COMMERCIAL LAW 2021

I. INSURANCE
(Insurance Code of the Philippines, R. A. No. 10607)

A. CONCEPT 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, ICP).

A contract of insurance, to be binding from the date of application, must have been a completed
contract. Thus, it must have all the essential elements of a valid contract as enumerated in Art.
1318 of the NCC:
1. Subject matter in which the insured has an insurable interest;
2. Consideration, which is the premium paid by the insured, for the insurer’s promise to
indemnify the former upon the happening of the event or peril insured against; and
3. Meeting of the minds of the parties.

Doing an insurance business or transacting an insurance business

A person is doing or transacting an insurance business if he performs any of the following:
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, not as a
mere incident to any other legitimate business of a surety;
3. Doing any insurance business like reinsurance and similar acts; and
4. Doing or proposing to do any business equivalent to the above.

NOTE: In the application of the provisions of the Insurance Code, the fact that no profit is
derived from the making of the insurance contracts, 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.

Parties to a contract of insurance

1. Insurer- party who assumes or accepts the risk of loss and undertakes for a consideration
to indemnify the insured on the happening of a specified contingency or event.

2. Insured- person in whose favor the contract is operative and is indemnified.

NOTE: The insured is not always the person to whom the proceeds are paid.

3. Assured/ Beneficiary- a person designated by the terms of the policy to receive the proceeds
of the insurance. He may be the insured or a third party in the contract for whose benefit
the policy is issued and to whom the loss is payable.

Insurer

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Every corporation, partnership, or association duly authorized by the Insurance Commission to
transact insurance business may be an insurer (Sec. 6, ICP).

The term “insurer” no longer includes “individuals” under RA 10607. Hence, an individual natural
person is no longer allowed to be an insurer.

However, it includes the following:

1. Professional reinsurer- any person, partnership, association, or corporation that transacts
solely and exclusively reinsurance business in the Philippines.
2. Mutual Insurance Companies- the law also provides for the procedure for mutualization
of domestic stock life insurance companies. A new provision on RA 10607 is on
demutualization or conversion of mutual insurance companies into stock corporations.
3. Cooperatives are now expressly included in the term “insurer” or “insurance company”.
However, the cooperative must:
a. Have a sufficient capital and asset required under the Insurance Code and the
pertinent regulations issued by the Commission.
b. Have a certificate of authority to operate issued by the Commission which should
be renewed every year.

Persons who may be insured

Anyone except a public enemy may be insured (Sec. 2, ICP).

A public enemy is a nation at war with the Philippines (presupposes existence of international war)
and every citizen or subject of such nation. It does not include mobs, thieves, or robbers.

Effect: Policy is abrogated.

Subject matter of a contract of insurance

Anything having an appreciable pecuniary value, which is subject to loss or deterioration, or of
which one may be deprived so that his pecuniary interest is or may be prejudiced.

Event or peril/risk insured against

It is contingent or unknown event, weather past or future, which may damnify a person having an
insurable interest, or create a liability against him subject to the provisions of Chapter 1 of the
Insurance Code (Sec. 3, ICP).

Consent of spouse NOT necessary

The consent of the spouse is not necessary for the validity of an insurance policy taken out by a
married person on his or her life or that of his or her children (Sec. 3, ICP).

Consent of the person insured is not essential to the validity of the policy
So long as it could be proved that the insured has an insurable interest at the inception of the policy,
the insurance is valid even without such consent (Sec. 10, ICP).

Effect of death of policy’s original owner

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All rights, title, and interest in the policy of insurance taken out by an original owner on the life or
health of the person insured shall automatically vest in the latter upon the death of the original
owner, unless otherwise provided for in the policy (Sec. 3, ICP).

Games of chances cannot be insured

An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized (Sec. 4, ICP).

Void stipulations in an insurance contract

Stipulations in an insurance contract which provides:
1. For the payment of loss whether the person insured has or does not have any insurable
interest in the subject-matter of insurance;
2. That the policy shall be received as proof of such interest;
3. Every policy executed by way of gaming or wagering (Sec. 25, ICP).

B. ELEMENTS OF AN INSURANCE CONTRACT (S P E A R)

1. Scheme to distribute losses- such assumption of risk is part of a general scheme to
distribute actual losses among large group or substantial number of persons bearing a
similar risk (Principle of Risk Distribution).

2. Payment of premium- as consideration for the insurer’s promise, the insured makes a
ratable contribution called “premium”, to a general insurance fund.

3. Existence of insurable interest- the insured possesses an interest of some kind susceptible
of pecuniary estimation, known as “insurable interest”.

4. Assumption of risk- the insurer assumes that risk of loss for a consideration.

5. Risk of loss- the insured is subject to a risk of loss through the destruction or impairment
of that interest by the happening of designated peril.

NOTE: The inherent uncertainty of events is normally described in terms of risk. A contract
possessing only the last three elements enumerated (existence of insurable interest; assumption
of risk; risk of loss) above is a risk-shifting device, but NOT a contract of insurance which is
a risk-distributing device.

*Principal Object and Purpose Test- The contract is insurance if the principal object and purpose
is assumption of risk and indemnification of loss and NOT service.

C. CHARACTERISTICS AND NATURE OF INSURANCE

CONTRACTS
Insurance is a risk distributing device

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The device of insurance serves to distribute the risk of economic loss among as many as possible
to those who are subject to the same kind of risk. By paying a pre-determined amount into a general
fund out of which payment will be made for an economic loss of a defined type, each member
contributes to a small degree toward compensation for losses suffered by any member of the group.
This broad sharing of economic risk is the principle of risk-distribution.

Contract of Adhesion or “Fine Print Rule”

Insurance is a contract of adhesion considering that most of the terms of the contract do not result
from mutual negotiations between the parties as they are prescribed by the insurer in printed form
to which the insured may “adhere” if he chooses but which he cannot change. Hence, in case of
doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the
insured.

However, if the terms of the contract are clear, there is no room for interpretation and the courts
are bound to adhere to the insurance contract although the contract may be rather onerous. Courts
cannot make a new contract for the parties where they themselves have employed clear and
unambiguous words.

Aleatory
The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening
of an event which is uncertain, or which is to occur at an indeterminate time (Art. 2010, NCC). In
a sense, however, the contract of insurance is commutative because there is still exchange of
equivalents- the amount paid by the insured is deemed the equivalent of the protection given by
the insurer based on the insurance contract.

Contract of Indemnity for Property/ Investment for Life

The contract of insurance is a contract of indemnity (Principle of Strict Indemnity). It is the basis
of all property insurance. It simply means that 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.

a. Applicable only to property insurance, except creditor insuring the life of his debtor.
b. Life insurance is NOT a contract of indemnity. There is no over insurance in life insurance.
There is over insurance only in property insurance and if this is present, the insurer is only
liable up to the extent of the loss.
c. Insurance contracts are not wagering contracts (Sec. 4, ICP).

Uberrimae Fidae Contracts

The contract of insurance is one of perfect good faith not for the insured alone, but equally so for
the insurer; in fact, it is more so for the latter since its dominant bargaining position carries with it
stricter responsibility.

Insurance policies are traditionally contracts uberrimae fidae, that is, contracts of utmost good
faith. It requires the parties to the contract of insurance to disclose conditions affecting the risk of
which he is aware, or material fact, which the applicant knows, and those, which he ought to know.
This doctrine is essential on account of the fact that the full circumstances of the subject matter of

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insurance are, as a rule, known to the insured only and the insurer, in deciding whether or not to
accept a risk, must rely primarily upon the information supplied to him by the applicant.

Personal contract
The law presumes that the insurer considered the personal qualifications of the insured in
approving the insurance application.

Reciprocal or Bilateral or Synallagmatic

Obligations imposed on both parties: on the part of the insured- payment of premium; on the part
of the insurer- to pay the proceeds to the designated beneficiary upon the happening of the peril.

Voluntary in general and Consensual

Mandatory contract- CMVLI/TPL; Employee’s insurance- SSS/GSIS

Executory and conditional on the part of the insurer but Executed on the part of the insured

D. CLASSES
1. MARINE
Coverage
a. Traditionally, marine insurance includes policies that cover risks connected with
navigation, to which ship, cargo, freightage, profits, or other insurable interest in movable
property, may be exposed during a certain voyage or a fixed period of time. However,
under the present laws, it also covers inland marine insurance (Sec. 101, ICP).

Section 101. Marine Insurance includes:

(a) Insurance against loss of or damage to:

1. Vessel, craft, aircraft, vehicles, goods, freight, cargoes, merchandise, effects,

disbursements, profits, moneys, securities, choses in action, evidences of debts,
valuable papers, bottomry, and respondentia interests and all other kinds of
property and interests therein, in respect to, appertaining to or in connection with
any and all risks or perils of navigation, transit, or transportation, or while being
assembled, packed, crated, baled, compressed or similarly prepared for shipment or
while awaiting shipment, or during any delays, storage, transshipment, or
reshipment incident thereto, including war risks, marine builder’s risks, and all
personal property floater risks.

2. Person or property in connection with or appertaining to a marine, inland marine,

transit or transportation insurance, including liability for loss or damage arising out
of or in connection with the construction, repair, operation, maintenance, or use of
the subject matter of such insurance (but not including life insurance or surety
bonds nor insurance against loss by reason of bodily injury to any person arising
out of ownership, maintenance, or use of automobiles);

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 3. Precious stones, jewels, jewelry, precious metals, whether in course of
transportation or otherwise;

4. Bridge, tunnels, and other instrumentalities of transportation and communication

(excluding buildings, their furniture and furnishings, fixed contents and supplies
held in storage); piers, wharves, docks and ships, and other aids to navigate and
transportation, including dry docks and marine railways, dams, and appurtenant
facilities for the control of waterways.

(b) “Marine protection and indemnity insurance”, meaning insurance against, or against
legal liability of the insured for loss, damage, or expense incident to ownership,
operation, chartering maintenance, use, repair, or construction of any vessel, craft, or
instrumentality in use of ocean or inland waterways, including liability of the insured
for personal injury, illness or death or for loss of or damage to the property of another.

b. 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 ship owner or not. Although he has no control over the vessel, the shipper has
control in the choice of vessel.

Implied warranties in marine insurance

1. That the ship is seaworthy at the inception of the insurance;
2. That the ship will not deviate from the agreed voyage unless deviation is proper;
3. That the ship will not engage in an illegal venture;
4. Warranty of possession of documents of neutrality: that the ship will carry the requisite
document of nationality or neutrality of the ship or cargo where such nationality or
neutrality is expressly warranted;
5. Presence of insurable interest.

Insurable interest in marine insurance

1. Shipowner
a. Over the value of the vessel (even if chartered and the charterer agreed to pay the
shipowner the value of the vessel in case of loss, however, the shipowner can
recover only the amount not recoverable from the charterer (Sec. 102, ICP)).
However, if the ship is hypothecated by a bottomry loan, the insurable interest is
only up to the excess of the value of the vessel over the loan.
b. Over expected freightage.

2. Cargo/ Shipper- over the cargo and expected profits.

3. Charterer
a. Over the vessel up to the extent of the amount he is liable to the shipowner, if the
ship is lost or damaged during the voyage.
b. Over is expected profits of freightage if he accepts cargoes for other persons for a
fee.
c. Over his own cargo or his client’s cargo.

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Perils of the sea vs. Perils of the ship
1. Perils of the sea or perils of navigation include only those casualties due to the unusual
violence or extraordinary causes connected with navigation. It has been said to include
only such losses as are of extraordinary nature or arise from some overwhelming power
which cannot be guarded against by the ordinary exertion of human skill or prudence, as
distinguished from the ordinary wear and tear of the voyage and from injuries suffered by
the vessel in consequence of her not being unseaworthy. (only perils of the seas is covered
by insurance)

2. Perils of the ship is a loss which in the ordinary course of events, results:
a. From the ordinary, natural, and inevitable action of the sea;
b. From ordinary wear and tear of the ship; and
c. From the negligent failure of the ship’s owner to provide the vessel with the proper
equipment to convey the cargo under ordinary conditions.

3. In the absence of stipulation, the risks insured against are only perils of the sea. Thus, the
insured is bound to prove that the cause of the loss is a peril of the sea.

4. However, in all “all risk policy”, all risks are covered unless expressly excepted. The
burden rests on the insurer to prove that the loss is caused by a risk that is excluded.

5. Barratry- willful misconduct on the part of the master or crew in pursuance of some
unlawful or fraudulent purpose without the consent of owners, and to the prejudice of
owner’s interest. This may be expressly covered by the policy. When so covered, proof of
willful and intentional act is necessary. No honest error of judgment or mere negligence,
unless criminally gross, can be barratry.

Concealment
1. Opinion and beliefs
Belief and expectation of a third person in reference to a material fact is material and must
be disclosed in marine insurance (Sec. 102, ICP). The rule is different from the general rule
where matters of belief, judgment, or opinion of third persons (except experts) are not
material (Sec. 35, ICP).

2. Ordinarily, the matters concealed need not be the cause of the loss. In marine insurance,
there are instances when matters, although concealed, will not vitiate the contract except
when they caused the loss (Sec. 122, ICP):
a. National character of the insured;
b. Liability of insured thing to capture or detention;
c. Liability to seizure from breach of foreign laws;
d. Want of necessary documents; and
e. Use of false or simulated papers.

General average loss vs. Particular average loss

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The insurer of the vessel or cargo that is saved is liable for general average contribution and not
for particular average. Only the insurer of the damaged cargo or vessel is liable for particular
average if covered by the policy.

1. GENERAL AVERAGE LOSS includes damages and expenses which are deliberately
caused by the master of the vessel or upon his authority, in order to save the vessel, her
cargo, or both at the same time from a real or known risk. It must be borne equally by all
of the interests concerned in the venture. Under this, the requisites to the right to claim
general average contribution are:

1. There must be a common danger to the vessel or cargo;

2. Part of the vessel or cargo was sacrificed deliberately;
3. The sacrifice must be for the common safety or for the benefit of all;
4. It must be made by the master or upon his authority;
5. It must be successful, i.e., resulted in the saving of the vessel or cargo; and
6. It must be necessary.

NOTE: Jason Clause- Cargo owner has to contribute in the general average even when
the damaging incident is caused by the negligence of the ship/carrier owner.

2. PARTICULAR AVERAGE LOSS includes all damages and expenses caused to the vessel
or to her cargo which have not inured to the common benefit and profit of all persons
interested in the vessel and her cargo. It refers to those losses which occur under such
circumstances as do not entitle the unfortunate owners to receive contribution from other
owners concerned in the venture as where a vessel accidentally runs aground and goes to
pieces after the cargo is saved.

3. 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.

Co-insurance clause
Where the property is insured for less than its value, the insured is considered a co-insurer for the
difference between the amount of insurance and the value of the property. In marine insurance,
there is co-insurance by virtue of Sec. 159, ICP, as long as the requisites are present, namely:

1. The loss is partial; and

2. The amount of insurance is less than the value of the property insured.

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 ((value
of damage/ value of vessel) x value of insurance).

In fire insurance, there has to be an express stipulation to that effect.

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 Problems: A vessel valued at P1M owned by X was insured for only P800,000 with A
insurance Corp. The vessel was damaged because of a storm and the extent of the damage
was determined to be P200,000. How much can X recover from A insurance Corp.?

Answer: X can recover only P160,000 (P200,000/P1M x P800,000). The co-insurance

clause operates in this case because the vessel was insured for less than the value of the
property and there was only partial loss. Under the Insurance Code, 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.

Seaworthiness

1. A ship is seaworthy, when reasonably fit to perform the service, and to encounter the
ordinary perils of the voyage, contemplated by the parties to the policy (Sec. 116, ICP).
There should be due consideration to the nature of the ship, the voyage, and the service to
be performed.

A warranty of seaworthiness extends not only to the condition of the structure of the ship
itself, but requires that it be properly laden, and provided with a competent master, a
sufficient number of competent officers and seamen, and the requisite appurtenances and
equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel, and
lights, and other necessary or proper stores and implements for the voyage (Sec. 118, ICP).

2. When ship should be seaworthy

An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time
of the commencement of the risk, except in the following cases:

1. Time policy- when the insurance is made for a specified length of time, the implied
warranty is not complied with unless the vessel is seaworthy at the commencement of
every voyage it undertakes during that time (Sec. 117 (a), ICP);
2. When the insurance is upon the cargo which, by the terms of the policy, description of
the voyage, or established customs of the trade, is to be transshipped at an intermediate
port, at the commencement of each particular voyage (Sec. 117 (b), ICP);
3. Where different portions of the voyage are contemplated, at the commencement of each
portion (Sec. 119, ICP);
4. When the ship was seaworthy at the commencement of the voyage but becomes
unseaworthy during the voyage to which an insurance relates, an unreasonable delay in
repairing the defect exonerates the insurer on ship or shipowner’s interest from liability
from any loss arising therefrom (Sec. 120, ICP).

3. Applicability of implied warranty of seaworthiness to cargo owners

The fact that the unseaworthiness of the ship was unknown to the insured is immaterial in
ordinary marine insurance and may not be used by him as a defense in order to recover on
the marine insurance policy.

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 Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance it becomes the obligation of 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 full control in the choice of the common carrier that will
transport his goods. Or the cargo owner may enter into a contract of insurance which
specifically provides that the insurer answers not only for the perils of the sea but also
provides for coverage of perils of the ship.

4. If a vessel is unseaworthy, is the insurer of the cargo liable even if the owner of the cargo
was not even aware of the unseaworthiness of the vessel?
NO. The insurer is not liable. It is the obligation of the cargo owner to look for a common
carrier which keeps its vessel in a seaworthy conditions. The shipper of the cargo may have
no control over the vessel, but it has full control in the choice of the common carrier that
will transport its goods.

5. Effect of payment
Payment made by the insurer to the insured for the latter’s lost cargo operates as waiver of
the insurer’s right to enforce the implied warranty of seaworthiness. However, this waiver
extends only in favor of the insured. There is no waiver in favor of the carrier that
transported the cargo. The insurer can still claim payment against the carrier for breach of
contract based on the insurer’s right of subrogation.

Deviation
Departure of vessel from course of voyage, or an unreasonable delay in pursuing voyage, or the
commencement of an entirely different voyage (Sec. 125, ICP).

Deviation is Proper
1. If due to circumstances outside the control of the ship captain or ship owner;
2. If done to comply with a warranty (seaworthiness);
3. If made in good faith to avoid a peril;
4. If made to save human life or another distressed vessel.

Loss and abandonment

1. Actual total loss (Sec. 132, ICP)

a. Total destruction;
b. Loss by sinking;
c. Damage rendering the thing valueless; or
d. Total deprivation of owner of possession of thing insured.
NOTE: Complete physical destruction is not necessary to consider the loss as
actual total loss as for example where the cargo became totally useless because of
water damage.

