
thereof (Sec. 51).
WHO MAY PETITION FOR DECLARATION OF
INSOLVENCY OF A PARTNERSHIP (Sec. 51)
1. In case of voluntary insolvency by all the
partners or any of them.
2. In case of involuntary insolvency by one
or more of the partners or three or more
creditors of the partnership.
PROPERTIES INCLUDED IN THE INSOLVENCY
PROCEEDINGS
1. All the property of the partnership; and
2. All the separate property of each of the
partners EXCEPT:
a. Separate properties of limited partners
(Art. 1843, Civil Code); and
b. Properties which are exempt by law (Sec.
51).
EFFECTS OF FILING OF PETITION
1. The proceedings are deemed to commence
against the partners at the same time;
2. Upon order of the court, all the properties of
the partnership and also all the separate
property of each partner, if they are liable,
shall be taken;
3. All creditors of the partnership and the
separate creditors of each partner shall be
allowed to prove their respective claims;
4. The assignee shall be chosen by the creditors
of the partnership; and
5. Pending insolvency proceedings by or against
any partnership, person or corporation no
statute of limitations shall run upon a claim of
or against the estate of the debtor.
EFFECT OF INSOLVENCY OF PARTNERSHIP
OR ANY PARTNER
Ri ght of partnershi p credi tors a

partnership may be declared insolvent
notwithstanding the solvency of the partners
constituting the same.
Winding up of partnership affairs a

partnership is not necessarily insolvent
because one of its members is insolvent. The
solvent members are bound to wind up the
partnership affairs.
Under the law, a partnership is automatically

dissolved by the insolvency of any partner or
of the partnership (Art 1830, Civil Code).
CORPORATION
WHO MAY PETITION FOR DECLARATION OF
INSOLVENCY OF A CORPORATION
1. In case of voluntary insolvency the
petition may be filed by any officer duly
authorized by the vote of the board of directors
or trustees at a meeting especially called for
that purpose, or by assent in writing of a
majority of the directors or trustees, as the
case may be (Sec. 52).
2. In case of involuntary insolvency
a. First view Upon a creditors petition
made and presented in the manner
provided in respect to debtors.
b. Second view The petition must be filed
by at l east three credi tors of the
corporation under the circumstances
mentioned by law (Comments and Cases on Credit
Transactions, De Leon, 2002ed).
EFFECT WHEN CORPORATION DECLARED
INSOLVENT
As provided in Section 52, its property and assets
shall be distributed to the creditors but no
discharge shall be granted to any corporation.
WHEN PROVISIONS OF ACT NOT APPLICABLE
Provisions of the Act not applicable to corporations
engaged principally in the banking business or any
other corporation to which there is any special
provision of law for its liquidation in case of
insolvency (Sec. 52).
PROOF OF DEBTS
DEBTS THAT MAY
BE PROVED
DEBTS THAT MAY NOT
BE PROVED
1. Those due and
payable at the
time of
adjudication;
2. Those existing but
not yet due;
3. Debts arising from
guaranty, surety,
etc. of debtor;
4. Contingent debts;
5. Debts arising from
guaranty or
others.
1. Prescribed claims;
2. Unliquidated claims;
3. Claims previously given
fraudulent preference by
debtor;
4. Secured claims where
the creditors chose to
pursue security;
5. Attachments levied,
judgments entered and
exceptions issued more
than one month
preceding the petition
CONTINGENT CLAIM
A claim in which liability depends on some future
event that may or may not happen and which
makes it uncertain whether there will be any
liability.
Note: Af t er t he cl ose of t he i nsol vency
proceedings and the happening of the contingency,
the creditor may pursue any available remedy for
the collection of his claim.
ALTERNATI VE RI GHTS OF SECURED
CREDITOR: (WAM)
1. To Maintain his rights under his security or lien
and ignore the insolvency proceedings, in
which case it is the duty of the assignee to
surrender to him the property encumbered;
2. To Waive his right under the security or lien
and thereby share in the distribution of the
assets of the debtor; or
3. To have the value of the encumbered property
Appraised and then share in the distribution of
the assets of the debtor with respect to the
balance of his credit.
Special Laws
COMPOSITION
A proceeding in insolvency proceedings, which is
voluntary on the part of the debtor and his
creditors, in which a debtor offers to pay his
creditors a certain percentage of their claims in
consideration of his release from liability.
Requisites: (FAD C)
1. Offer must be made after the Filing of the
Schedule of the debtors property and the list
of his creditors;
2. Offer must be Accepted in writing by a majority
of the creditors representing a majority of the
claims which have been allowed;
3. Offer must be made only after the insolvent
Deposits the consideration to be paid to the
creditors;
4. Accepted offer must be Confirmed by the
court.
Effects of confirmation: (DTR
2
)
1. The consideration shall be Distributed as the
judge shall direct.
2. The i nsol vency proceedi ngs shal l be
Terminated.
3. The title to the insolvents estate shall Revest
in him
4. The insolvent shall be released from his debts
(Comments and Cases on Credit Transactions, De Leon,
2002ed).
ACCORD
An agreement between a debtor and a single
creditor for a discharge of the obligation by a part
payment or on different terms (Comments and Cases on
WHEN COURT MAY CONFIRM A COMPOSITION
1. It is for the best interest of the creditors;
2. The debtor has not been guilty of any of the
acts, or of a failure to perform any of the duties
which would create a bar to his discharge; and
3. The offer and its acceptance are in good faith
and have not been made or procured in a
manner forbidden by the Act (Comments and Cases
on Credit Transactions, De Leon, 2002ed).
WHEN CONFIRMATION MAY BE SET ASIDE
Upon application of a party in interest within six
months after the composition has been confirmed,
the court may set aside the confirmation and
reinstate the case if it shall be showed upon a trial
that:
1. That fraud was practiced in the procuring of
such composition; and
2. That the knowledge thereof has come to the
petitioner since the confirmation of such
composition (Sec. 63).
DISCHARGE
The judicial release of the insolvent debtor, both in
voluntary and involuntary insolvency proceedings,
from his debts which were or might be proved in
the insolvency proceedings such that they are no
longer a charge up on him.
Only natural persons may ask for discharge;