2. Constructive total loss (Sec. 133, in relation to Sec. 141, ICP)

a. Actual loss or more than ¾ (75%) of the value of the object;

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 b. Damage reducing value by more than ¾ (75%) of the value of the vessel and of
cargo; and
c. Expenses of the shipment exceed ¾ (75%) of value of cargo.
In case of constructive total loss, insured may abandon the goods or vessel to the
insurer and claim for whole insured value, or he may, without abandoning vessel,
claim for partial actual loss.

3. Abandonment
The act of the insured by which, after a constructive total loss, he declares the
relinquishment to the insurer of his interest in the thing insured (Sec. 140, ICP). This can
be done by the ship agent.

Requisites:
1. There must be actual relinquishment by the person insured of his interest in the
thing insured (Sec. 140, ICP);
2. There must be a constructive total loss (Sec. 141, ICP);
3. The abandonment should be neither partial nor conditional (Sec. 142, ICP);
4. It must be made within a reasonable time after receipt of reliable information of the
loss (Sec. 143, ICP);
5. It must be factual (Sec. 144, ICP);
6. It must be made by giving notice thereof to the insurer which may be done orally
or in writing (Sec. 145, ICP);
7. The notice of abandonment must be explicit and must specify the particular cause
of the abandonment (Sec. 146, ICP).

NOTE: All other losses not total, is partial.

2. FIRE
Fire insurance
It is a contract of indemnity by which the insurer for a consideration agrees to indemnify the
insured against loss of, or damage to, property by fire, but may include 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. 169, ICP).

Fire- burning, or heat and light combustion.

What is the extent of liability of an insurer under an open policy?

In an open policy, the actual loss, as determined, will represent the total indemnity due the insured
except only that the total indemnity shall not exceed the total value of the policy.

Problem: Supposed A constructed a house in 1987 at a cost of P200,000, which he insured

against fore for the said amount. The policy for P200,000 was renewed every year. This
year, when the said house was already P400,000, ¼ of the house was destroyed by fire.
How much can A recover from the insurer?

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 Answer: It depends. If the policy is a valued policy valued at P200,000, A can recover
only P50,000. If the policy is an open policy, A can recover his actual loss of P100,000.

Alteration
An alteration in the use or condition of a thing insured from that to which it is limited by the policy
made without the consent of the insurer, by means within the control of the insured, and increasing
the risks, entitles the insurer to rescind a contract of fire insurance (Sec. 170, ICP).

1. In a fire insurance, what is the effect of an alteration in the use or condition of a thing
insured from that which it is limited by the policy?
The insurer may rescind a contract of fire insurance provided the following requisites are
present:

1. The use or condition of the thing insured is specially limited or stipulated in the policy;
2. Such use or condition 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; and
6. There must be a violation of a material policy provision.

3. CASUALTY
Casualty insurance
An insurance covering loss or liability arising from accident or mishap, excluding those falling
under other types of insurance such as fire or marine (Sec. 176, ICP).

“Intentional” vs. “Accidental” as used in insurance

Intentional as used in an accident policy excepting intentional injuries inflicted by the insured or
any other person implies the exercise of the reasoning faculties, consciousness, and volition.
Where a provision of the policy excluded intentional. Injury that is controlling. If the injuries
suffered by the insured clearly resulted from the intentional act of a third person, the insurer is
relieved from liability as stipulated.

The terms “accident” and “accidental” have been taken to mean that which happens by chance
or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. The
terms do not without qualification, exclude events resulting in damage or loss due to fault,
recklessness or negligence of third parties. The concept is not necessarily synonymous with “no
fault”. It may be utilized simply to distinguish intentional or malicious acts from negligent or
careless acts of men.

Third-party Liability
1. Casualty insurance may provide for third party liability (in the nature of stipulation pour
autrui for personal injury and even damage to property), in which case, the third party may
directly sue the insurer upon the occurrence of the loss. However, the insurer is not
solidarily liable with the insured or the tortfeasor for the latter’s obligation. If the insurer
pays the third person, the right of subrogation operates.

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 Note that it is not a defense that there is still no final and executory decision in a case filed
against the offender (the person who caused the injury). The insurer is already liable upon
happening of the loss.

2. If there is no stipulation in favor of third person but the insurance is an insurance against
liability to third persons, any third person who might be injured may not sue the insurer.
Only the insured (sought to be held liable by the third person) can recover from the insurer.

3. Liability of insurer if insured was committing a felony

Liabilities arising out of acts of negligence, which are also criminal, are also insurable on
the ground that such acts are accidental. Thus, a motor insurance policy covering the
insured’s liability for accidental injury caused by his negligence, even though gross and
attended by criminal consequences such as homicide through reckless imprudence, will not
be void as against public policy. But liability consequences of deliberate criminal acts are
not insurable.

4. SURETY
An agreement whereby a party called the surety guarantees the performance by another called the
principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It
shall be deemed to be an insurance contract if made by a surety who or which, as such, is doing an
insurance business (Sec. 177 and Sec. 2, par. 3, ICP). Nature of liability of surety is joint and
several.
a. Fidelity bond- contract of insurance against loss from misconduct.
b. Fidelity Guaranty Insurance- a contract whereby one, for a consideration, agrees to
indemnify the assured against loss arising from the want of integrity, fidelity, or honesty
of employees or other persons holding positions of trusts.

5. LIFE
1. Life insurance
a. Insurance on human life and insurance appertaining thereto or connected therewith
which included every contract or undertaking for the payment of endowments or
annuities (Sec. 181, ICP).
b. Annuity- every contract or undertaking for the payment of annuities including
contracts for the payment of lump sums under a retirement program where a life
insurance company manages or acts as a trustee for such retirement program shall be
considered insurance contract (Sec. 181, ICP).

NOTE: Insurance with minor insured or beneficiary valid; parents/ guardian/ grandparent/
eldest sibling may exercise right in behalf of minor even if there is no bond if amount does
not exceed P500,000.

2. Effect of death of insured through suicide

The insurer in a life insurance contract shall be liable in case of suicide by the insured if:
a. Suicide was committed after the policy has been in force for a period of 2 years from
the date of its issue or its last reinstatement, unless the policy provides a shorter period;

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 b. Suicide committed in a state of insanity; it shall make the insurer liable regardless of
the date of the commission of the suicide (Sec. 183, ICP).

3. Kinds
a. Ordinary life, General life, or Old Line Policy- insured pays a premium every year
until he dies. Surrender value after 3 years.
b. 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.
c. Endowment Policy- 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.
d. Term Insurance- Insurance pays premium only once, 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.
e. Industrial Life- life insurance entitling the insured to pay premiums weekly, or where
premiums are payable monthly or oftener.

6. MICROINSURANCE
Section 187, R. A. 10607
Microinsurance is a financial product or service that meets the risk protection needs of the poor
where:

a. The amount of contributions, premiums, fees or charges, computed on a daily basis,

does not exceed seven and a half percent (7.5%) of the current daily minimum wage
rate for nonagricultural workers in Metro Manila; and
b. The maximum sum of guaranteed benefits is not more than one thousand (1,000) times
of the current daily minimum wage rate for nonagricultural workers in Metro Manila.

Section 188
No insurance company or mutual benefit association shall engage in the business of
microinsurance unless it possesses all the requirements as may be prescribed by the Commissioner.
The Commissioner shall issue such rules and regulations governing microinsurance.

7. CUMPOLSORY MOTOR VEHICLE LIABILITY INSURANCE

(CMVLI)/ TPL
Mandatory insurance
The Insurance Code makes it unlawful for any land transportation operator or owner of a motor
vehicle to operate the same in public highways, unless there is an insurance or guarantee to
indemnify the death or bodily injury and/or damage to property of a third party or passenger arising
from the use thereof (Sec. 387, ICP). Registration of any vehicle will NOT be made or renewed
without complying with the requirement (Sec. 389, ICP).

a. The protection may be complied with using any of the following: (1) insurance policy; (2)
surety bond; or (3) cash bond.

b. “Motor vehicle” shall mean any vehicle propelled by any power other than muscular power
using the public highways, but excepting road rollers, trolley cars, street-sweepers,

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 sprinklers, lawn mowers, bulldozers, graders, fork-lifts, amphibian trucks, and cranes if not
used on public highways, vehicles which run only on rails or tracks, and tractors, trailers
and traction engines of all kinds used exclusively for agricultural purposes.

Trailers having any number of wheels, when propelled or intended to be propelled by

attachment to a motor vehicle, shall be classified as separate motor vehicle with no power
rating (Sec. 3, RA 4136).

c. “Passenger” is any fare paying person being transported and conveyed in and by a motor
vehicle for transportation of passengers for compensation, including persons expressly
authorized by aw or by the vehicle’s operator or his agents to ride without fare. The
passenger can claim from the insurer of the vehicle where he was riding.

d. “Third-Party” is any person other than a passenger as defined in this section and shall also
exclude 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, as
likewise defined herein, or his employee in respect of death, bodily injury, or damage to
property arising out of and in the course of employment.

e. “Owner” or “Motor vehicle owner” means the actual legal owner of a motor vehicle, in
whose name such vehicle is duly registered with the Land Transportation Commission.

f. “Land transportation operator” means the owner or owners of motor vehicles for
transportation of passengers for compensation, including school buses.

What is the purpose of Compulsory Third-Party Liability Insurance?

It is intended 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.

No Fault Clause (Sec. 391, ICP)

The injured third party or passenger is given the option to file a claim for death or injury without
the necessity of proving fault or negligence of any kind under the following condition:

1. The total indemnity in respect of any person shall not exceed P15,000;
2. The following proofs of loss, when submitted under oath, shall be sufficient evidence to
substantiate the claim:
a. Police report of accident; and
b. Death certificate and evidence sufficient to establish the proper payee; or
c. Medical report and evidence of medical or hospital disbursement in respect of
which refund is claimed.
3. Claim may be made against 1 motor vehicle only.

From whom should the injured recover?

1. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in
which the occupant is riding, mounting, or dismounting from.

15
 2. If not an occupant, claim shall lie against the insurer of the directly offending vehicle.
3. 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.

Time to file and process claim under CTPL

Period to File Notice
The written notice of claim (setting forth the nature, extent, and duration of the injuries as certified
by a duly licensed physician) must be presented within 6 months from the date of the accident
otherwise the claim is deemed waived (Sec. 397, ICP).

Prescriptive Period
The action must be filed in court or Insurance Commission within 1 year from denial of the claim
(Sec. 397, ICP).

If there is an agreement, the insurance company concerned shall forthwith ascertain the truth and
extent of the claim and make payment within 5 working days after reaching an agreement (Sec.
398, ICP).

If no agreement is reached the insurance company shall pay only the “no-fault” indemnity
without prejudice to the claimant from pursuing his claim further, in which case, he shall not be
required or compelled by the insurance company to execute any quit claim or document releasing
it from liability under the policy of insurance or surety bond issued (Sec. 398, ICP).

May a third person sue the insurer directly?

It depends. If the policy provides for indemnity against liability, the insurer can be sued directly
by a third person. However, if the policy provides for “reimbursement after actual payment by
the insured”, or for the indemnity against loss, a third person has no cause of action.

Is the insurer solidarily liable with the insured?

NO. while the insurer’s liability may be direct, it does not mean that the insurer can be held
solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is
based on torts. Furthermore, the insurer’s liability is limited to the amount of the insurance
coverage.

May the proceeds of a third-party liability insurance be garnished?

Yes. In a third-party liability insurance, the insurer assumes the obligation of paying the injured
party to whom the insured is liable. The insurer becomes liable as soon as the liability of the insured
attaches. From the moment the insured becomes liable to the third person, the insured acquires
interest in the insurance contract, which interest may be garnished just like any other credit.

It is not necessary that summons be served upon the insurer, the writ of garnishment is enough. By
such service, the garnishee becomes a “virtual party” or a “forced intervenor” in this case.

Coverage and Extent of Liability

1. Coverage- P100,000 (plus additional P100,000 if what is involved is used as public
utility).

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 2. Death indemnity- P70,000 plus P30,000 funeral expenses.

Other Rules Concerning Motor Vehicles

*Authorized Driver Clause

This is a stipulation in a motor vehicle insurance which provides that the driver, other than the
insured owner, must be duly licensed to drive the motor vehicle, otherwise the insurer is excused
from liability.

The clause means that the insurer indemnifies 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.
1. The insured need not prove that he has a driver’s license at the time of the accident if he
was the driver.
2. If the claimant was able to present a driver’s license the same is presumed to be genuine.
Thus, even if it was established that the driver does not know how to read and write, the
license will still be sustained in the absence of proof that it was not validly issued.
3. A driver (not the insured himself) who holds an expired driver’s license is not an authorized
driver.

*Theft Clause
1. The risks insured against in the policy may include theft. If there is such a provision and
the vehicle was unlawfully taken, the authorized driver clause does not apply. The
insured can recover even if the thief has no driver’s license.
2. In other words, where the motor vehicle is unlawfully and wrongfully taken without the
owner’s consent or knowledge, such taking constitutes theft, and therefore, it is the “theft
clause” and not the “authorized driver’s clause” that should apply. The fact that the driver
using the car before it was carnapped had an expired license is of no moment.
3. Theft Clause Applies- There is theft as contemplated under the Theft Clause if the vehicle
is taken with intent to gain without the consent of the insured-owner. Thus, there is theft
EVEN if: (1) the vehicle was returned; or (2) the vehicle was stolen by the driver of the
insured; or (3) the vehicle was taken to the owner of a repair shop for the purpose of repair
and in order to attach accessories.
4. Theft is not covered by the Malicious Damage Clause. Malicious damage (within the
contemplation of the clause in the policy expressly excluding malicious damage from the
risk insured against) is the direct result from the deliberate or willful act of the insured,
members of his family, and any person in the insured’s service, whose clear plan or purpose
was to cause damage to the insured vehicle for purpose of defrauding the insurer.

8. COMPULSORY INSURANCE COVERAGE FOR AGENCY-

HIRED WORKERS (Section 37-A of Republic Act No. 8042)
In addition to the performance bond to be filed by the recruitment/manning agency under Section
10, each migrant worker deployed by a recruitment/manning agency shall be covered by a
compulsory insurance policy which shall be secured at no cost to the said worker. Such insurance

17
policy shall be effective for the duration of the migrant worker's employment and shall cover, at
the minimum:

(a) Accidental death, with at least US$10,000.00 survivor's benefit payable to the migrant worker's
beneficiaries;

(c) Permanent total disablement, with at least US$7,500.00 disability benefit payable to the
migrant worker. The following disabilities shall be deemed permanent: total, complete loss of sight
of both eyes; loss of 2 limbs at or above the ankles or wrists; permanent complete paralysis of 2
limbs; brain injury resulting to incurable imbecility or insanity;

(d) Repatriation cost of the worker when his/her employment is terminated without any valid
cause, including the transport of his or her personal belongings. In case of death, the insurance
provider shall arrange and pay for the repatriation or return of the worker's remains. The insurance
provider shall also render any assistance necessary in the transport including, but not limited to,
locating a local licensed funeral home, mortuary or direct disposition facility to prepare the body
for transport, completing all documentation, obtaining legal clearances, procuring consular
services, providing necessary casket or air transport container, as well as transporting the remains
including retrieval from site of death and delivery to the receiving funeral home;

(e) Subsistence allowance benefit, with at least US$100.00 per month for a maximum of 6 months
for a migrant worker who is involved in a case or litigation for the protection of his/her rights in
the receiving country;

(f) Money claims arising from employer's liability which may be awarded or given to the worker
in a judgment or settlement of his or her case in the NLRC. The insurance coverage for money
claims shall be equivalent to at least 3 months for every year of the migrant worker's employment
contract;

In addition to the above coverage, the insurance policy shall also include:

(g) Compassionate visit. When a migrant worker is hospitalized and has been confined for at least
7 consecutive days, he shall be entitled to a compassionate visit by 1 family member or a requested
individual. The insurance company shall pay for the transportation cost of the family member or
requested individual to the major airport closest to the place of hospitalization of the worker. It is,
however, the responsibility of the family member or requested individual to meet all visa and travel
document requirements;

(h) Medical evacuation. When an adequate medical facility is not available proximate to the
migrant worker, as determined by the insurance company's physician and/or a consulting
physician, evacuation under appropriate medical supervision by the mode of transport necessary
shall be undertaken by the insurance provider; and

(i) Medical repatriation. When medically necessary as determined by the attending physician,
repatriation under medical supervision to the migrant worker's residence shall be undertaken by
the insurance provider at such time that the migrant worker is medically cleared for travel by

18
commercial carrier. If the period to receive medical clearance to travel exceeds 14 days from the
date of discharge from the hospital, an alternative appropriate mode of transportation, such as air
ambulance, may be arranged. Medical and non-medical escorts may be provided when necessary.

Any claim arising from accidental death, natural death or disablement under this section shall be
paid by the insurance company without any contest and without the necessity of providing fault or
negligence of any kind on the part of the insured migrant worker: Provided, That the following
documents, duly authenticated by the Philippine foreign posts, shall be sufficient evidence to
substantiate the claim:

(1) Death Certificate - In case of natural or accidental death;

(2) Police or Accident Report - In case of accidental death; and
(3) Medical Certificate - In case of permanent disablement;

E. VARIABLE CONTRACTS
Any policy or contract on either a group or individual basis issued by an insurance company
providing for benefits or other contractual payments or values thereunder to vary so as to reflect
investment result of any segregated portfolio of investments or of a designated separate account in
which amounts received in connection with such contracts shall have been placed and accounted
for separately and apart from other investments and accounts (Sec. 238, ICP). This contract may
also provide benefits or values incidental thereto payable in fixed or variable amounts, or both.

F. INSURABLE INTEREST
An insurable interest is that interest which a person is deemed to have in the subject matter insured,
where he has a relation or connection with or concern in it, such that the person will derive
pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer
pecuniary loss or damage from its destruction, termination, or injury by the happening of the event
insured against.

Mere hope or expectancy is not insurable

A mere contingent or expectant interest in anything, not found on an actual right to the thing, nor
upon any valid contract for it, is not insurable (Sec. 16, ICP).

Insurable interest in life insurance vs. Insurable interest in property insurance

LIFE PROPERTY
As to extent
GR: Every person has an unlimited insurable Limited to the actual value of the property.
interest in his own life.

XPN: Where life insurance in taken out by a

creditor on the life of the debtor, insurable
interest is limited to the amount of debt.
When must insurable interest exist

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Must exist at the time the policy takes effect GR: Must exist twice, i.e., both at the time the
and need NOT exist thereafter (Sec. 19, ICP). policy takes effect and the time of loss, but
need not exist in the period in between (Sec.
19, ICP).

XPN: (Sec. 21-24; 25; 27), ICP).

1. A change in interest in a thing insured,
after the occurrence of an injury which
results in a loss, does not affect the
right of the insured to indemnity for the
loss (Sec. 21, ICP).
2. A change of interest in one or more
several distinct things, separately
insured by one policy, does not avoid
the insurance as to the others (Sec. 22,
ICP).
3. A change on interest, by will or
succession, on the death of the insured,
does not avoid an insurance; and his
interest in the insurance passes to the
person taking his interest in the thing
insured (Sec.23, ICP).
4. A transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to
the others, does not avoid an insurance
even though it has been agreed that the
insurance shall cease upon an
alienation of the thing insured. (Sec.
24, ICP).
5. Every stipulation in a policy of
insurance for the payment of loss
whether the person insured has or has
not any interest in the property insured,
or that the policy shall be received as
proof, of such interest, and every policy
executed by way of gaming or
wagering, is void (Sec. 25, ICP).
As to the beneficiary’s interest
GR: The beneficiary need not have insurable The beneficiary must have insurable interest
interest over the life of the insured if the over the thing insured.
insured himself secured the policy.
NOTE: Insurable interest is an indispensable
XPN: However, if the life insurance was requirement.
obtained by the beneficiary, the latter must

20
 have insurable interest over the life of the
insured.

Existence of insurable interest in life and property insurance

For both life and property insurance, the insurable interest is required to exist at the time of
perfection of the policy. For property insurance, the insurable interest must also exist at the time
of loss, however, in case of life insurance, the insurable interest needs to exist at the time of
perfection and not thereafter.

Change of beneficiary
GR: The insured shall have the right to change the beneficiary he designated in the policy.

XPN: If the insured expressly waived this right in the said policy

Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his
lifetime, the designation shall be deemed irrevocable (Sec. 11, ICP).

NOTE: Under Sec. 64 of the Family Code, the innocent spouse is allowed to revoke the
designation of the other spouse as irrevocable beneficiary after legal separation.

Effects of Irrevocable Designation of a beneficiary

1. The insured cannot assign the policy if the designation of the beneficiary is irrevocable.
The irrevocable beneficiary has a vested right.
2. The beneficiary designated in a life insurance contract cannot be changed without the
consent of the beneficiary.
3. A new beneficiary cannot be added to the irrevocably designated beneficiary for this would
in effect reduce the latter’s vested rights.
4. The irrevocably designated beneficiary may obtain a policy loan to the extent stated in the
schedule of values attached to the policy.
5. The insured cannot take the cash surrender value (CSV) assigned or even borrow on said
policy without the consent of the beneficiary.

1. IN LIFE/HEALTH
NOTE: In life insurance, it is only necessary that the person who took out a life insurance on the
life of another has insurable interest on such life at the time the policy takes effect. He need not
have insurable interest thereafter.

*Two general classes of life policies

*1. Insurance upon one’s life- are those taken out by the insured upon his own life for the benefit
(H E T):
a. Of himself;
b. Of his estate, in case it matures only at his death;
c. Of third person who may be designated as beneficiary.

21
The question of insurable interest is immaterial where the policy is procured by the person whose
life is insured. A person who ensures his own life can designate any person as his beneficiary,
whether or not the beneficiary has an insurable interest in the life of the insured.

*2. Insurance upon life of another- are those taken out by the insured upon the life of another.
Where a person names himself beneficiary in a policy he takes on the life of another, he must have
insurable interest in the life of the latter. This class includes the following (S D L D):
a. His spouse and of his children.
b. Any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest.
c. Of any person under a legal obligation to him for the payment of money, or respecting
property or services, of which death or illness might delay or prevent the performance
(creditor-debtor insurance).
d. Of any person upon whose life any estate or interest vested in him depends (contract of
usufruct) (Sec. 11, ICP).

In paragraph (a) of Sec. 10 of the Insurance Code, mere relationship is sufficient while the rest
(par. (b), (c), and (d)) requires pecuniary interest. Thus, the interest of the creditor over the life of
the debtor ceases upon full payment.

Persons prohibited from being designated as beneficiaries

1. Those made between persons who were guilty of adultery or concubinage at the time of
donation.
2. Those made between persons found guilty of the same criminal offense, in consideration
thereof.
3. Those made to a public officer or his wife, descendants or ascendants by reason of his
office.

The designation of the above-enumerated persons is void but the policy is binding. The estate will
get the proceeds.

Beneficiary willfully brought about the death of the insured

GR: 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
such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with
the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the
insured (Sec. 12, ICP).

XPNs:
1. Insanity of the beneficiary at the time he killed the insured;
2. The insured’s death was unintentionally caused (e.g., thru accident);
3. The beneficiary acted in self-defense.

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 3. IN PROPERTY

Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that contemplated peril might directly damnify the insured, is insurable
interest (Sec. 13, ICP).

NOTE: In property insurance, the insured must have insurable interest over the property at the
time of the perfection of the contract and at the time of loss. The transfer of the property does not
include the transfer of the insurance policy.

Insurable interest in property may consist of the following:

1. An existing interest- the existing interest in the property may be legal or equitable title.
Legal title:
a. Trustee, as in the case of the seller of the property not yet delivered;
b. Mortgagor of the property mortgaged; or
c. Lessor of the property leased.
Equitable title:
a. Purchaser of property before delivery or before he has performed the conditions of
the sale;
b. Mortgagee of property mortgaged; or
c. Mortgagor, after foreclosure but before the expiration of the redemption period.

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 interest in that out of which the expectancy arises.

NOTE: Existence of insurable interest is a matter of public policy. Hence, the principle of
estoppel cannot be invoked.

Measure of insurable interest in property

Under Sec. 17, the measure of insurable interest in property is the extent to which the insured
might be damnified by loss or injury thereof. Insurable interest in, or 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.

TEST: In general, person has an insurable interest in the property, if he derives pecuniary
benefit or advantage from its preservation or would suffer pecuniary loss, damage, or
prejudice by its destruction whether he has or has no title in, or lien upon, or possession of
the property.

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 Hence, PECUNIARY INTEREST over the property is always necessary although the
interest is not limited to interest of an owner.

A common carrier or depository’s extent of insurable interest in a thing held by him

A carrier or depositary 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, because the loss of the thing by the carrier or
depository may cause liability against him to the extent of its value (Sec. 15, ICP).

Change of interest in any part of a thing insured

“Change of interest” contemplated by law is an absolute transfer of the insured’s entire interest in
the property insured to one not previously interested or insured.

GR: A change of interest in any part of a thing insured unaccompanied by a corresponding change
in interest in the insurance 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; 58, ICP).

XPNs:
1. Automatic transfer clause- interest in the policy will follow whoever will be the owner of
the property.
2. When there is a prohibition against alienation or change of interest without consent of the
insurer in which case the policy is not merely suspended but avoided.
3. In life, accident, and health insurance.
4. A change of interest in a thing insured, after the occurrence of an injury which results in a
loss does NOT affect the right of the insured to indemnity for loss (Sec. 21, ICP).
NOTE: After the occurrence of the peril insured against, the insured acquired a vested
right over the proceeds of the policy.
5. A change of interest in one or more distinct things, separately insured by one policy does
NOT avoid the insurance as to the others.
6. A change of interest by will or succession, on the death of the insured, does NOT avoid an
insurance; and his interest in the insurance passes to the person taking his interest in the
thing insured (Sec. 23, ICP).
7. A transfer of interest by one of several partners, joint owners or owner in common, who
are jointly insured, to the others does NOT avoid an insurance even though it has been
agreed that the insurance shall cease upon an alienation of the thing insured (Sec. 24, ICP).
8. When the 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, ICP).

3. DOUBLE INSURANCE AND OVER INSURANCE

Double insurance
Double insurance exists where the same person is insured by several insurers separately, in respect
to the same subject and interest (Sec. 95, ICP). It is not prohibited by law, but it may be prohibited
by “other insurance clause”.

24
Requisites of double insurance (S T R I P)

1. Subject matter is the same;

2. Two or more insurers insuring separately;
3. Risk or peril insured against is the same;
4. Interest insured is the same;
5. Person insured is the same;

Double insurance is NOT prohibited by law

It is not contrary to law and hence, in case of double insurance, the insurers may still be made
liable up to the extent of the value of the thing insured but not to exceed the amount of the policies
issued.

A provision in the policy that prohibits double insurance is valid. However, in the absence of such
prohibition, double insurance is allowed.

Nature of the liability of the several insurers in double insurance

In double insurance, the insurers are considered as co-insurers. Each one is bound to contribute
ratably to the loss in proportion to the amount for which he is liable under his contract, this is
known as the “principle of contribution” or “contribution clause” (Sec. 96 (e), ICP).

Over insurance
There is over insurance whenever the insured obtains a policy in an amount exceeding the value
of his insurable interest.

Double insurance Over insurance

There may be no over insurance as when the When the amount of the insurance is beyond
sum total of the amounts of the policies issued the value of the insured’s insurable interest.
does not exceed the insurable interest of the
insured.
There are two or more insurers insuring the There may be only one insurer, with whom the
same subject matter. insured takes insurance beyond the value of his
insurable interest.

Rules when the insured in a policy other than life is over insured by double insurance
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 which the insurers are severally liable under
their respective contracts.
2. Where the policy under which the insured claims is a valued policy, any sum received by
him under any other policy shall be deducted from the value of the 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, any sum received
by him under any policy shall be deducted against the full insurable value, for any sum
received by him under any policy.

25
 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 him and the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is liable under his contract (Sec. 96, ICP).
6. Discovery of other insurance coverage in excess of the value of property is a ground for
rescission (Sec. 64 (f), ICP).

Additional or other insurance clause

A clause in the policy that provides that the policy shall be void if the insured procures additional
insurance without the consent of the insurer.

Waiver of violation
When the insurer, with the knowledge of the existence of other insurances, which the insurer
deemed a violation of the contract, preferred to continue the policy, its action amounted to a waiver
of annulment of the contract.

Absence of notice of existence of other insurance constitutes fraud

When the insurance policy specifically requires that notice shall be given by the insured of the
existence of other insurance policies upon the same property, the total absence of such notice
nullifies the policy. Such failure to give notice of the existence of other insurance of the same
property when required to do so constitutes deception and it could be inferred that had the insurer
known that there were many other insurance policies on the same property, it could have hesitated
or plainly desisted from entering into such contract.

No policy of insurance shall be cancelled except upon notice thereof to the insured
As a general rule, no policy is binding unless the premiums thereof have been paid. One of the
exceptions is when there is an agreement allowing the insured to pay the premium in installments
and partial payment has been made at the time of loss. Furthermore, the contention of the insurer
that the failure to pay premium resulted in the cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon notice thereof to the insured (Sec. 64, ICP).

Cancellation of policy of insurance by reason of over insurance

Sec. 64 of the IC provides that upon discover of other insurance coverage that makes the total
insurance in excess of the value of the property insured, the insurer may cancel such policy of
insurance; provided there is prior notice and such circumstances occurred after the effective date
of the policy.

4. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY

Instances where more than 1 insurable interest may exist in the same property
1. Trust- both trustor and trustee have insurable interest over the property in trust.
2. Corporation- both the corporation and its stockholders have insurable interest over the
assets.
3. Partnership- both the firm and partners have insurable interest over its assets.

26
 4. Assignment- both the assignor and assignee have insurable interest over the property
assigned.
5. Lease- the lessor, lessee, and sub-lessee have insurable interest over the property in lease.
6. Mortgage- both the mortgagor and mortgagee have insurable interest over the property
mortgaged.

Insurable interest of mortgagor and mortgagee in case of a mortgaged property are NOT the
same.
Each has 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. The same is not open to objection that there is double insurance.

Extent of insurable interest of mortgagor and mortgagee

1. Mortgagor- the mortgagor of property, as owner, has an insurable interest to the extent of
its value even though the mortgage debt equals such value.
2. Mortgagee- the mortgagee as such has an insurable interest in the mortgaged property to
the extent of the debt secured; such interest continues until the mortgage debt is
extinguished.

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.

Standard or Union Mortgage Clause

It is a clause that states that the acts of the mortgagor do not affect the mortgagee. The purpose of
the clause is to make a separate and distinct contract of insurance on the interest of the mortgagee.

Open or Loss-Payable Mortgage Clause (mortgagor/debtor takes an insurance payable to

the mortgagee)
It is a clause which provided for the payment of loss, if any, to the mortgagee as his interest may
appear and under it, the acts of the mortgagor affect the mortgagee.

In a policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such
by the insurer but not made a party to the contract itself. This kind of policy covers only such
interest as the mortgagee has at the issuance of the policy.

The mortgagee may be made a beneficial payee through any of the following:
1. He may become the assignee of the policy with the consent of the insurer;
2. He may be the pledgee without such consent of the insurer;
3. A rider making the policy payable to the mortgagee “as his interest may appear” may be
attached; or
4. A “standard mortgage clause” containing a collateral independent contract between the
mortgagee and the insurer may be attached.

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The policy, though, by its terms payable absolutely to the mortgagor; may have been procured by
a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which case the
mortgagee acquires an equitable lien upon the proceeds.

Effects if the insurance is procured by mortgagor for benefit of mortgagee, or policy assigned
to mortgagee
1. The contract is deemed to be upon the interest of the mortgagor; hence, he does not cease
to be 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.
3. Any act which under the contract of insurance is 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 at the
time of loss, and
5. The debt is extinguished upon recovery by the mortgagee to the extent of his credit.

NOTE: The rule on subrogation by the insurer to the right of the mortgagee does not apply in this
case.

Assignment of policy to mortgagee is not a payment

The assignment is merely to afford the mortgagee a greater security for the settlement of the
mortgagor’s obligation and should not be construed as payment in just the same way that delivery
of negotiable instruments does not constitute payment until the proceeds realized or collected.

Effects of “Mortgage redemption” insurance procured by the mortgagor

A “mortgage redemption insurance” is simply a kind of life insurance procured by the mortgagor,
with the mortgagee as beneficiary, up to the extent of the mortgage indebtedness. Its rationale is
to give protection to both the mortgagee and the mortgagor. In case the mortgagor-insured dies,
the proceeds of such insurance will be applied to the payment of the mortgage debt to the
mortgagee, thereby reliving the heirs of the mortgagor of the burden paying the debt.

G. PERFECTION OF THE CONTRACT OF INSURANCE

Policy of insurance
It is the written instrument in which the contract of insurance is set forth (Sec. 49, ICP). It is the
written document embodying the terms and stipulations of the contract of insurance between the
insured and insurer.

The policy is NOT necessary for the perfection of the contract (because the contract of insurance
is consensual).

Types of policy of insurance

1. Open- one in which the value of the thing insured is not agreed upon, and the amount of
the insurance merely represents the insurer’s maximum liability. The value of such thing
insured shall be ascertain at the time of the loss (Sec. 60, ICP).

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 2. Valued- is one which expresses on its face an agreement that the thing insured shall be
valued at a specific sum (Sec. 61, ICP).
3. Running- one which 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 indorsements (Sec. 62, ICP).

Basic contents of a policy

1. Parties
2. Period during which the insurance is to continue
3. Property or life insured
4. Amount of insurance, except in open or running policies
5. Interest of the insured in the property if he is not the absolute owner
6. Risk insured against
7. Rate of premium (Sec. 51, ICP).

Rider/ Indorsement (attachment to a property insurance)

An attached to an insurance policy that modifies the conditions of the policy by expanding or
restricting its benefits or excluding certain conditions from the coverage.

Riders are not binding on the insured unless the descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy. It should be countersigned by the insured or
owner unless he was the one who applied for the same (Sec. 50, ICP).

Cover notes
Persons who wish to be insured may get protection before the perfection of the insurance contract
by securing a cover note. The cover note issued by the insurer shall be deemed an insurance
contract as contemplated under Sec. 1 (1) of the IC subject to the following rules:
1. The cover note shall be issued or renewed only upon prior approval of the Insurance
Commission;
2. The cover note shall be valid and binding for not more than 60 days from the date of its
insurance;
3. No separate premium (separate from the policy or main contract) is required for the cover
note;
4. The cover note may be canceled by either party upon prior notice to the other of at least 7
days;
5. The policy should be issued within 60 days after the issuance of the cover note;
6. The 60-day period may be extended upon written approval of the Insurance Commission;
and
7. The written approval of the Insurance Commission is dispensed with upon the certification
of the president, vice-president or general manager of the insurer that the risk involved, the
values of such risks and premium therefor, have not a yet been determined or established
and the extension or renewal is not contrary to or is not for the purpose of violating the
Insurance Code or any rule.

Requisites for cancellation of policy

1. Prior notice to the insured

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 2. Grounds limited to:
a. Non-payment of premium;
b. Conviction of crime arising out of acts increasing the hazard insured against;
c. Discovery of fraud or material misrepresentation;
d. Discovery of willful or reckless acts or omissions increasing the hazard insured
against;
e. Physical changes in the property insured which result in the property becoming
uninsurable; or
f. Over insurance (New provision);
g. Determination by the Commissioner that the continuation of the policy would
violate or would place the insurer in violation of this Code.
3. Notice in writing, mailed or delivered to insured

1. OFFER AND ACCEPTANCE/ CONSENSUALITY

Perfection of an insurance contract
The contract of insurance is perfected when the assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the cause which are to constitute the contract. Mere
offer or proposal is not contemplated.

Cognition Theory
Mere submission of the application without the corresponding approval of the policy does not
result in the perfection of the contract of insurance.

Insurance contracts through correspondence follow the “cognition theory” wherein an acceptance
made by letter (by the insurer) shall NOT bind the person making the offer (insured) except from
the time it came to his knowledge.

a. DELAY IN ACCEPTANCE

Delay in approval of policy

Mere delay in acceptance of the insurance application will not result in a binding contract. Courts
cannot impose upon the parties a contract if they did not consent. However, in proper cases, the
insurer may be liable for tort.

Offer in property and liability insurance

It is the insured who makes an offer to the insurer, who accepts the offer, rejects it, or makes a
counter-offer. The offer is usually accepted by an insurance agent on behalf of the insurer.

Offer in life and health insurance

It depends upon whether the insured pays the premium at the time he applies for insurance.

1. If he does NOT pay the premium, his application is considered an invitation to the insurer
to make an offer, which he must then accept before the contract goes into effect.
2. If he pays the premium with his application, his application will be considered an offer.

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b. DELIVERY OF POLICY
Delivery is not necessary in the formation of the contract of insurance since the contract of
insurance is consensual.

The mere delivery of an insurance policy to someone does not give rise to the formation of a
contract in the absence of proof that he has agreed to be insured.

The contract may be completed prior to delivery of the policy or even without the delivery of the
policy depending upon the intention of the parties. The policy may contain a provision that states
that the insurance is not effective until the delivery of the policy.