corporations cannot ask for discharge (Sec 52).
When granted, takes effect not from its due

date, but from the commencement of the
proceedings in insolvency (44 C.J.S. 387).
Requisites:
1. Compliance with statutory requirements
regarding surrender of his assets for the
benefit of creditors and regarding the rendition
of an account of his assets and liabilities;
2. Application after 3 months from order of
adjudication of insolvency, but not one year
later;
3. Insolvent debtor must not have committed any
of the acts of insolvency preventing discharge.
Effects: (ReD-DOE)
1. It Releases the debtor from all claims, debts,
liabilities and demand set forth in the schedule
or which were or might have been proved
against his estate in insolvency (non-provable
debts whether or not properly scheduled are
not affected);
2. Operates as a Discharge of the insolvent and
future acquisitions but permits mortgages and
other lien creditors to have their satisfaction
out of the mortgage or subject of the lien;
3. Special Defense which may be pledged and
be a complete bar to all suits brought on any
such debts, claims, liabilities or demands;
4. Does not Operate to release any person liable
for the same debt, for or with the debtor, either
as partner, joint contractor, indorser, surety or
otherwise;
5. The certificate of discharge is prima facie
Evidence of the fact of release and the
regularity of such discharge.
Note: Applies to all debts contracted BEFORE
insolvency proceeding EXCEPT: (GF-Co-So-
ADIC)
1. Assessments due to the government
2. Debts due to fraud, embezzlement, and
defalcation by the debtor
3. Solidary debts
4. Alimony
5. Corporate debts
6. Debts not included in the schedule
7. Debts owing to creditors without notice
8. Claims of secured creditors
When Discharge may be Revoked
A discharge in insolvency may be revoked by the
court which granted it on petition of any creditor:
1. Whose debt was proved or provable against
the estate in insolvency, on the ground that the
discharge was fraudulently obtained;
2. Who has discovered facts constituting the
fraud subsequent to the discharge; and
fraudulent transfer
3. The petition is filed within 1 year after the date
of the discharge (Sec. 69).
FRAUDULENT PREFERENCES AND
TRANSFERS
TRANSFER
It includes the sale and every other and different
modes of disposing of or parting with property, or
the possessi on of property, absol utel y or
conditionally, as a payment, pledge, mortgage, gift,
or security (National Bank v. National Herkimer Country
Bank, 225 U.S. 178).
PREFERENTIAL TRANSFER
There is a parting with the insolvents property for
the benefit of the creditor and consequent
diminution of the insolvents estate with the result
that such creditor receives a greater proportion of
his claim than other creditors of the same class
(Chautaugua Citizens State Bank v. Trust Nat. Bank, 157 P.
392).
FRAUDULENT PREFERENCE
Committed when the debtor procures any part of
his property to be attached, sequestered, or seized
on execution or makes any payment, pledge,
mor t gage, assi gnment , t r ansf er, sal e or
conveyance of any part of his property, whether
directly or indirectly, absolutely or conditionally, to
any one under the following circumstances:
1. The debtor is insolvent or in contemplation of
insolvency;
2. The transaction in question is made within 30
days before the filing of a petition by or against
the debtor;
3. It is made with a view to giving preference to
any creditor or person having a claim against
him;
4. The person receiving a benefit thereby has
reasonable cause to believe:
a. That the debtor is insolvent
b. That the transfer is made with a view to
prevent his property from coming to his
assignee in insolvency or to prevent the
same from being distributed ratably
among his creditors or to defeat the object
of or any way hinder the operation of or
evade the provisions of the Insolvency
Law.
Effects:
1. The preference is void.
2. The assignee or receiver may recover the
property or value thereof as assets of the
insolvent debtor (Sec. 70).
Note: The law does not grant a discharge to a
corporate debtor as a consequence of going
through insolvency proceedings (Commercial Law
Review, Villanueva, C., 2004ed).
ACTS CRIMINALLY PUNISHABLE UNDER THE
INSOLVENCY LAW
1. Af t er c ommenc ement of i ns ol v enc y
proceedings:
a. Concealing any part of his estate;
b. Destroying, altering, mutilating or falsifying
any book, deed, document, or writing
relating thereto;
c. Removing the same with intent to prevent
or delay its recovery by the assignee;
d. Making any payment, gift, sale, assignment,
t ransf er or conveyance of propert y
belonging to his estate with like intent;