Two types of delivery

1. Actual- delivery to the person of the insured.
2. Constructive
a. By mail- if policy was mailed already and premium was paid and nothing is left to
be done by the insured, the policy is considered constructively delivered if insured
died before receiving the policy.
b. By agent- if delivered to the agent of the insurer, whose duty is ministerial, or
delivered to the agent of the insured, the policy is considered constructively
delivered.

2. PREMIUM PAYMENT
Premium
It is an agreed price for assuming and carrying the risk- that is, the consideration paid by the insured
to an insurer for undertaking to indemnify the insured against a specified peril. The elixir vitae or
source of life of the insurance business.

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.

Payment of premium to agent of the insurance company is binding on it.

NOTE: An insurance company which delivers a policy to an insurance broker, is deemed to have
authorized the latter to receive the payment of the premium (Sec. 306, ICP).

“Cash and carry” rule

GR: No policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid. Any agreement to the contrary is void.

XPN:
A policy is valid and binding even when there is non-payment of premium:
1. When there is an agreement allowing the insured to pay the premium in installments and
partial payment has been made at the time of loss.

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 2. When there is an agreement to grant the insured credit extension for the payment of the
premium and loss occurs before the expiration of the credit term.
3. When estoppel bars the insurer to invoke non-recovery on the policy.
4. In case of life or industrial life policy whenever the grace period (30 days provided initial
payment was made) provision applies, or whenever under the broker and agency
agreements with duly licensed intermediaries, a 90-day credit extension is given. No credit
extension to a duly licensed intermediary should exceed 90 days from date on issuance of
the policy (Sec. 77, ICP).
5. When there is acknowledgement in a policy of a receipt of premium, which the law
declares to be conclusive evidence of payment, even if there is stipulation therein that it
shall not be binding until the premium is actually paid. This is without prejudice however
to right of insurer to collect corresponding premium (Sec. 77, ICP).
6. When the public interest so requires, as determined by the Insurance Commissioner.

Payment through salary deduction

Employees of the Republic of the Philippines, including its political subdivisions and
instrumentalities, and government-owned or controlled corporations, may pay their insurance
premiums and loan obligations through salary deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the government employee is authorized,
notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make
deductions from the salary, wage, or income of the latter pursuant to the agreement between the
insurer and the government employee and to remit such deductions to the insurer concerned, and
collect such reasonable fee for its services (Sec. 77, ICP).

Payment of 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.

*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.

*NOTE: This is not applicable in case of post-dated checks, the payment of a promissory note
or postdated check at a stated maturity subsequent to the loss, is insufficient to put the insurance
into effect if there is no credit agreement.

Non-payment of premiums
Non-payment of the premium will not entitle the insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy, the contractual relation between the parties
having ceased. If the peril insured against has occurred, the insurer would have had a valid defense
against recovery under the policy.

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Non-payment of the first premium prevents the contract from becoming binding notwithstanding
the acceptance of the application or the issuance of the policy, unless waived. But nonpayment of
the balance of the premium due does not produce the cancellation of the contract.

With respect to subsequent premiums, non-payment does not affect the validity of the contracts
unless by express stipulation, it is provided that the policy shall in that event be suspended or shall
lapse.

Non-payment of premiums by reason of the circumstances or conduct of the insurer

GR: Non-payment of premiums does not merely suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the essence of the contract.

XPNs:
1. The insurer has become insolvent and has suspended business, or has refused without
justification a valid tender of premiums.
2. Failure to pay was due to the wrongful conduct of the insurer.
3. The insurer has waived his right to demand payment.

Fortuitous events will not prevent forfeiture of the policy when the premium remains unpaid.
Hence, non-payment of premium by reason of a fortuitous event is not an excuse.

Non-payment of premiums occasioned by war causes complete abrogation of the insurance.

Hence, war does not excuse non-payment.

Instances when payment of premium becomes a debt or obligation

1. In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as
the risk attaches.
2. In life insurance, the premium becomes a debt only when, in the case of the first premium,
the contract has become binding, and in the case of subsequent premiums, when the insurer
has continued the insurance after maturity of the premium, in consideration of the insured’s
express or implied promise to pay.

Payments in addition to regular premium

An insurer may contract and accept payments, in addition to regular premium, for the purpose of
paying future premiums on the policy or to increase the benefits thereof (Sec. 84, ICP).

3. NON-DEFAULT OPTION IN LIFE INSURANCE

Devices used to prevent the forfeiture of a life insurance after the payment of the first
premium
1. 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. Note: the policy holder is entitled to the CSV
in the event of default in a premium payment after 3 full annual premiums shall have been
paid.
2. Paid up Insurance- The insured is given a right, upon default, after the payment of at least
3 annual premiums to have the policy continued in force from the date of default for the

33
 whole period of the insurance without further payment of premiums. It results to a
reduction of the original amount of insurance, but for the same period originally stipulated.
3. 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 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.
4. Grace period- After the payment of the first premium, the insured is entitled to a grace
period of 30 days within which to pay the succeeding premiums.
5. Extended insurance- It is where the insured is given a right, upon default, after the payment
of at least 3 full annual premiums (Sec. 233(f), ICP) to have the policy continued in force
from the date of default for a time either stated or equal to the amount as the net value of
the policy taken as a single premium, will purchase.
6. Reinstatement- Provision that the holder of the policy shall be entitled to reinstatement of
the contract at any time within 3 years from the date of default in the payment of premium,
unless (1) the CSV has been paid, or (2) the extension period expired, upon (1) production
of evidence of insurability satisfactory to the company and the (2) payment of all
overdue premiums and any indebtedness to the company upon said policy (Sec. 233(j),
ICP).

4. REINSTATEMENT OF A LAPSED POLICY OF LIFE

INSURANCE
Purpose of the reinstatement provision
The purpose of the provision is to clarify the requirements for restoring a policy to premium-paying
status after it has been permitted to lapse.

The law requires that the policy owner be permitted to reinstate the policy, subject to the violations
specified, any time within 3 years from the date of the default of premium payment. A longer
period, being more favorable to the insured, may be used.

Reinstatement is not an absolute right of the insured, but discretionary on the part of the insurer,
which has the right to deny reinstatement if it were not satisfied as to the insurability of the insured,
and if the latter did not pay all overdue premiums and other indebtedness to the insurer.

5. REFUND OF PREMIUMS
Instances when the insured is entitled to recover premiums already paid or portion thereof
1. Whole
a. When no part of the thing insured has been exposed to any of the peril insured
against (non-exposure vs. non-occurrence) (Sec. 80, ICP).
b. When the contract is voidable because of the fraud or misrepresentations of the
insurer or his agent (Sec. 82, ICP).
c. When the insurance is voidable because of the existence of facts of which the
insured was ignorant without his fault (Sec. 82, ICP).

34
 d. When the insurer never incurred any liability under the policy because of the default
of the insured other than actual fraud (Sec. 82, ICP).
e. When rescission is granted due to insurer’s breach of contract (Sec. 74, ICP).

NOTE: When the contract is voidable, a person insured is entitled to a return of the
premium when such contract is subsequently annulled under the provisions of the NCC.

A person insured is not entitled to a return of premium if the policy is annulled, rescinded,
or if a claim is denied by reason of fraud (Sec. 82, ICP).

2. Pro rata
a. When the insurance is for a definite period and the insured surrenders his policy
before the termination thereof; except:
i. Policy not made for a definite period of time;
ii. Short period rate is agreed upon; or
iii. In life insurance policy (because it is indivisible in character).

b. When there is over-insurance. The premiums to be returned shall be proportioned

to the amount by which the aggregate sum insured in all the policies exceeds the
insurable value of the thing at risk.
i. 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 is not entitled to that portion of the
premium corresponding to the excess of the insurance over the insurable
interest of the insured.
ii. In case of over-insurance be 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 insured (Sec. 83, ICP).

Illustration:
Where there is a total over insurance of P500,000 in an aggregate P2,000,000
policy (P1,500,000 is only the insurable value), 25% (proportion of P500k to
P2M) of the premiums paid to the several insurers should be returned.

When the insured is not entitled to return of premiums paid

1. In life insurance policies (Sec. 80, ICP).
2. If contract is illegal and the parties are in pari delicto.
3. If the policy is annulled, rescinded, or if a claim is denied by reason of fraud (Sec. 82, ICP).
4. If the peril insured against has existed, and the insurer has been liable for any period, the
peril being entire and indivisible (Sec. 81, ICP).

H. RESCISSION OF INSURANCE CONTRACTS

Instances wherein a contract of insurance may be rescinded
1. Concealment

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 2. Misrepresentation/ omission
3. Breach of warranties

Instances wherein a contract of insurance may be canceled by the insurer

1. Nonpayment of premium
2. Conviction of a crime arising out of acts increasing the hazard insured against
3. A determination by the Commissioner that the continuation of the policy would violate or
would place the insurer in violation of the Insurance Code
4. Physical changes in the property insured which result in the property becoming uninsurable
5. Discovery of other insurance coverage that makes the total insurance in excess of the value
of the property insured
6. Discovery of willful or omissions or reckless acts increasing the hazard insured against
(Sec. 64, ICP).

No policy of insurance other than life shall be canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation shall be effective unless it is based on the
occurrence, after the effective date of the policy, of one or more of the above-mentioned instances
(Sec. 64, ICP).

Notice of cancellation of the contract

All notices of cancellation shall be in writing, mailed or delivered to the named insured at the
address shown in the policy, or to his broker provided the broker is authorized in writing by the
policy owner to receive the notice of cancellation on his behalf, and shall state:
1. Which of the grounds set forth in Sec. 64 is relied upon; and
2. That, upon written request of the named insured, the insurer will furnish the facts on which
the cancellation is based (Sec. 65, ICP).

1. CONCEALMENT
Concealment is a neglect to communicate that which a party knows and ought to communicate
(Sec. 26, ICP).

Requisites:
1. A party knows a 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;
4. The other party has no means of ascertaining the fact concealed; and
5. The fact must be material;

Test of materiality
It is 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 the disadvantages of
the proposed contract, or in making his inquiries (Sec. 31, ICP), or in fixing the premium rate. The
matters concealed (or misrepresented) refers to those facts occurring at or before the time the
policy becomes effective not thereafter.

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NOTE: As long as the facts concealed are material, concealment, whether intentional or not,
entitles the injured party to rescind (Sec. 27, ICP).

Effects of Concealment
It vitiates the contract and ENTITLES THE INSURER TO RESCIND, even if the death or
loss is due to the cause not related to the concealed matter (Sec. 27, ICP).

Facts not conveyed to the insurer raises presumption that the failure of the insured to communicate
must have been intentional rather than inadvertent. Good faith is not a defense because of the
Uberrimae Fidei Doctrine.

Matters that need not be disclosed

GR: The parties are not bound to communicate information of the following matters:
1. 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 (constructive notice);
2. Those of which the other waives communication;
3. Those which the other knows;
4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and
which are not otherwise material; and
5. The nature or amount of the interest of one insured, except (in property insurance) if he is
not the owner of the property insured (Sec. 34, ICP).

XPN: In answer to inquiries of the other (Sec. 30, ICP).

NOTE: Neither party is bound to communicate, even upon inquiry, information of his own
judgment, because such would add nothing to the appraisal of the application (Sec. 35, ICP).

NOTE: It is settled that the INSURED CANNOT RECOVER even though the material fact not
disclosed is not the cause of the loss.

Right to information of material facts may be waived

1. Expressly by the terms of the contract
2. Impliedly the failure to make an inquiry as to such facts, where they are distinctly implied
in other facts from which information is communicated (Sec. 33, ICP).

Rules on concealment
1. If there is concealment under Sec. 27, the remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
2. The party claiming the existence of concealment must prove that there was knowledge of
the fact concealed on the part of the party charged with concealment.
3. Good faith is not a defense in concealment. Concealment, whether intentional or
unintentional entitle the injured party to rescind the contract of insurance (Sec. 27, ICP).
4. The matter concealed need not be the cause of loss (Sec. 31, ICP).
5. To be guilty of concealment, a party must have knowledge of the fact concealed at the time
of the effectivity of the policy.

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In order for concealment to produce the effect of avoiding the policy, it should take place at
the time the contract is entered into
Concealment should take place at the time the contract is entered into and not afterwards in order
that the policy may be avoided. The duty of disclosure ends with the completion of the contract.

Waiver of medical examination in a non-medical insurance contract renders even more material
the information required of the applicant concerning previous condition of health and diseases
suffered, for such information necessarily constitutes an important factor which the insurer makes
into consideration in deciding whether to issue the policy or not. Failure to communicate
information acquire after the effectivity of the policy will not be a ground to rescind the contract.

NOTE: The rationale for this rule is that if concealment should take place after the contract is
entered into, the information concealed is no longer material as it will no longer influence the other
party to enter into such contract.

NOTE: If the policy of life insurance has been in force for a period of 2 years or more from the
date of its issue then the insurer can no longer prove that the policy is void ab initio or is rescindable
by reason of the fraudulent concealment or misrepresentation (Sec. 48, ICP).

Instances whereby concealment made by an agent procuring the insurance binds the
principal
1. Where it was the duty of the agent to acquire and communicate information of the facts in
question.
2. Where it was possible for the agent, in the exercise of reasonable diligence to have made
such communication before the making of the insurance contract.

NOTE: Failure on the part of the insured to disclose such facts known to his agent, or wholly due
to the fault of the agent, will avoid the policy, despite the good faith of the insured.

Concealment in Marine Insurance

Effect of concealment: Rescission BUT if matter concealed refers to any of the following, contract
is not vitiated but it merely exonerates insurer from loss resulting from risk concealed (Sec. 112,
ICP).
1. National character of insured
2. Liability of thing insured to capture and detention
3. Liability to seizure from breach of foreign laws of trade
4. Want of necessary documents
5. Use of false and simulated papers

2. MISREPRESENTATION/ OMISSION
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 (Sec. 46, ICP).

38
Under Sec. 37, representation should be made, altered, or withdrawn at the time of or before the
issuance of the policy. It may be altered or withdrawn before the insurance is effected, but not
afterwards (Sec. 34, ICP).

Characteristics of representation
1. Not a part of the contract but merely a collateral inducement to it
2. Oral or written
3. Must be presumed to refer to the date the contract goes into effect
4. Altered or withdrawn before the insurance is effected but not afterwards
5. Made before or at the time of issuing the policy and not after (Sec. 42, ICP).

Similarities of concealment and representation

1. Both refer to the same subject matter and both take place before the contract is entered.
2. Concealment or representation prior to loss or death give rise to the same remedy; that is
rescission or cancellation.
3. The test of materiality is the same (Sec. 31, 46, ICP).
4. The rule of concealment and representation are the same with life and non-life insurance.
5. Whether intentional or not, the injured party is entitled to rescind a contract of insurance
on ground of concealment or false representation.
6. Since the contract of insurance is said to be one of utmost good faith on the part of both
parties to the agreement, the rule on concealment and representation apply likewise to the
insurer.

Kinds of representation
1. Oral or written (Sec. 36, ICP).
2. Affirmative (Sec. 42, ICP)- Any allegation as to the existence or non-existence of a fact
when the contract begins.
3. Promissory (Sec. 39, ICP)- Any promise to be fulfilled after the contract has come into
existence or any statement concerning what is to happen during the existence of the
insurance.

A representation as to the future is to be deemed a promise unless it appears that it was

merely a statement to present, actual knowledge.

Misrepresentation
It occurs when the facts fail to correspond with its assertions or stipulations. Misrepresentation is
an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by
satisfactory and convincing evidence.

Requisites of 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; and
3. Such fact in either case is material to the risk.

39
 A representation cannot qualify as express provision in a contract of insurance but it may
qualify an implied warranty (Sec. 40, ICP).

Test of materiality
It is to be determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom the representation is made, in forming his estimate of the
disadvantages of the proposed contract or in making his inquiries (Sec. 46, ICP).

Effects of misrepresentation
1. It renders the insurance contract VOIDABLE AT THE OPTION OF THE INSURER,
although the policy is not thereby rendered void ab initio. The injured party entitled to
rescind from the time when the representation becomes false.
2. When the insurer accepted the payment of premium with the knowledge of the ground for
rescission, there is waiver of right of rescission.

NOTE: Acceptance of premium would not estop the insurer from rescinding the policy on the
ground of misrepresentation (Sec. 45, ICP).
This should be distinguished from a case where an insurer may be estopped from claiming that
there was a violation of a condition if the insured correctly represented a matter that is contrary to
a condition.

Effect of collusion between the insurer’s agent and the insured

It vitiates the policy even though the agent is acting within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus, represents himself; so, the insurer is not estopped
from avoiding the policy.

Concealment vs Misrepresentation
Concealment Misrepresentation
The insured withholds the information of The insured makes erroneous statements of
material facts from the insurer. facts with the intent on inducing the insurer to
enter into the insurance contract

Application of concealment and misrepresentation in case of loss or death

*GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or death, the insurer can refuse to pay.

XPN: The incontestability clause under Par. 2 of Sec. 48.

*Incontestability clause
After the policy of life 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 (1) date of its issue or its (2)
last reinstatement, the insurer cannot prove that the policy is void ab initio (construed as
voidable) or is rescindable by reason of the fraudulent concealment or misrepresentation of the
insured or his agent.

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*NOTE: Considering that the insured died before the two-year period has lapsed, respondent
company is not, therefore, barred from proving that the policy is void ab initio by reason of the
insured’s fraudulent concealment or misrepresentation (Tan vs. CA, GR No. 408049, June 29,
1989).

Defenses that are NOT barred by incontestability clause

1. That the person taking the insurance lacked insurable interest as required by law;
2. That the cause of death of the insured is an excepted risk (listed in the policy);
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 particularly 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; or
7. That the action was not brought within the time specified.

Remedy of the injured party in case of misrepresentation

If there is misrepresentation, the injured party is entitled to rescind from the time when the
representation becomes false.

Exercise of the right to rescind the contract

In the non-life insurance policy, it must be exercised previous to the commencement of an action
on the contract, the action referred to is that to collect a claim on the contract. (Sec. 48, Par. 1,
ICP).

In life insurance policy, the defense mentioned in the second paragraph of Sec. 48 of the IC are
available only within 2-year incontestability period.

3. BREACH OF WARRANTIES
Warranties
Statement or promises by the insured set forth in the policy itself or incorporated in it by proper
reference, the untruth or non-fulfillment of which in any respect, and without reference to whether
the insurer was in fact prejudiced by such untruth or non-fulfillment render the policy VOIDABLE
BY THE INSURER.

Purpose of warranties
To eliminate potentially increasing moral or physical hazards which may either be due to the acts
of the insured or to the change of the condition of the property.

Basis of warranties
The insurer took into consideration the condition of the property at the time of effectivity of the
policy.

Kinds of warranties (Sec. 67, ICP).