e. Spending any part thereof in gaming;
f. Concealing from his assignee or omitting
from the schedule any part of his property
with intent to defraud;
g. Failing to disclose to his assignee the fact
that a person has proved a false or fictitious
claim against his estate within one month
after coming to the knowledge or belief
thereof; or
h. Attempting to account for any of his
property by fictitious losses or expenses.
2. Within 3 months before commencement of
insolvency proceedings:
a. Obtaining on credit from any person, any
goods, or chattels, with intent to defraud,
under the false pretense of carrying an
ordinary course of business;
b. Making any pledge or disposition of,
otherwise then by bona fide transactions in
the ordinary course of his trade, with intent
to defraud, any of his goods or chattels
Special Laws
which have been obtained on credit and
remain unpaid for;
c. Suffering loss in any kind of gaming when
such loss is one of the causes determining
t he commencement of i nsol vency
proceedings;
d. Selling at a loss or for less than the current
price any goods bought on credit and still
unpaid for; or
e. Advancing payment to the prejudice of his
creditors.
3. Duri ng proceedi ngs f or suspensi on of
payments:
a. Concealing or destroying any property
belonging to his estate;
b. Dest royi ng, al t eri ng, mut i l at i ng, or
falsifying any book, deed, document, or
writing relating thereto;
c. Making any payment, sale, assignment,
transfer or conveyance of property
belonging to his estate with like intent;
d. Spending any part thereof in gaming;
e. Falsely swearing to the schedule and
inventory with intent to defraud the
creditors; or
f. Violating the injunction issued by the court
under Sec. 3 (Sec. 71).
EFFECT OF DEATH OF INSOLVENT DEBTOR
PENDING INSOLVENCY PROCEEDINGS
1. Deat h occurs AFTER t he order of
adjudication the proceedings shall be
continued and concluded and effect as if he
had lived (Sec. 72).
2. Death occurs BEFORE the order of
adjudication the proceedings shall be
discontinued and claims must be filed in the
proper testate or intestate proceedings.
WHEN PETITION MAY BE DISMISSED
1. Voluntary petition - upon the application for
dismissal of the debtor, if no creditor files
written objections;
2. Creditors petition - upon the application for
dismissal of the petitioning creditors; or
3. By written consent of all creditors filed in
court.
Note: After appointment of an assignee, dismissal
is NOT allowed without the consent of all parties
interested in or affected thereby (Sec. 81).
WHEN APPEAL MAY BE TAKEN TO THE
SUPREME COURT
1. Fr om an or der gr ant i ng or r ef usi ng
adjudication in insolvency and in the latter
case, from the order fixing the amount of cost,
expenses, damages, and attorneys fees
allowed the debtor;
2. From any order allowing or rejecting a
creditors claim when the amount in dispute
exceeds P300.00;
3. From an order allowing or denying a claim for
property not belonging to the insolvent,
presented under Sec. 48;
4. From an order settling an account of an
assignee;
5. From an order against or in favor of setting
apart homestead or other property claimed as
exempt from execution; and
6. From an order granting or refusing a discharge
to the debtor (Sec. 82).
Truth in Lending Act (TILA)
(RA No. 3765)
Truth In Lending Act
PURPOSES
1. To protect a debtor from the effects of
misrepresentation and concealment;
2. To allow him to fully appreciate and evaluate
the real cost of his borrowing;
3. To avoid circumvention of usury laws.
APPLICABILITY
The law applies to creditors who extend loans,
sales in installments, and other credit transactions.
It applies only to cases involving an extension of
credit, and NOT to those in cash basis.
As used in TILA, the term credit means:
1. loan, mortgage, deed of trust, advance or
discount;
2. conditional sales contract;
3. contract to sell or contract of sale of property
or services;
4. rental-purchase contract;
5. contract for hire, bailment or leasing of
property;
6. option, demand, lien, pledge, or other claim
against or for the delivery of property or
money;
7. purchase or acquisition of any credit upon
security of any obligation arising out of any of
the above;
8. any transaction with similar PURPOSE. (Sec. 3)
Ba n k s a n d n o n - b a n k f i n a n c i a l
intermediaries authorized to engage in
quasi-banking functions are required to
strictly adhere to the provisions of the
TILA and shall make the true and effective
cost of borrowing an integral part of every
loan contract (Consolidated Bank v. CA, GR No.
L-92660, July 14, 1995).
CREDITOR
Any person engaged in the business of extending
credit including any person who, as a regular