1. Affirmative warranty- one which relates to matters which exist at or before the issuance of
the policy.

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 2. Promissory warranty- one which the insured undertakes that something shall be done or
omitted after the policy takes effect and during its continuance.
3. Express warranty- a statement in a policy, of a matter relating to the person or thing
insured, or to the risk, as a fact.
4. Implied warranty- an agreement or stipulation not expressed in the policy but the existence
of which is admitted or presumed from the fact that the contract of insurance has been
executed.

Warranty vs. Representation

Warranty Representation
Considered parts of the contract. Collateral inducement to the contract.
Always written on the face of the policy, May be written in a totally disconnected paper
actually or by reference. or may be oral.
Must be strictly complied with. Only substantial proof is required.
Its falsity or non-fulfillment operates as a Its falsity renders the policy void on the ground
breach of contract. of fraud.
Presumed material. Insurer must show its materiality in order to
defeat an action on the policy.

Effects of breach of warranty

1. Material
GR: Violation of material warranty or of material provision of a policy will entitle the other
party to rescind the contract.

XPN: (with regard to “promissory” warranties)

a. Loss occurs before the time of performance of the warranty;
b. The performance becomes unlawful at the place of the contract; or
c. Performance becomes impossible (Sec. 73, ICP).

2. Immaterial
GR: It will not avoid the policy.

XPN: When the policy expressly provides, or declares that a violation thereof will avoid it.

For instance, an “Other Insurance Clause” which is a condition in the policy requiring the
insured to inform the insurer of any other insurance coverage of the property. A violation of
the clause by the insured will not constitute a breach unless there is an additional provision
stating that the violation thereof will avoid the policy (Sec. 75, ICP).

Effect of a breach of warranty without fraud

The policy is avoided only from the time of breach and the insured is entitled:
1. To the return of the premium paid at pro rata from the time of breach or if it occurs after
the inception of the contract; or
2. To all premiums if it is broken during the inception of the contract.

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Effect of breach of warranty with fraud
1. Policy is avoided ab initio and never became binding.
2. Insured is not entitled to the return of the premium.

Omission
The failure to communicate information on matters proving or tending to prove the falsity of
warranty. In case of omission, the aggrieved party may rescind the contract of insurance.

I. CLAIMS SETTLEMENT AND SUBROGATION

1. NOTICE AND PROOF OF 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, in case of marine insurance.

Conditions before the insured may recover on the policy after the loss
1. The insured or some person entitled to the benefit of the insurance, without unnecessary
delay, must give written notice to the insurer (Sec. 90, ICP).
2. When required by the policy, insured must present a preliminary proof of loss which is the
best evidence he has in his power at the time (Sec. 91, ICP).
NOTE: For other non-life insurance, the Commissioner may specify the period for the submission
of the notice of loss (Sec. 90, ICP).

In some life and accident policies, a provision included, requiring certificate of the attending
physician of the insured, be furnished as part of the proof of death.

Notice of loss
It is the more or less formal notice given to the insurer by the insured or claimant under a policy,
of the occurrence of the loss insured against.

Purpose of notice of loss

1. To give 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 practice upon him
3. To operate as a check upon extravagant claims

Effect of failure to give notice of loss

Fire Insurance Other Types of Insurance

Failure to give notice defeats the right of the Failure to give notice will not exonerate the
insured to recover. insurer, unless there is a stipulation in the
policy requiring the insured to do so.

The law does not require any form in which the notice of loss must be given. In absence of any
stipulation in the policy, notice may be given orally or in writing.

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Instances when the defects in the notice or proof of loss are considered 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. Recognized 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
objections on account of notice and preliminary proof; or
5. Makes objection on any ground other than the formal defect in the preliminary proof.

Instances when delay in the presentation of notice or proof of loss deemed waived
If caused by:
1. Any act of the insurer; or
2. By failure to take objection promptly and specifically upon that ground (Sec. 93, ICP).

Proof of loss
It is the more or less formal evidence given the company by the insured or claimant under a policy
of the occurrence of the loss, the particulars thereof and the data necessary to enable the company
to determine its liability and the amount thereof.

Time for payment of claims

Life policies Non-life policies

1. Maturing upon the expiration of the The proceeds shall be paid within 30 days after
term- the proceeds are immediately the receipt by the insurer of proof of loss and
payable to the insured, except if ascertainment of the loss or damage by
proceeds are payable in installments or agreement of the parties or by arbitration but
annuities which shall be paid as they not later than 90 days from such receipt of
become due. proof of loss, whether or not ascertainment is
had or made (Sec. 249, ICP).
2. 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. 248, ICP).

2. GUIDELINES ON CLAIMS SETTLEMENT

Claim Settlement
Claim settlement is the indemnification of that suffered by the insured.

The claimant may be the:

1. Insured;
2. Reinsured, the insurer who is entitled to subrogation; or
3. A third party who has a claim against the insured.

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Purpose of the rule
To eliminate unfair claim settlement practices.

Rules in claim settlement

1. No insurance company doing business in the Philippines shall refuse, without justifiable
cause, to pay or settle claims arising under coverage provided by its policies, nor shall any
such company engaged in unfair claim settlement practices.
2. Evidence as to numbers and types of valid and justifiable complaints to the Commissioner
against an insurance company, and the Commissioner’s complaint experience with other
insurance companies writing similar lines of insurance shall be admissible in evidence in
an administrative or judicial proceeding brought under this section (Sec. 247 (b), ICP).

Claims settlement in life insurance

1. The proceeds shall be paid immediately upon the maturity of the policy if there is such a
maturity date.
2. If the policy matures by the death of the insured, within 60 days after presentation of the
claim and filing of the proof of the death of the insured (Sec. 248, ICP).

Claims settlement in property insurance

1. Proceeds shall be paid within 30 days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement or by arbitration.
2. If no ascertainment is made within 60 days after receipt of proof of loss, it should be paid
within 90 days after such receipt (Sec. 249, ICP).

Collateral Source Rule

Tortfeasor is prevented from benefitting from victim’s receipt of money from other sources. But
this is not applicable to cases involving no-fault insurances where insured is indemnified regardless
of who is at fault.

a. UNFAIR CLAIMS SETTLEMENT; SANCTIONS

Unfair settlement practices

1. Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims
submitted in which liability has become reasonably clear.
2. Knowingly misrepresenting to claimant’s pertinent facts or policy relating to coverage at
issue;
3. Failing to acknowledge with reasonable promptness pertinent communications with
respect to claims arising under its policies;
4. Failing to adopt and implement reasonable standards for the prompt investigation of claims
arising under its policies;
5. Compelling policy holders to institute suits to recover amounts due under its policies by
offering without justifiable reasons substantially less than the amounts ultimately
recovered in suits brought by them.

Sanctions for the insurance companies which engaged to unfair settlement practices

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The sanction for insurance companies engaged in unfair settlement practices can either be (a)
suspension; or (b) revocation of an insurance company’s certificate of authority (Sec. 247, ICP).

Effect of refusal or failure to pay the claim within the time prescribed
The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board on
the proceeds of the insurance from the date following the time prescribed under the IC, until the
claim is fully satisfied.

NOTE: 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.

Where the mortgagor and the mortgagee were, both claiming the proceeds of a fire insurance policy
and the creditors of the mortgagor also attached the proceeds, the insurance company cannot be
held liable for damages for withholding payment since the delay was not malevolent.

A prima facie evidence of unreasonable delay in payment of the claim is created by the failure of
the insurer to pay the claim within the time fixed in the IC.

b. PRESCRIPTION OF ACTION

Rules on the prescriptive period for filing an insurance claim

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, ICP).
a. The stipulated prescriptive period shall begin to run from the date of the insurer’s
rejection of the claim filed by the insured or beneficiary and not from the time of
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 reconsideration. To rule
otherwise would give the insured a scheme or devise to waste time until any
evidence which may be considered against him is destroyed.

2. If there is no stipulation or the stipulation is void, the insured may bring the action within
10 years in case the contract is written.
3. In a comprehensive motor vehicle liability insurance (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 1 year from its rejection.

4. The suit from 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, claimant’s right of action shall prescribe.

c. SUBROGATION

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Right of Subrogation
A process of legal substitution; the insurer, after paying the amount covered by the insurance
policy, stepping into the shoes of the insured, as it were, and availing himself of the latter’s rights
that exist against the wrongdoer at the time of the loss.

Principle of Subrogation
If the plaintiff’s property has been insured, and he has received indemnity from the insurance
company from the injury or loss arising out of wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract (Art. 2207, NCC).

The payment by the insurer to the insured operates as an equitable assignment to the insurer of
all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any
privity of contract. It accrues simply upon payment by the insurance company of the insurance
claim.

Purpose 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.
3. To prevent the tortfeasor from being free from liability and is thus founded on
consideration of public policy.

Rules on indemnity
1. Applies onlyto property insurance except when the creditor insures the life of his debtor.
2. Insurance contracts are not wagering contracts or gambling contracts.

When amount paid by the insurance company does not fully cover the insured or loss
The aggrieved party shall be entitled to recover the deficiency from the person causing the loss or
injury (Art. 2207, NCC).

Instances where the right of subrogation does not apply

1. Where the insured by his own act releases the wrongdoer or third party liable for loss or
damage from liability.
2. The insurer loses his rights against the wrongdoer since the insurer can only be subrogated
to only such rights as the insured may have.
3. Where the insurer pays the insured the value of the loss without notifying the carrier who
has in good faith settled the insured claim for loss.
4. Where the insurer pays the insured for a loss or risk not covered by the policy.
5. Life insurance.
6. For recovery of loss in excess of insurance coverage.

J. BUSINESS INSURANCE; REQUIREMENTS

Section 190. For purposes of this Code, the term insurer or insurance company shall include all
partnerships, associations, cooperatives, or corporations, including government-owned or -controlled

47
corporations or entities, engaged as principals in the insurance business, excepting mutual benefit
associations. Unless the context otherwise requires, the term shall also include professional reinsurers
defined in Section 288. Domestic company shall include companies formed, organized or existing under the
laws of the Philippines. Foreign company when used without limitation shall include companies formed,
organized, or existing under any laws other than those of the Philippines.

Section 191. The provisions of the Corporation Code, as amended, shall apply to all insurance corporations
now or hereafter engaged in business in the Philippines insofar as they do not conflict with the provisions of
this chapter.

*Section 192. No corporation, partnership, or association of persons shall transact any insurance business in
the Philippines except as agent of a corporation, partnership or association authorized to do the business of
insurance in the Philippines, unless possessed of the capital and assets required of an insurance corporation
doing the same kind of business in the Philippines and invested in the same manner; unless the Commissioner
shall have granted it a certificate to the effect that it has complied with all the provisions of this Code.

Every entity receiving any such certificate of authority shall be subject to the insurance and other applicable
laws of the Philippines and to the jurisdiction and supervision of the Commissioner.

*Section 193. No insurance company shall transact any insurance business in the Philippines until after it
shall have obtained a certificate of authority for that purpose from the Commissioner upon application
therefor and payment by the company concerned of the fees hereinafter prescribed.

The Commissioner may refuse to issue a certificate of authority to any insurance company if, in his judgment,
such refusal will best promote the interest of the people of this country. No such certificate of authority shall
be granted to any such company until the Commissioner shall have satisfied himself by such examination as
he may make and such evidence as he may require that such company is qualified by the laws of the
Philippines to transact business therein, that the grant of such authority appears to be justified in the light of
local economic requirements, and that the direction and administration, as well as the integrity and
responsibility of the organizers and administrators, the financial organization and the amount of capital,
reasonably assure the safety of the interests of the policyholders and the public.

In order to maintain the quality of the management of the insurance companies and afford better protection
to policyholders and the public in general, any person of good moral character, unquestioned integrity and
recognized competence may be elected or appointed director or officer of insurance companies in accordance
with the pertinent provisions contained in the corporate governance circulars prescribed by the
Commissioner. In addition hereto, the Commissioner shall prescribe the qualifications of directors, executive
officers and other key officials of insurance companies for purposes of this section.

No person shall concurrently be a Director and/or Officer of an insurance company and an adjustment
company.

Before issuing such certificate of authority, the Commissioner must be satisfied that the name of the company
is not that of any other known company transacting a similar business in the Philippines, or a name so similar
as to be calculated to mislead the public. The Commissioner may issue rules and regulations on the use of
names of insurance companies and other supervised persons or entities.

The certificate of authority issued by the Commissioner shall expire on the last day of December, three (3)
years following its date of issuance, and shall be renewable every three (3) years thereafter, subject to the
company’s continuing compliance with the provisions of this Code, circulars, instructions, rulings or
decisions of the Commission.

Every company receiving any such certificates of authority shall be subject to the provisions of this Code
and other related laws and to the jurisdiction and supervision of the Commissioner.

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 *No insurance company may be authorized to transact in the Philippines the business of life and non-life
insurance concurrently, unless specifically authorized to do so by the Commissioner: Provided, That the
terms life and non–life insurance shall be deemed to include health, accident and disability insurance.

No insurance company issued with a valid certificate of authority to transact insurance business anywhere in
the Philippines by the Insurance Commissioner, shall be barred, prevented, or disenfranchised from issuing
any insurance policy or from transacting any insurance business within the scope or coverage of its certificate
of authority, anywhere in the Philippines, by any local government unit or authority, for whatever guise or
reason whatsoever, including under any kind of ordinance, accreditation system, or scheme. Any local
ordinance or local government unit regulatory issuance imposing such restriction or disenfranchisement on
any insurance company shall be deemed null and void ab initio.

“Doing or Transacting an Insurance Business” covers:

1. Making or proposing to make:
a. As an insurer, an insurance contract;
b. As surety, any contract of suretyship as a vocation and not merely incidental to any
other legitimate business activity;
2. Doing any kind of business, including a reinsurance business, recognized as constituting
the doing of an insurance business;
3. Doing or proposing to do any business in substance equivalent to any of the foregoing, in
evasion of the provision of the Insurance Code.
That no profit is derived from making of insurance transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.

Unless specifically authorized to do so by IC, no insurance company may be authorized to

transact in the Philippines the business for life and non-life insurance concurrently.

*Mutual Life Insurance Company (Steamship Mutual vs. Sulpicio Lines, Inc- Protection and
Indemnity Club/ Protection & Indemnity club (P &I Club))
A mutual insurance company is cooperative enterprise where members are both insurer and
insured. Members contribute, by a system of premiums or assessments, to creation of a fund from
which all losses and liabilities are paid, and when profits are divided among themselves, in
proportion to their interests.

A mutual life insurance corporation is a cooperative that promotes the welfare of its own members.
It does not operate for profit, but for the mutual benefit of its members-policyholders.

Mutual benefit associations cover any society, association, corporation, without capital stock
formed or organized not for profit, but mainly for purpose of paying:
1. Sick benefits to members;
2. Financial support to members while out of employment; or
3. Relatives of deceased members of fixed or any sum of moneys.

Irrespective of whether such aim or purpose is carried out by means of fixed dues or assessments
collected regularly from the members, or of providing through issuance of certificates of insurance,
payment of its members of accident or life insurance benefits out of such fixed and regular dues
or assessments.

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Sec190 of IC expressly excludes “mutual benefit associations” from coverage from term,
“insurance company”, but nevertheless regulates as follows:
1. Such association can start to transact only it has secured a license from IC.
2. IC shall issue a license only when mutual benefit association has constituted and
established Guaranty Fund deposited with IC an initial amount of P5,000,000.00 in cash
or government securities.
3. Association must:
a. Issue certificate of membership to its members, and every outstanding certificate
must have an equity value equivalent to at least 50% of the total contributions
collected thereon;
b. Accumulate and maintain out of membership dues collected, sufficient reserves to
pay claims or obligations from its funds.

*Capital Requirements for Insurance Companies

1. Domestic, Life, and Non-Life
1. Newly Established: Paid Up Capital of at least P1,000,000,000.00 (P1.0 Billion)
2. Existing: At least P 250 M Net worth by end of 2013;
Additional P 300 M by end of 2016;
Additional P 350 M by end of 2019;
Additional P 400 M by end of 2022
Consisting of Paid-up Capital, Retained Earnings, Unimpaired Surplus. And
Revaluation of Assets as approved by the Insurance Commissioner.

2. Foreign Insurance Company

1. At least P 1.0 Billion of Unimpaired Capital or Assets and Reserves consisting of
Philippine securities, to wit:
a. 50% consisting of bonds or other instruments of debts of the Philippine Government,
its political subdivisions and instrumentalities or GOCCs;
b. Total investments in any registered enterprise shall not exceed 20% of its Net Worth
in Philippines or exceed 20% of capital of registered enterprise.

2. Deposited with IC for the benefit and security of policyholders and creditors in the
Philippines.

3. Reinsurer- At least P 3.0 Billion Capitalization in cash:

a. 50% is Paid-up and the remaining portion is contributed surplus of not less than P 400
Million;
b. 25% of Paid-Up Capital to be invested in securities consisting of bonds or other
instruments of debt of the Philippine Government, its political subdivisions and
instrumentalities or GOCC;
c. Remaining 75% in such other securities as may be allowed by IC, always to be
maintained free from any lien or encumbrance.

4. Mutualization of Stock Life Insurance Company- Domestic stock life insurance

company may convert itself into an incorporated mutual life insurer, by carrying out a plan

50
 for the acquisition of the outstanding shares of its capital stock for the benefit of its
policyholders.

Rules on the Operation of Insurance Companies

1. Solvency and Dividend Rules- Every insurance company authorized to do business in the
Philippines shall at all times maintain prescribed minimum Paid-up capital, and Net Worth
requirements.

No domestic insurance company shall declare or distribute any dividend on its outstanding
stocks unless it has met the Minimum Paid-up Capital and Net Worth requirements.
2. Margin of Solvency Requirements- It is constituted of Excess of Admitted Assets, less
Paid-up Capital over Liabilities and Reserve, which must be at least:
a. Life insurance: P2.00 for every P1,000.00 of Total Amount Insured in force.
b. Non-Life Insurance: 10% of net premium.

But, in no case less than P500,000.00 (Life and Non-Life)

3. Maintenance of Security Fund- To be used to pay claims against an insurance company
remaining unpaid by reason of its insolvency.

Likewise, in times of national emergency or calamity, Fund may pay insured claims not
otherwise compensable under existing policies.
4. 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; provided, that
reinsurance ceded shall be deduced in determining the risk retained.
5. Reserves Requirement- The aggregate Net Value of all policies at the end of the calendar
year of every Life Insurance company shall constitute its reserve liability to provide for
which it shall hold funds in secure investment equal to such Net Value above all other
liabilities and unpaid dividends.

Every Non-Life Insurance company shall maintain a reserve for unearned premiums on its
policies in force, which shall be charged as a liability in determination of its financial
condition.

Related Activities of Insurance Companies

1. Microinsurance- It is a financial product or services that meets the risk protection needs
of the poor, where:
a. Amount of contributions, premiums, fees or charges, computed on a daily basis
does not exceed 7.5% of; and
b. Maximum sum of guaranteed benefits is not more than 1,000 times of, the current
daily minimum wage rate for nonagricultural workers in Metro Manila.

No insurance company or mutual benefit association shall engage in microinsurance

unless it possesses all IC-prescribed requirements.

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 2. Bancassurance- Activity sanctioned under Insurance Code covering the presentation and
sale to bank customers by an insurance company of its insurance products within the bank’s
head office or any of its branches.

Arrangement does not require the bank to have equity ownership of the insurance company.

No insurance company shall enter into a bancassurance arrangement unless it possesses all
IC-BSP-prescribed requirements.

3. Reinsurance- Every insurance company must procure from another insurance company
reinsurance for any insurance coverage that exceed 20% of its Net Worth.

“Contract of Reinsurance”- Is one by which an insurer procures a third person to insure

him against loss or liability by reason of such original insurance. Where an insurer obtains
reinsurance, except under automatic reinsurance treaties, he must communicate all the
representations of original insured, and also all knowledge and information he possesses,
whether previously or subsequently acquired, which are material to the risk.

Reinsurance is presumed to be a contract of indemnity against liability, and not merely

against damage.

Original insured has no interest in a contract of insurance.

“Boldereaux”- is the journal where reinsured enters the risks that reinsurer is supposed to
assume. No insurance company which is guilty of manufacturing loss can obtain
reinsurance in the future, because he will be blacklisted.

“Errors and Omissions Policies”- are the professional liability or professional indemnity
policies which every reinsurance broker has to file with IC intended to indemnify such
broker against claims for breach of duty as reinsurance broker which may be made against
him by reason of any negligent act, error, or omission, whenever or wherever committed
or alleged to have been committed on his part or any person employed by him.

Persons, Entities, and Activities Related to Business of Insurance

1. Underwriter- Entity which must be duly registered with IC, whose duty and responsibility
it shall be to select, evaluate, and accept risks for, and to determine terms and conditions,
including those pertaining to amounts of retentions, under which such risks are to be
accepted by insurance company.

Non-life insurance companies must maintain at all times a register of risks accepted and a
claim register for each line of risks engaged in, with such entries therein as required by IC.

It is the responsibility of the underwriter to see to it that the said registers are well
maintained ad kept and that all entries therein property and correctly recorded.
2. Insurance Agents and Brokers-

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 “Insurance Agent”- Is an independent contractor, and not an employee of the company,
who for compensation:
a. Solicits or obtains insurance in behalf of insurance company;
b. Transmits for another person an application for a policy or contract of insurance
to or from such company; or
c. Offers or assumes to act in the negotiation of such insurance.

“Insurance Broker”- is a person who for compensation, commission, or other thing of

value, acts or aids in any manner in soliciting, negotiating, or procuring the making of any
insurance contract or in placing risk or taking out insurance, on behalf of the insured.
3. Adjusters-
“Independent adjuster” is any person who, for money, commission or any other thing of
value, acts for or on behalf of an insurer in the adjusting of claims arising under insurance
contracts or policies issued by such insurer.

“Public adjuster”- is any person who, for money, commission or any other thing of value,
acts on behalf of an insured in negotiating for, or effecting, the settlement of claims or
claims of said insured arising under insurance contracts or policies, or which advertises for
or solicits employment as an adjuster of such claims.
4. Actuaries- No life insurance company shall be licensed to do, or allowed to continue doing,
business in the Philippines, unless it engages services of an IC-accreditation actuary who
shall be directly responsible for direction and supervision of all its actuarial work.

IC may also require under specific regulations that non-life insurance companies to engage
the services of an accredited actuary.
5. Rating Organizations- Those formed for the purpose of, and duly licensed by IC to,
making rates to be used by insurance companies.

“Rate” means the ratio of the Premium to the Amount Insured, and, as the context may
require, shall include either: (i) consideration to be paid or charged for insurance contracts
(including surety bonds), or (ii) elements and factors forming the basis for the
determination or application of the same, or (iii) both.

Prohibition: No rating organization, or insurance company making its own rate, shall
make or promulgate any rate for any fire risk, on condition that the whole insurance amount
on any risk (or any specified part thereof) shall be placed with members of or subscribers
to such rating organization or with such insurer.

K. INSURANCE COMMISSIONER AND ITS POWERS

Powers of the Insurance Commissioner
(Administrative or regulatory) The duty to regulate insurance companies is vested with the
Insurance Commissioner. The Insurance Commissioner shall be appointed by the President for a
terms of 6 years without reappointment and shall serve as such until the successor shall have been
appointed and qualified (Sec. 437, IC).

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Adjudicatory or Quasi-Judicial Powers
1. Concurrent Jurisdiction (with regular civil courts)- cases where any single claim does not
exceed P5,000,000.00 (threshold) involving liability arising from the following:
a. Insurance contract;
b. Contract of suretyship;
c. Reinsurance contract; and
d. Membership certificate issued by members of mutual benefit associations (Sec.
439, IC).
2. Primary and exclusive jurisdiction- claim for benefits involving pre-need plans where the
amount of benefits does not exceed P100,000.00 (Sec. 55, Pre-Need Code, R.A. No. 9829).
3. For the purpose of any proceedings under Sec. 416 of the ICP, the Commissioner or any
officer thereof designated by him, is empowered to administer oaths and affirmation,
subpoena witnesses, compel their attendance, take evidence and require the production of
any books, papers, documents, or contracts or other records which are relevant or material
to the inquiry (Sec. 439, IC).
4. The Insurance Commissioner does not have jurisdiction over the legality of a contract of
agency entered into between an insurance company and its agent, it is NOT covered by the
term “doing or transacting insurance business”, neither is it covered by Sec. 439 which
grants the Commissioner adjudicatory powers.
5. The Insurance Commissioner likewise has jurisdiction over administrative cases against
insurance companies such as cases are independent of the civil or criminal cases that can
be filed against the insurance companies arising from the same claim.

Revocation of Certificate of Authority

The Certificate of Authority issued to the domestic or foreign company by the Commission may
be revoked or suspended by the Insurance Commissioner for any of the following grounds (Sec.
245, IC).:
1. The company is in an unsound condition;
2. That it has failed to comply with the provisions of law or regulations obligatory upon it;
3. That its condition or method of business is such as to render its proceedings hazardous to
the public or to its policyholders;
4. That its paid-up capital stock, in the case of a domestic stock company, or its available cash
assets, in the case of a domestic mutual company, or its security deposits, in the case of a
foreign company, is impaired or deficient;
5. That the margin of solvency required of such company is deficient.

The Commissioner is authorized to suspend or revoke all certificates of authority granted to such
insurance company, its officers and agents, and no new business shall thereafter be done by such
company or for such company by is agent in the Philippines while such suspension, revocation, or
disability continues or until its authority to do business is restored by the Commissioner.

Before restoring such authority, the Commissioner shall require the company concerned to submit
to him a business plan showing the company’s estimated receipts and disbursements, as well as
the basis therefor, for the next succeeding 3 years.

Insolvency

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 1. If the company is determined by the Commissioner to be insolvent or cannot resume
business, he shall, if public interest requires, order its liquidation (Sec. 256, IC).
2. It should be distinguished from a situation where a conservator is appointed when the
Commissioner finds that a company is in a state of continuing inability or unwillingness to
maintain a condition of solvency or liquidity deemed adequate to protect the policyholders
and creditors. The conservator will take charge of the management of the insurance
company (Sec. 255, IC).

II. PRE-NEED
R. A. No. 9829, December 3, 2009

A. DEFINITION
1. PRE-NEED PLANS
“Pre-need plans” are contracts, agreements, deeds, or plans for the benefit of the planholders which
provide for the (1) performance of future service/s, (2) payment of monetary considerations
or (2) delivery of other benefits at the time of actual need or agreed maturity date, as specified
herein, in exchange for cash or installment amounts with or without interest or insurance coverage
and includes life, pension, education, interment, and other plans, instruments, contracts, or
deeds as may in the future be determined by the Commission.

2. PRE-NEED COMPANY
“Pre-need company” refers to any corporation registered with the Commission and
authorized/licensed to sell or offer to sell pre-need plans. The term “pre-need company” also refers
to schools, memorial chapels, banks, nonbank financial institutions and other entities which have
also been authorized/licensed to sell or offer to sell pre-nee plans insofar as their pre-need activities
or business are concerned.

B. REGISTRATION OF PRE-NEED PLANS

SEC. 14. Registration of Pre-need Contracts/Plans. – Within a period of 45 days after
the grant of a license to do business as a pre-need company, and for every pre-need plan
which the pre-need company intends to offer for sale to the public, the pre-need company
shall file with the Commission a registration statement for the sale of pre-need plans
pursuant to this Code. The Commission shall promulgate rules governing the registration
of pre-need plans and the required documents which include, among others, the viability
study with certification, under oath, of a pre-need actuary accredited by the Commission,
any information brochure, a copy of the pre-need plan, and information and documents
necessary to ensure the protection of planholders and the general public. Said rules shall
further set forth the conditions under which such registration may be denied, revoked,
suspended or withdrawn, and the remedies of pre-need companies in such instances.

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SEC. 15. Registration Requirements. – The Commission shall set forth the requirements
for registration of pre-need plans and shall require the following documents, among others:
1. Duly accomplished Registration Statements;
2. Board resolution authorizing the registration of applicant’s pre-need plans;
3. Opinion of independent counsel on the legality of the issue;
4. Audited financial statements;
5. Viability study with certification, under oath, of pre-need actuary accredited by the
Commissions;
6. Copy of the proposed pre-need plan; and
7. Sample of sales materials.

Such registration statements and sales materials required under this Section shall contain
the appropriate risk factors as may be determined by the Commission.

SEC. 16. Accreditation of Actuary. – The Commission shall have the power to set
standards for the accreditation of actuaries directly responsible for the preparation and
certification of the viability study of the pre-need plan submitted by the pre-need company
for registration or amendment with the Commission. It shall further have the power to
define the obligations and liabilities of actuaries accredited by it. No actuary engaged by a
pre-need company shall at the same time be a stockholder or serve as a director of the
board, chief executive officer or chief financial officer of the company or any such position
that the Commission may determine to have an inherent conflict of interest to the position
of an actuary.

SEC. 17. Approval of Contract Forms. – All forms, including amendments thereto,
relating to the pre-need plans shall be approved by the Commission. No pre-need contracts
or certificates shall be issued or delivered within the Philippines unless in the form
previously approved by the Commission.

SEC. 18. Pre-need Advertising Rules. – Pre-need plans shall be advertised and sold in an
appropriate non-misleading manner in accordance with the rules to be prescribed by the
Commission.

It shall be unlawful for any pre-need company to advertise itself or its pre-need plans unless
the Commission has approved such advertising material. The Commission shall have a
period of 10 working days to approve or deny the advertising material and failure to act
within the said period shall cause the advertising material to be approved. For purposes
hereof, the Commission shall have the power to define the scope of its advertising rules to
appropriately cover advertising or other communications to the public.

Any person who sells or offers to sell any pre-need plan or contract by any means or
instruments of communication in violation of this section shall be liable to the person
purchasing such pre-need contract who may sue to recover the consideration paid for such
pre-need contract with interest thereon. In addition hereto, the Commission shall have the
power to pursue the erring pre-need company in an administrative or criminal proceeding.

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 A fine of P100,000.00 shall be imposed on any pre-need company found to have violated
this Section: Provided, That a second violation of this Section shall, in addition to the fine
imposed, result in the suspension of the license of the pre-need company.

SEC. 19. Disclosures to Prospective Planholders. – No registered pre-need plan shall be

sold to prospective planholders unless an information brochure, which has been filed with
the Commission, has been provided to the purchaser. The information brochure shall
contain an explanation of the principal features of the pre-need plan, a statement that the
planholder may avail of a default or reinstatement period within which to reinstate his
lapsed plan, and the conditions of the same and the rates of return for scheduled benefit
plans and illustrative yields for contingent benefit plans, and such other information that
the Commission shall require by rule.

C. LICENSING OF SALES COUNSELORS AND

GENERAL AGENTS
SEC. 20. Licensing of Sales Counselors. – No sales counselor shall be allowed to solicit,
sell, or offer to sell pre-need plans under this Code without being licensed as such by the
Commission. No license shall be issued unless the following qualifications have been
complied with:
1. The applicant must be of good moral character and must not have been convicted of any
crime involving moral turpitude;
2. The applicant has undergone a training program approved by the Commission and such
fact has been certified under oath by a duly authorized representative of a pre-need
company; and
3. The applicant has passed a written examination administered by the Commission:
Provided, That the administration of the examination may be delegated to an
independent organization under the supervision of the Commission.

Such license shall automatically expire every 30th day of June or such date of every year
as may be fixed by the Commission and may be accordingly renewed.

SEC. 21. Denial, Suspension, Revocation of License. – An application for the issuance
or renewal of a license to act as sales counselor may be denied, or such license, if already
issued, shall be suspended or revoked based on the following grounds:
1. materially misrepresented statements in the application requirements;
2. obtained or attempted to obtain a license by fraud or misrepresentation;
3. materially misrepresented the terms and conditions of pre-need plan which he sold or
offered to sell;
4. solicited, sold or attempted to solicit or sell a pre-need plan by means of false or
misleading representation and other fraudulent means;
5. terminated for cause from another pre-need company;
6. similar grounds found in Section 11 of this Code (disqualification of directors);
7. willfully allowing the use of one’s license by a non-licensed or barred individual; and
8. analogous circumstances.

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 SEC. 22. Licensing of General Agents. – If the issuer should contract the services of a
general agent to undertake the sales of its plans, such general agent shall be required to be
licensed as such with the Commission, in accordance with the requirements imposed by
the Commission.

D. DEFAULT AND TERMINATION BY PLANHOLDERS

*SEC. 23. Default; Reinstatement Period. – The pre-need company must provide in all
contracts issued to planholders a grace period of at least 60 days within which to pay
accrued installments, counted from the due date of the first unpaid installment.
Nonpayment of a plan within the grace period shall render the plan a lapsed plan. Any
payment by the planholder after the grace period shall be reimbursed forthwith, unless the
planholder duly reinstates the plan. The planholder shall be allowed a period of not less
than 2 years from the lapse of the grace period or a longer period as provided in the
contract within which to reinstate his plan. No cancellation of plans shall be made by the
issuer during such period when reinstatement may be effected.

Within 30 days from the expiration of the grace period and within 30 days from the
expiration of the reinstatement period, which is 2 years from the lapse of the grace period,
the pre-need company shall give written notice to the planholder that his plan will be
cancelled if not reinstated within 2 years. Failure to give either of the required notices shall
preclude the pre-need company from treating the plans as cancelled.

SEC. 24. Termination of Pre-Need Plans. – A planholder may terminate his pre-need
plan at any time by giving written notice to the issuer.

A pre-need plan shall contain a schedule of termination values to which the planholder
is entitled to upon termination. Such schedule of termination value shall be required for all
in-force pre-need plans and shall be fair, equitable and in compliance with the Commission
issuances. The termination value of the pre-need plan shall be pre-determined by the
actuary of the pre-need company upon application for registration of the pre-need plans
with the Commission and shall be disclosed in the contract.

E. CLAIMS SETTLEMENT
SEC. 25. Unfair Claims Settlement Practices. – (a) No pre-need company shall refuse,
without just cause, to pay or settle claims arising under coverages provided by its plans nor
shall any such company engage in unfair claim settlement practices. Any of the following
acts by a pre-need company, if committed without just cause, shall constitute unfair claims
settlement practices:

1. Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to

coverages at issue;

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2. Failing to acknowledge with reasonable promptness pertinent communications with
respect to claims arising under its plan;
3. Failing to adopt and implement reasonable standards for the prompt investigation of
claims arising under its plan;
4. Failing to provide prompt, fair and equitable settlement of claims submitted in which
liability has become reasonably clear; or
5. Compelling planholders to institute suits or recover amounts due under its plan by
offering, without justifiable reason, substantially less than the amounts ultimately
recovered in suits brought by them.

(b) Evidence as to the number and types of valid and justifiable complaints to the
Commission against a pre-need company shall be deemed admissible in an administrative
or judicial proceeding brought under this section.
(c) Any violation of this section shall be considered sufficient cause for the suspension or
revocation of the company’s certificate of authority.

SEC. 26. Payment of Plan Proceeds. – In the case of scheduled benefit plans, the
proceeds of the plan shall be paid immediately upon maturity of the contract, unless such
proceeds are made payable in installments or as an annuity, in which case the installments
or annuities shall be paid as they become due. Refusal or failure to pay the claim within 15
days from maturity or due date will entitle the beneficiary to collect interest on the proceeds
of the plan for the duration of the delay at the rate twice the legal interest unless such failure
or refusal to pay is based on the ground that the claim is fraudulent: Provided, That the
planholder has duly complied with the documentary requirements of the pre-need
company.

In the of contingent benefit plans, the benefits shall be paid by the pre-need company 30
days upon submission of all necessary documents.

SEC. 27. Recovery of Investment. – The planholder may institute the necessary legal
action in court to recover his/her investment in the pre-need company, in case of its
insolvency or bankruptcy.

However, in case the insolvency or bankruptcy is a mere cover-up for fraud or illegality,
the planholder may institute the legal action directly against the officers and/or controlling
owners of the said pre-need company.

SEC. 28. Consequences of Delay or Default. – In case of any litigation for the
enforcement of any pre-need plan, it shall be the duty of the Commission to determine
whether the payment of the claim of the planholder has been unreasonably denied or
withheld. If found to have unreasonably denied or withheld the claim, the pre-need
company shall be liable to pay damages, consisting of actual damages, attorney’s fees and
legal interest, to be computed from the date the claim is made until it is fully satisfied:
Provided, That the failure to pay any such claim within the time prescribed in Section 26
hereof shall be considered prima facie evidence of unreasonable delay in payment.

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 SEC. 29. Distribution of Profits. – A pre-need company may declare dividend: provided,
That the following shall remain unimpaired, as certified under oath by the president and
the treasurer with respect to items (a) and (b); and in the case of item (c), by the trust officer.
a) One hundred percent (100%) of the capital stock;
b) An amount sufficient to pay all net losses reported, or in the course of settlement, and
all liabilities for expenses and taxes; and
c) Trust fund.

Any dividend declared under the preceding paragraph shall be reported to the Commission
within 30 days after such declaration.

NOTE: Pre-need code (Sec. 30) prohibits the utilization of the trust fund for the purposes other
than for the benefit of the planholders (cannot use it for payment of unpaid creditors). The allowed
withdrawals (specifically, the cost of benefits or services, the termination values payable to the
planholders, the insurance premium payments for insurance-funded benefits of memorial life plans
and other costs) refer to payments that the pre-need company has undertaken to be made based on
the contracts (SEC vs. CAP, G.R. No. 202052, March 7, 2018).