business practice, makes loans, or sells or rents
property or services on a time, credit or installment
basis either as a principal or agent who requires as
an incident to the extension of credit, the payment
of a finance charge.
DISCLOSURE REQUIREMENT
The creditor shall furnish the debtor, prior to the
consummation of a loan or sale, a written
statement containing:
1. Cash price;
2. Amounts credited as down payment and/or
trade-in;
3. Difference between the amounts in (1) and (2);
4. Charges not incident to the extension of credit;
5. Total amount to be financed;
6. Finance charge amount to be paid by the
debtor incident to the extension of credit such
as interest, fees, service charges, collection
charges, discounts and such other charges
incident to the extension of credit;
7. Percentage of the finance charge to amount
financed (Sec. 4).
EFFECTS OF NON-DISCLOSURE
1. The validity or enforceability of the contract or
transaction is not affected (DBP v. Arcilla, Jr., GR
No. 161397, June 30, 2005).
2. The creditor is liable to the debtor for P100 or
an amount equal to twice the finance charge,
whichever is greater, plus attorneys fees,
provided that liability shall not exceed P2,000
on any credit transaction.
Action to recover penalty must be brought
within one year from the date of violation.
No punishment or penalty provided by the
TILA shal l appl y to the Phi l i ppi ne
Government or any agency or any political
subdivision thereof (Sec. 6).
3. The creditor can be held criminally liable.
The seller/ lender, if convicted, may be
imposed a fine ranging from P1,000.00 to
P 5,000.00 or imprisoned from 6 months
to 1 year or both.
4. Finance charges may not be paid.
5. Debtor may recover any interest payment
made (Sec. 6).
INTEREST
The lifting of ceiling on interest rates (CB Circular
905) does not give lender carte blanche authority
to raise interest rates. Rates found to be iniquitous
or unconscionable are void, as if there was no
express contract thereon (New Sampaguita Builders
Construction, Inc. v. PNB, GR No. 148753, 2004).
Special Laws
San Beda College of Law
BIBLIOGRAPHY
Agbayani, A. Commentaries and Jurisprudence on the Commercial Laws of the Philippines. Vols. 1 & 4.
Quezon City: AFA Publications, 1993.
Agbayani, A. Commercial Law Reviewer. Vols. 1 & 2. Quezon City: AFA Publications, 1988.
Agpalo, R. Trademarks, Infringement and Unfair Competition. Manila: Rex Bookstore,
Amador, V. Copyright under the IPC. Manila: Rex Bookstore, 1999.
Amador, V. Patents under the IPC. Manila: Rex Bookstore, 1999.
Amador, V. Trademarks under the IPC. Manila: Rex Bookstore, 1999.
Aquino, R. Intellectual Property Law: Comments and Annotations. Quezon City: Central Professional
Books, 2003.
Aquino, T. Notes and Cases on Banks, Negotiable Instruments and Other Commercial Documents. Manila:
Rex Bookstore, 2003.
Aquino, T and Hernando, R.P. Notes and Cases on the Law on Transportation and Public Utilities. Manila:
Rex Bookstore, 2004.
Aquino, T. Philippine Corporate Law Compedium. Manila: Rex Bookstore, 2006.
Campos, Jr., J. and Lopez-Campos, M. Negotiable Instruments Law. Quezon City: Central Professional
Books, Inc., 1994.
Campos, M. Insurance. Quezon City: UP Law Center, 1983.
Catindig, T. Notes on Selected Commercial Laws: A Guide for Bar Reviewees. Pasig City: Verde
Productions, 2003.
De Leon, H. Comments and Cases on Credit Transactions. Manila: Rex Bookstore, 2006.
De Leon, H. Comments and Cases on Sales and Lease. Manila: Rex Bookstore, 2005.
De Leon, H. The Corporation Code of the Philippines Annotated. Manila: Rex Bookstore, 2006
De Leon, H. The Insurance Code of the Philippines. Manila: Rex Bookstore, 2006.
De Leon, H. Laws on Negotiable Instruments. Manila: Rex Bookstore, 2004.
Guevarra, S. Handbook of Commercial Law. Manila: Atlas, 1959.
Morales, R. The Philippine General Banking Law Annotated. National Publishing Cooperative, Inc., 2004.
Miravite, J. Bar Review Materials in Commercial Law. Quezon City: Rural Bankers Legal Assistance Center,
2007.
Paras, E. Civil Code Annotated. Vol. 5. Manila: Rex Bookstore, 2000.
Perez, H. Reviewer on Insurance, Insolvency and Code of Commerce. Manila: Rex Bookstore, 2000.
Sundiang, J. and Aquino, T. Reviewer on Commercial Law. Manila: Rex Bookstore, 2006.
Villanueva, C. Commercial Law Review. Manila: Rex Bookstore, 2007.
Villanueva, C. Philippine Corporate Law. Manila: Rex Bookstore, 2001.
Villanueva, C. Philippine Law on Sales. Manila: Rex Bookstore, 2004.
Viray, A. Handbook on Bank Deposits. Manila: Rex Bookstore, 2001.
Vitug, J. Pandect of Commercial Laws and Jurisprudence, Vols. 1 & 2. Quezon City: Rex Printing Co., Inc.,
2006.
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TABLE OF CONTENTS