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 III. TRANSPORTATION LAW
A. COMMON CARRIERS
Common carriers are persons, corporations, firms, or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public (Art. 1732, NCC).

Requisites for an entity to be classified as a common carrier

1. Must be a person, corporation, firm, or association;
2. Engaged in the business of carrying or transporting passengers or goods or both;
3. The carriage or transport must either be by land, water, or air;
4. The service is for a fee; and
5. The service is offered to the public.

True test for determining whether one is a common carrier

The true test for a common carrier is NOT the quantity or extent of the business actually
transacted, or the number and character of the conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by the carrier that he has held out to the
general public as his business or occupation (Sps. Perena vs. Sps. Nicolas, GR No. 157917,
August 29, 2012).

Rules or Principles/ Characteristics

1. Art. 1732 makes no 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.
2. Art. 1732 also carefully avoids making any 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.
3. Art. 1732 does not distinguish between a carrier offering its services to the “general
public”, and one who offers services or solicits its business only from a narrow segment
of the general population or it can serve a limited clientele.
4. A person or entity is a common carrier and has the obligations of the common carrier under
the Civil Code even if he did not secure a Certificate of Public Convenience.
5. The NCC makes no distinction as to the means of transporting, as long as it is by land,
water, or air.

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 6. The NCC does not provide that the transportation should be by motor vehicle.
7. A person or entity may be a common carrier even if he has no fixed and publicly known
route, maintains no terminals, and issues no tickets.
8. A person or entity need not be engaged in the business of public transportation for the
provisions of the NCC on common carriers apply to them.
9. The carrier can also be a common carrier even if the operator does not own the vehicle or
vessel that he or she operates.

Private carrier
A private carrier is one who, without making the activity a vocation, or without holding himself
or itself out to the public as ready to act for all who may desire his or its services, undertakes, by
special agreement in a particular instance only, to transport goods or persons from one place to
another wither gratuitously or for hire.

A carrier which does not qualify under the requisites of a common carrier is deemed a private
carrier.

NOTE: A private or special carrier lies in the character of the business, such that if the undertaking
is an isolated transaction, not a part of the business or occupation, and the carrier does not hold
itself out to carry the goods for the general public or to a limited clientele, although involving the
carriage of goods for a fee, the person or corporation providing such service could very well be
just a private carrier (PlihAm Gen. Insurance Co. vs. PKS Shipping Co., GR No. 149038, April 9,
2003).

Common carrier vs. private carrier

1. The common carrier holds himself out in common, that is, to all persons who choose to
employ him, ready to carry for hire, while the private carrier or special carrier agrees in
some special case with some private individual to carry for hire.
2. A private carrier is NOT bound to carry for any reason, unless it enters a special agreement
to do so. A common carrier is bound to carry for all who offer such goods as it is
accustomed to carry and tender reasonable compensation for carrying them.
3. A common carrier is subject to regulation as it is a public service. A private carrier is not.
4. A common carrier is bound to exercise extraordinary diligence while a private carrier owes
only diligence of a good father of a family.
5. A common carrier cannot stipulate that it is exempt from liability for the negligence of its
agents or employees. Such stipulation is void as it is against public policy. A private carrier
may validly enter into such stipulation.

NOTE: A charter party may transform a common carrier into a private carrier. However, it must
be a bareboat or demise charter where the charterer mans the vessel with his own people and
becomes, in effect, the owner (pro hac vice) for the voyage or service stipulated.

The common carrier is NOT transformed into a private carrier if the charter party is a contract of
affreightment like a voyage charter or a time charter.

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1. DILIGENCE REQUIRED OF COMMON CARRIERS (Defenses
of common carriers)
The diligence required of common carriers is extraordinary diligence.

It is that extreme measure of care and caution which persons of unusual prudence and
circumspection use for securing and preserving their own property or rights. The law requires
common carriers to render service with the greatest skill and utmost foresight.

NOTE: The defense of due diligence in the selection and supervision of an employee is not
available to a common carrier because the degree of diligence required of a common carrier is not
the diligence of a good father of a family but extraordinary diligence, the diligence of great skill
and utmost foresight.

Extraordinary diligence in the Extraordinary diligence in the

Carriage of Goods Transport of Passengers
Commencement
Commences from the time the goods are Commences from the moment the person who
unconditionally placed in the possession of and purchases the ticket from the carrier presents
received by the carrier for transportation. himself at the proper place and in a proper
manner to be transported.
Duration
1. GR: Continues until the goods are Continues until passenger has been landed at
delivered, actually or constructively, the port of destination and has left the vessel’s
by the carrier to the consignee or to the owner’s dock or premises.
person who has a right to receive them,
and even when they are temporarily
unloaded or stored in transit.

XPN: The shipper or owner has made

use of the right or stoppage in transitu
(the right which the unpaid vendor has
to repossess himself of his goods
before they come into the actual or
constructive possession of his
insolvent transferee).

2. Continues even during the time the

goods are stored in a warehouse of the
carrier at the place of designation until
the consignee has been advised of the
arrival of the goods and has been given
a reasonable opportunity thereafter to
remove them or otherwise dispose of
them.

Causes of action for failure to observe diligence required

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 PERSON WHO HAS CAUSE OF BASIS OF CAUSE OF ACTION
ACTION AGAINST COMMON CARRIER
Third person who suffered damages Tort/ Quasi-delict (extra-contractual
negligence; culpa aquiliana)
Shipper of the goods damaged Breach of the contract of carriage (Culpa
Contractual)
Heir/s of the deceased passengers or the Breach of the contract of carriage (Culpa
passenger himself for the injuries sustained Contractual)
by him

CAUSE OF ACTION OF THE INJURED BASIS OF CAUSE OF ACTION/

PASSENGER OR HIS HEIRS, IF THE (source of obligation- contract; tort; crime)
PASSENGER DIES:
Against the negligent driver Culpa criminal

If the driver is convicted and it turns out that

he is insolvent, the heirs/ passengers may run
after the employer of the driver, pursuant to the
employer’s subsidiary liability under Article
103, in relation to Arts. 100 and 102 RPC.
Against the carrier and driver operating the Tort/ Quasi-delict
other vehicle at fault
Against the common carrier at fault Culpa Contractual; Direct and primary

The liability of the common carrier and his

driver as well as the operator of the other
vehicle and his driver is joint and several.

Problem: Fil-Asia Air Flight 916 was on a scheduled passenger flight from Manila when it crashes
as it landed at the CDO airport. The pilot miscalculated the plane’s approach and undershoot the
runway. Ten passengers dies at the crash scene.

One of them managed to leave the plane but was run over by an ambulance coming to the rescue.
Another was an airline employee who hitched a free ride to CDO who was not in the passenger
manifest.

The Civil Aeronautics Authority investigation showed that the co-pilot who had control of the
plane’s landing time experience, and should not have been in control of the plane at the time. He
was allowed to fly as a co-pilot because of the scarcity of pilots- Philippine pilots have been
recruited by foreign airlines under vastly improved flying terms and wages so that newer and less
trained pilots are being locally deployed. The main pilot, on the other hand, had a very high level
of blood alcohol at the time of the crash.

You are part of the team that the victims hired to handle the case for them as a group. In your case
conference, the following questions came up:

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 a. Explain the causes of action legally possible under the given facts against the airline and
the pilots; whom will you specifically implead in these causes of action?
b. How will you handle the cases of the passenger run over by the ambulance and the airline
employee allowed to hitch a free ride to CDO?

Answer:
a. A complaint for breach of contract of carriage can be filed against Fil-Asia Air for failure
to exercise extraordinary diligence in transporting the passengers safely from their point of
embarkation to their destination (Art. 1755, NCC).

A complaint based on quasi-delict can be filed against the pilots because of their fault and
negligence (Art. 2176, NCC). Fil-Asia Air can be included for negligence in the selection
and supervision of the pilots (Art. 2180, NCC).

A third cause of action may be a criminal prosecution for the reckless imprudence resulting
in homicide against 2 pilots. The airline will be subsidiary liable for the civil liability, only
after the pilots are convicted and found to be insolvent.

b. It is the driver of the ambulance and his employer who should be held liable for damages
because a passenger was run over. This is in accordance with Articles 2176 and 2180 of
the NCC. There could also be a criminal prosecution for reckless imprudence resulting in
homicide against the ambulance driver and his consequent civil liability.

Since the airline employee was being transported gratuitously, Fil-Asia was not required
to exercise extraordinary diligence for his safety and only ordinary care.

2. LIABILITIES OF COMMON CARRIERS

*Presumption of negligence in the carriage of goods

GR: There is a presumption of negligence if the goods are lost, destroyed, or deteriorated.

XPNs: (N P S C P E) *Defenses
1. Natural disaster or calamity which is the proximate cause of the loss (flood, storm,
earthquake, lightning);
2. Acts of public enemy (enemy of the carrier) in war, whether international or civil;
3. Act or omission of the shipper or passenger;
4. Character of the goods or defects in the packing or container;
5. Order or act of competent public authority (Art. 1734, NCC); or
6. Exercise of extraordinary diligence (Art. 1735, NCC).

*Presumption of negligence in the transportation of passengers

In case of death of or injuries to passengers, common carriers are presumed to have been at fault
or to have acted negligently (Art. 1756, NCC). However, such presumption may be refuted by
proving observance of extraordinary diligence as prescribed by Art. 1733 of the NCC.

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*Presumption of negligence
The court need not make an express finding of fault or negligence of common carriers, the law
imposes liability upon common carriers, as long as it is shown that:
1. There exists a contract between the passenger or the shipper and the common carrier; and
2. That the loss, deterioration, injury, or death took place during the existence of the contract.

Effect of Acquittal
The acquittal of the employee of the common carrier in the criminal case is immaterial to the case
for breach of contract.

3. CLASSIFICATION OF TRANSPORT NETWORK VEHICLE

SERVICES (TNVS) AND TRANSPORT NETWORK COMPANIES
(TNC)
Department of Transportation and Communication issued Department Order No. 2015-11
last May 8, 2015

Transport Network Companies (TNC) shall mean as an “organization whether a corporation,

partnership, or sole proprietor, that provides pre-arranged transportation services for compensation
using internet-based technology application or digital platform technology to connect passengers
with drivers using their personal vehicles.”

Transport Network Vehicle Services (TNVS) refers to vehicle owners who provide pre-arranged
transportation services through the use of a TNC provided internet-based digital technology
application like Grab, Uber, Tripda and EasyTaxi on an internet connected device.

TNCs and TVNSs come under the concept of common carrier as persons, corporations, firms
or associations engaged in the business of carrying or transporting passengers…by land…for
compensation, offering their services to the public notwithstanding their utilization of internet-
based digital technology application in their system of operation. As a consequence, the seven (7)
characteristics/ rules and principles will appropriately apply to them.

**NOTE: The LTFRB declared that a TNC is treated as a transport provider, whose accountability
commences from the acceptance by its TNVS while online. On the other hand, the accountability
of the TNVS, as a common carrier, attaches from the time the TNVS is online and offers its
services to the riding public.

NOTE:
There is no contractual discretion between the Angkas bikers and would-be passengers. The app
automatically pairs them up based on algorithmic procedures. Verily, the absence of true choice
on these material contractual points apparently contradicts the postulation that the Angkas app
merely facilitates a purely private arrangement between the biker and his passenger. It will still be
considered as a common carrier.

B. VIGILANCE OVER GOODS

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1. *EXEMPTING CAUSES
PRESUMPTION on the loss, destruction, or deterioration of goods
GR: The common carrier is presumed to have been at fault or to have acted negligently when the
goods transported are lost, destroyed, or deteriorated (Art. 1735, NCC). Unless they prove that they
observe extraordinary diligence as required by law.

XPNs: When the same is due to any of the following causes only:(*Defenses of common carriers)
1. Fortuitous events (flood, storm, earthquake, lightning, or other natural disaster or
calamity). Provided, the following conditions are present:
a. Natural disaster was the proximate and only cause;
NOTE: For a common carrier to be absolved from liability in case of force majeure,
it is not enough that the accident was caused by a fortuitous event. The common
carrier must still prove that it did NOT contribute to the occurrence of the incident
due to its own or its employees’ negligence (Sulpicio Lines, Inc. vs. Napoles
Sesante, et. Al., GR No. 172682, July 27, 2016).
b. Carrier exercises due diligence to prevent or minimize loss before, during, and
after the occurrence of the natural disaster; and
c. The common carrier has NOT NEGLIGENTLY incurred delay in transporting
the goods (Art. 1739-1740, NCC).

2. Act of the public enemy in war, whether international or civil, provided:

a. Act was the proximate cause and only cause; and
b. Carrier exercises due diligence to prevent or minimize loss before, during, and after
the act (Art. 1739-1740, NCC).

3. Act or omission of the shipper or owner of the goods, provided:

a. If the proximate and only cause- exempting
b. If contributory negligence- mitigating

4. The character of the goods or defects in the packing or in the containers; provided,
carrier exercised due diligence to forestall or prevent loss (Art. 1742, NCC).
NOTE: If the fact of improper packing is known to the carrier or its servants, or apparent
upon ordinary observation, but it accepts the goods notwithstanding such condition, it is
NOT relieved from responsibility for loss or injury resulting therefrom.

5. Order or act of competent authority; provided, the authority is with power to issue the
order (Art. 1743, NCC).

NOTE: There must be an order or act of competent authority through which the goods are
seized or destroyed (Art. 1743, NCC).

If the officer acts without legal process, the common carrier will be held liable.

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In all cases other than those enumerated above, there is presumption of negligence even if there is
an agreement limiting the liability of the common carrier in the vigilance over the goods.

*NOTE: What is the rule if the loss of the goods was due to theft?
The common carrier is liable.
Under Art. 1745 (6) of the Civil Code, a common carrier is held responsible- and will NOT be
allowed to divest or to diminish such responsibility- even for acts of strangers like thieves or
robbers, except where such thieves or robbers in fact acted “WITH GRAVE OR IRRESSISTIBLE
THREAT, VIOLENCE, OR FORCE” (Dean Ceniza).

FORTUITOUS EVENT

a. REQUIREMENT OF ABSENCE OF NEGLIGENCE

Requisites of a fortuitous event (F I U I)

1. The common carrier must be free from any participation in or aggravation of the injury to
the creditor.
2. The event must be such as to render it impossible for the common carrier to fulfill his
obligation in a normal manner.
3. The event must be unforeseen or unavoidable.
4. The cause of the breach of obligation must be independent of the will of the common
carrier.

NOTE:
1. A mechanical defect is not fortuitous event
2. Fire is not considered a natural disaster- Fire arises almost invariably from some act of
man or by human means. It does not fall within the category of n act of God. Except, if the
fire is caused by lightning or by other natural disaster or calamity.
3. Typhoon as a fortuitous event
4. Common carrier’s liability for the acts of strangers or criminals- A common carrier is
liable even for the acts of strangers like thieves or robbers. Except, where such thieves or
robbers acted “with grave or irresistible threat, violence, or force”. The common carrier is
not liable for the value of the undelivered merchandise which was lost because of an event
that is beyond his control.
5. Other invalid defenses:
a. Explosion
b. Worms and rats
c. Water damage
d. Barratry- The ship owner cannot escape liability to 3 rd persons if the cause of
damage is barratry. It is an act committed by the master or crew of the ship for some
unlawful or fraudulent purpose, contrary to their duty to the owner.

b. ABSENCE OF DELAY
Rules regarding the time of delivery of goods and delay
1. If there is an agreement as to time of delivery- delivery must be within the time stipulated
in the contract or bill of lading

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 2. If there is no agreement- delivery must be within a reasonable time.

Delay in the delivery of goods

The carrier shall be liable for damages immediately and proximately resulting from such neglect
of duty (Art. 1170, NCC).

In the absence of a special contract, a carrier is not an insurer against delay in the transportation
of goods. The effects of delay are as follows:
1. If the common carrier, without just cause, delays the transportation of the goods or changes
the stipulated or usual route, the contract limiting the common carrier’s liability cannot be
availed of in case of the loss, destruction, or deterioration of the goods (Art. 1747, NCC).
NOTE: An agreement limiting the common carrier’s liability for delay on account of
strikes or riots is valid (Art. 1748, NCC).

2. Excusable delay in carriage merely suspends and generally does not terminate the contract
of carriage;
3. The carrier shall be made liable when vessel or vehicle is unreasonably delayed;
4. Carrier remains duty bound to exercise extraordinary diligence; and
5. Natural disaster shall not free the carrier from responsibility.

c. DUE DILIGENCE TO PREVENT OR LESSEN LOSS

To free the common carrier from liability in case of flood, storm or other natural disaster or
an act of a public enemy
1. The common carrier must exercise due diligence to prevent or minimize loss before,
during, and after the occurrence (Art. 1739, NCC).
2. The natural disaster or the act of the public enemy is the proximate and only cause of the
loss (Art. 1740, NCC).

NOTE: If the common carrier negligently incurs delay in transporting the goods, a natural
disaster shall not free such carrier from responsibility.

Loss due to character of the goods or the faulty nature of its containers
If the loss, destruction, or deterioration of the goods was caused by the character of the goods, or
the faulty nature of the packing or the containers the common carrier must exercise due diligence
to forestall or lessen the loss.

2. CONTRIBUTORY NEGLIGENCE
Contributory negligence is the failure of a person who has been exposed to injury by the fault or
negligence of another, to use such degree of care for his safety and protection an ordinary prudent
man would use under the circumstances.
NOTE: Contributory negligence on the part of the passenger does not justify the common carrier’s
exemption from liability.

NOTE: Under the Civil Code, a common carrier is duty bound to exercise extraordinary diligence
in carrying its passenger through the negligence or willful acts of its employees even if the latter

69
have acted beyond the scope of their authority or in violation of their orders. This liability cannot
be eliminated or limited by stipulation or by posting notices.

Rule if there is contributory negligence on the part of the shipper

If the shipper or owner merely contributed to the loss, destruction, or deterioration of the goods,
the proximate cause thereof being the negligence of the common carrier, the latter shall be liable
for damages, which however, shall be equitably reduced (Art. 1741, NCC).

3. DURATION OF LIABILITY
The NCC is explicit when it comes to the duration of extraordinary responsibility with respect of
goods. Such responsibility lasts 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 a right to receive them
(Art. 1736, NCC).

The carrier’s responsibility terminates in any of the following cases:

1. When the goods are delivered actually or constructively by the carrier to the consignee or
to the person who was a right to receive them (Art. 1736, NCC);
2. When the goods are temporarily unloaded or stored in transit by reason of the exercise of
the shipper or owner of his right to stoppage in transitu;
3. When the consignee has been advised of the arrival of the goods at the place of destination
and has had reasonable opportunity to remove them or dispose of them from the warehouse
of the carrier at the place of destination (Art. 1738, NCC).

a. DELIVERY OF GOODS TO COMMON CARRIER

The goods are deemed delivered to the carrier when the goods are ready for and have been placed
in the exclusive possession, custody and control of the carrier for the purpose of their immediate
transportation and the carrier has accepted them.