A mere advising or notifying bank is not liable

It is ONLY when the instrument in question is

Must either present it for acceptance or

A bill may be presented for acceptance

Where a party receives notice of

Bill is payable after sight or

Bill expressly stipulates

Bill is drawn payable elsewhere

By or on behalf of any party

Any person found

If there are two or more

If drawee is dead, presentment

If dead, to his personal

If partners, notice to any

If jointly liable, notice must

If payable on demand, the bill

If living in the SAME AREA,

if none, any place

if none, at his residence

when the drawer

when the delay is

Even after the

drawee is dead, absconded, a

after the exercise of due

although presentment was

after the exercise of due

drawer and drawee is the

drawee is a fictitious person

drawer is the person to

drawer has no right to

drawer has countermanded

when the drawee is a

indorser is the person to

when the instrument was

The release of the principal debtor must be

Tender of Payment means the act by

In the second and third cases, the

The beneficiary acquires NO vested right

The right may be exercised in the manner

The right ceases upon the insureds

The beneficiary acquires a vested right in

If the i nsured refuses to pay the

A person has an insurable interest in his

The insured can make it payable to

Upon the insureds death, the beneficiary

It is assumed that the insured would not

Wher e a per son names hi msel f

Sec. 10 specifies the person in whose life

A cr edi t or may name hi msel f as

Except Sec. 10 (par. a) of the ICP, an

BUT if the debtor is the insured and the

A person may take a policy on the life of

A business firm can take out a policy on

Expectancy to be insurable must be

The rule on subrogation by the insurer to

Whoever takes the property of the

As to whether a person has or has no

The right to information of material facts