When the carrier has thus accepted such delivery, the liability of the carrier commences eo instanti.

b. ACTUAL OR CONSTRUCTIVE DELIVERY

Party to whom delivery should be made

It must be delivered, actually or constructively, to the consignee or to the person who has a right
to receive them (Art. 1736, NCC).

Constructive delivery
There is constructive delivery when delivery is effected not by actually transferring the possession
of thing to the vendee (in this case, the other party, either the carrier or the consignee) but by legal
formalities or by symbolic tradition.

Misdelivery by a carrier who was chosen by the buyer

Misdelivery of the goods is attributed to the carrier and not to the seller. And, since the carrier was
chose and authorized to make the delivery by the buyer itself, the seller cannot be held responsible
for such misdelivery.

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c. TEMPORARY UNLOADING OR STORAGE

Right of stoppage in transit

It is the right exercised by the seller by stopping the delivery of the goods, in case of insolvency
of the buyer or consignee, when such goods are already in transit (Art. 1530, NCC);

The seller may exercise this right either:

1. By obtaining actual possession of the goods; or
2. By giving notice of his claim to the carrier or other bailee in whose possession the goods
are.

GR: The common carrier’s duty to observe extraordinary diligence in the vigilance over the goods
remains in full force and effect even when they are temporarily unloaded or stored in transit (Art.
1737, NCC).

XPN: When the shipper or owner has made use of the right of stoppage in transitu (Art. 1737,
NCC).
The diligence required is merely ordinary diligence because of the following:
1. It is holding the goods in the capacity of an ordinary bailee or warehouseman and not as a
carrier.
2. There is a change of contract from a contract of carriage to a contract of deposit.

Obligation required of the common carrier in case of stoppage in transit

When notice of stoppage in transitu is given by the seller to the carrier, he must redeliver the goods
to, or according to the directions of, the seller. The expenses of such delivery must be borne by the
seller (Art. 1532, NCC).
NOTE: If the seller instructs to deliver it somewhere else, a new contract of carriage is formed
and the carrier must be paid accordingly.

4. STIPULATION FOR LIMITATION OF LIABILITY

Valid stipulations that a common carrier of goods may indicate in a contract in order to
escape liability
1. A stipulation limiting the liability of the common carrier for the loss, destruction, or
deterioration of the goods to a degree less than extraordinary diligence, provided that:
a. In writing, signed by the shipper or owner;
b. Supported by a valuable consideration other than the service rendered by the
common carrier; and
c. Reasonable, just, and not contrary to public policy.
2. An agreement limiting the common carrier’s liability for delay on account of strikes or
riots (Art. 1748, NCC).
3. A stipulation that the common carrier’s liability is limited to the value of the goods
appearing in the bill of lading, unless the shipper or owner declares a greater value (Art.
1749, NCC).

71
 4. A contract fixing the sum that may be recovered by the owner or shipper for the loss,
destruction, or deterioration of the goods (Art. 1749, NCC).

NOTE: The contract limiting the common carrier’s liability cannot be availed of in case of loss,
destruction, or deterioration of the goods, if the common carrier, without just cause:
1. Delays the transportation of the goods; or
2. Changes the stipulated or usual route (Art. 1747, NCC).

Even if there is an agreement limiting the liability of the common carrier in the vigilance over the
goods, the common carrier is still disputably presumed to have been negligent in case of its loss,
destruction, or deterioration (Art. 1752, NCC).

Annulment of a stipulation limiting the common carrier’s liability by the shipper or owner
A stipulation limiting the common carrier’s liability may be annulled by the shipper or owner if
the common carrier refused to carry the goods unless the shipper or owner agreed to such
stipulation (Art. 1746, NCC).

a. *VOID STIPULATIONS
1. That the common carrier need not observe any diligence in the custody of goods.
2. That the goods are transported at the risk of the owner or shipper.
3. That the common carrier’s liability for acts committed by thieves, or of robbers who do not
act with grave or irresistible threat, violence, or force, is dispensed with or diminished.
4. Any similar stipulation that is unreasonable, unjust, and contrary to public policy.
5. That the common carrier shall exercise a degree of diligence less than that of a good father
of the family, or a man of ordinary prudence in the vigilance over the movable transported.
6. That the common carrier will not be liable for any loss, destruction, or deterioration of the
goods.
7. That the common carrier shall not be responsible for the acts or omission of his or its
employees.
8. That the common carrier is not responsible for the loss, destruction, or deterioration of
goods on account of the defective condition of the car, vehicle, ship, airplane, or other
equipment used in the contract of carriage (Art. 1745, NCC).

b. LIMITATION OF LIABILITY TO FIXED AMOUNT

A contract fixing the sum that may be recovered for the loss, destruction, and deterioration of
goods is binding provided that it is:
1. Just and reasonable under the circumstances; and
2. Has been fairly and freely agreed upon (Art. 1750, NCC).

A stipulation between the common carrier and the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary
diligence shall be valid, provided it be:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other than the service rendered by the common
carrier; and
3. Reasonable, just, and not contrary to public policy (Art. 1744, NCC)

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c. LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION OF
GREATER VALUE
GR: The liability of the common carrier shall NOT exceed the stipulation in a contract of carriage,
even if the loss or damage results from the carriers negligence.

XPN: Common carrier’s liability may be extended beyond the specified amount mentioned if the
shipper or owner of the goods:
1. Declares a greater value; and
2. Pays corresponding freight (Art. 1749, NCC).

NOTE: The liability of an airline company for lost baggage is limited to the amount stated in the
ticket unless the passenger declared a higher valuation and paid additional fare.

5. LIABILITY FOR BAGGAGE OF PASSENGERS

a. CHECKED-IN BAGGAGE
The provisions of Art. 1733-1753, NCC shall apply (Art. 1754, NCC).

Art. 1753. The law of the country to which the goods are to be transported shall govern the
liability of the common carrier for their loss, destruction, or deterioration.

b. BAGGAGE IN POSSESSION OF PASSENGER

The rules in Arts 1998 and 2000 to 2003, NCC concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable.

1. The common carrier shall be responsible for shipper’s baggage as depositaries, provided
that:
a. Notice was given to them, or to their employees, of the effects brought by the
guests; and
b. On the part of the shipper, they take the precautions which said common carriers or
their substitutes advised relative to the care and vigilance of their effects (Art. 1998,
NCC).
2. The responsibility shall include the loss of, or injury to the personal property of the shipper
caused by the employees of the common carrier as well as strangers; but not that which
may proceed from any force majeure (Art. 2000, NCC).
3. The act of a thief or robber, who has entered the carrier, is not deemed force majeure,
unless it is done with the use of arms or through an irresistible force (Art. 2001, NCC).
4. The common carrier is not liable for compensation if the loss is due to the acts of the
shipper, his family, or servants, or if the loss arises from the character of the things brought
into the carrier (Art. 2002, NCC).
5. The common carrier cannot free himself from responsibility by posting notices to the effect
that he is not liable for the articles brought by the passenger. Any stipulation between the
common carrier and the shipper whereby the responsibility of the former as set forth in
Arts 1998 to 2001 is suppressed or diminished shall be void (Art. 2003, NCC).

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C. SAFETY OF 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 a due regard for all the
circumstances (Art. 1755, NCC).

Who are considered passengers

1. One who has boarded a wrong vehicle, has been properly informed of such fact, and on
alighting, is injured by the carrier.
2. Invited guests and accommodation passengers.
3. 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.
4. One who remains on a carrier for an unreasonable length of time after he has been afforded
every safe opportunity to alight.

The carrier is thus NOT obliged to exercise extraordinary diligence but only ordinary
diligence in these instances.

Assumption of risk on the part of the passengers

Passengers must take such risks incident to the mode of travel. The passenger must observe the
diligence of a good father of a family to avoid injury to himself (Art. 1761, NCC).

Problem:
WTC owned and operated an inter-island deluxe bus service playing the Manila-Batangas-
Mindoro route. Three friends, namely: Aurelio, Jerome, and Florencio rode on the same WTC
bus from Manila bound for Mindoro. Aurelio purchased a ticket from himself. Jerome, being
a boyhood friend of the bus driver, was allowed a free ride by agreeing to sit during the trip
on a stool placed in the aisle. Florencio, already penniless after spending all of his money on
beer the night before, just stole a ride in the bus by hiding in the on-board toilet of the bus.

During the trip, the bus collided with another bus coming from the opposite direction. The
three friends all suffered serious physical injuries.

What are WTC’s liabilities, if any, in favor of Aurelio, Jerome, and Florencio? Explain your
answer.

Answer:
As a common carrier, WTC is liable to Aurelio for breach of contract of carriage, the latter
being a passenger who purchased a ticket for himself. WTC as also liable to Jerome for
breach of contract of carriage because he was passenger although he was being transported
gratuitously. However, WTC has no liability in favor of Florencio for breach of contract of
carriage. A stowaway like Florencio, who secures passage by fraud, is not a passenger.

What should a common carrier do to avoid liability for the death or injury to a passenger?
The common carrier must prove his or its observance of that extraordinary diligence; otherwise,
the legal presumption that he or it was at fault or acted negligently would stand.

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Is the liability of the common carrier automatic?
No. Carriers are not insurers 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. The common carrier’s liability for personal injuries sustained by its passenger rests upon
its negligence, its failure to exercise the degree of diligence that the law requires.

1. VOID STIPULATIONS
Stipulations limiting the liability of common carrier in case of injury or death
GR: The responsibility of a common carrier for the safety of passengers CANNOT be dispensed
with or lessened by stipulation, by posting of notices, by statements on tickets, or otherwise (Art.
1757, NCC).

XPN: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s
liability for negligence is valid (Art. 1758, NCC).

NOTE: The passenger must be carried gratuitously. If it is only a reduction of fare, then any
limitation of the common carrier’s liability is not justified.

XPN to the XPN: Notwithstanding the exception, common carriers will be liable nevertheless for
willful acts or gross negligence.

2. DURATION OF LIABILITY
Observance of extraordinary diligence in transportation of passengers commences from the
moment the person who purchases the ticket from the carrier presents himself at the proper
place and in a proper manner to be transported, and continues until the passenger has been
landed at the port of designation and has left the vessel owner’s dock or premises.

a. WAITING FOR CARRIER OR BOARDING OF CARRIER

A person whom the carrier would be bound to accept who enters upon the carrier’s premises such
as a station, ticket office, or waiting room, with the intention of becoming a passenger, will
ordinarily be viewed as assuming the status of a passenger.

Trains
The carrier is supposed to exercise extraordinary diligence although passenger is still waiting for
a coach on the platform of the train station. However, there is no obligation on the part of a street
railway company to stop its cars to let on intending passengers at other points than those appointed
for stoppage.

Carriage by sea
The duty of the carrier commences as soon as a person with bona fide intention of taking passage
places himself in the care of the carrier or its employees and is accepted as passenger.

Land transportation

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The act of the driver in stopping their conveyances is a continuous offer to riders (Continuing
Offer Rule). 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 the point.

*It is the duty of common carriers of passengers, including common carriers by railroad train,
streetcar, or motorbus, to stop their conveyances 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 conveyance while they are
doing so.

When a Public Utility Vehicle is not in motion, it is not necessary for a person who wants to
tide the same to signal his intention to board
When a bus is not in motion, there is no necessity for a person who wants to ride the same to signal
his intention to board. A public utility bus, once it stops, is in effect making a continuous offer to
bus riders. Hence, it becomes the duty of the driver and the conductor, every time the bus stops, to
do no act that would have the effect of increasing the peril to a passenger while he was attempting
to board the same. The premature acceleration of the bus in this case was a breach of such duty.

A person, by stepping and standing on the platform of the bus, is already considered a passenger
and is entitled all the rights and protection pertaining to such a contractual relation. Hence, it has
been held that the duty which the carrier owes to its patrons extends to persons boarding cars as
well as to those alighting therefrom.

b. ARRIVAL AT DESTINATION

Liability for death or injury to passengers upon arrival at destination

Once created, the relationship will not ordinarily terminate until the passenger has, after reaching
his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity
to leave the carrier’s premises. All persons who remain on the premises a reasonable time after
leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable
delay within this rule is to be determined from all the circumstances, and includes a reasonable
time to see after his baggage and prepare for his departure.

Carrier-passenger relationship continues until the passenger has been landed at the port of
destination and has left the vessel-owner’s premises. The victim’s presence in a vessel after 1 hour
from his disembarkation is not enough in order to absolve the carrier from liability in his death.

3. LIABILITY FOR ACTS OF OTHERS

a. EMPLOYEES

Common carriers are liable for the acts of their employees

Common carriers are liable for the death of or injury to passengers through negligence or willful
acts of the former’s employees, although such employees may have acted beyond the scope of
their authority or in violation of the orders of the common carriers. The liability of the common

76
carriers DOES NOT CEASE upon proof that the common carrier exercised all the diligence of a
good father of a family in the selection and supervision of their employees (Art. 1759, NCC).

NOTE: Under Art. 2180 of the NCC, employers are liable for the damages caused by their
employees acting within the scope of their assigned tasks. Once negligence on the part of the
employee is established, a presumption instantly arises that the employer was remiss in the
selection and/or supervision of the negligent employee. It is incumbent upon the employer to rebut
this presumption by presenting adequate and convincing proof that it exercised the care and
diligence of a good father of a family in the selection and supervision of its employees. Failing to
do this, a common carrier cannot avoid liability for the quasi-delict committed by its negligent
employee. The responsibility of 2 or more persons who are liable for a quasi-delict is solidary.

NOTE: The carrier, unlike in suits for quasi-delict, may NOT escape liability by proving that
it has exercised due diligence in the selection and supervision of its employees (Art. 1759,
NCC).

Liability of the common carrier as regard the acts of employees may not be limited by
stipulation
The common carrier’s responsibility cannot be eliminated or limited by stipulation, by the posting
of notices, by statements on the tickets or otherwise (Art. 1760, NCC).

Concept of vicarious liability- When an injury is caused by the negligence of an employee, there
instantly arises a presumption of law that there was negligence on the part of the employer either
in the selection of the employee or in the supervision over him after the selection, or both.

b. OTHER PASSENGERS AND STRANGERS

The registered owner of the vehicle may be held liable for damages suffered by a third person
in the course of the operation of the vehicle
The registered owner of a public service vehicle is responsible for damages that may arise from
consequences incident to its operation or that may be caused to any of the passengers therein.

Registered Owner Rule- The rule in this jurisdiction is that the person who is the registered
owner of a vehicle is liable for any damages caused by the negligent operation of the vehicle
although the same was already sold or conveyed to another person at the time of the accident.
The registered owner is liable to the injured party subject to his right of recourse against
the transferee or the buyer.

Kabit system- it is an arrangement whereby a person who has been granted a certificate of
convenience allows other persons who own motor vehicles to operate under his license,
sometimes for a fee or percentage of the earnings. Contrary to public policy, thus, void and
inexistent.

*Extent of liability of common carriers for acts of co-passengers or strangers

A common carrier is responsible for injuries suffered by a passenger on account of the willful acts
or negligence of other passengers or of strangers, if the carrier’s employees through the exercise

77
of the diligence of a good father of a family could have prevented or stopped the act or omission
(Art. 1763, NCC).

4. LIABILITY FOR DELAY IN COMMENCEMENT OF VOYAGE

5. LIABILITY FOR DEFECTS IN EQUIPMENT AND
FACILITIES

6. EXTENT OF LIABILITY FOR DAMAGES

Kinds of damages that may be recovered in case of death of a passenger
1. An indemnity for the death of the victim
2. An indemnity for loss of earning capacity of the deceased
3. Moral damages
4. Exemplary damages
NOTE: Carrier is not liable for exemplary damages where there is no proof that it acted in
wanton, fraudulent, reckless, oppressive or malevolent manner.
5. Attorney’s fees and expenses of litigation
6. Interest in proper cases
7. Hospital and funeral expenses
NOTE: In case of death, the plaintiff is entitled to the amount he spent during the wake
and funeral of the deceased. However, it has been ruled that expenses after the burial are
not compensable.

Damages in Personal Injury Cases

Personal injury and even death entitles claimant to all medical expenses as well as other reasonable
expenses that he incurred to treat his or his relative’s injuries. Medical expenses may even include
the amount spent for plastic surgery of the plaintiff or any procedure to restore the part of the body
that was affected.

Loss of earning capacity

The formula for the computation of unearned income is:
1. Net Earning Capacity= Life Expectancy x (Gross Annual Income – Reasonable and
Necessary Living Expenses).
2. Life Expectancy is determined in accordance with the formula: 2/3 x (80 – age of deceased
at the time of death).

When there is no showing that the living expenses constituted the smaller percentage of the gross
income, the Court fixes the living expenses at half of the gross income.

Moral damages
GR: Moral damages are not recoverable for breach of contract of carriage, because such
contract cannot be considered included in the “analogous cases” used in Art. 2219 of the NCC.
Also, Art. 2176 of the NCC, which is the provision of quasi-delict, expressly excludes the cases
where there is a “pre-existing contractual relation between the parties” from recovering damages.

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XPNs:
1. Where the mishap results in the death of the passenger (Art. 1764, NCC).
2. Where it is proved that the common carrier was guilty of fraud or bad faith, even if death
does not result (Art. 2220, NCC).
3. Where the negligence of the carrier is so gross and reckless as to virtually amount to bad
faith.

Although the relation of passenger and carrier is “contractual both in origin and nature”
nevertheless, “the act that breaks the contract may be also a tort” when said act is done with gross
negligence or with bad faith.

NOTE: The current jurisprudential award for the loss of life of a passenger is P100,000 pesos by
way of moral damages.

NOTE: If moral damages cannot be awarded, it follows that the award of exemplary damages is
also not available, since this kind of damages may only be awarded in addition to moral, temperate,
liquidated, or compensatory damages.

*Defenses available to a Common Carrier

1. Exercise of extraordinary diligence
2. Fortuitous event
3. Contributory negligence of passengers- it does not bar recovery of damages for death or
injury if the proximate cause is the negligence of the common carrier but the amount of
damages shall be equitably reduced (Art. 1762, NCC).
4. Doctrine of Last Clear Chance
5. Due Diligence in the selection and supervision of employees (quasi-delict).

The diligence of the passenger may be considered in determining liability in case of injury
The passenger must observe the diligence of a good father of a family or ordinary diligence to
avoid injury to himself (Art. 1761, NCC). This means that if the proximate cause of the passenger’s
injury is his negligence, the common carrier is not liable.

Doctrine of Last Clear Chance

Provides that where both parties are negligent but the negligent act of one is appreciably later in
point of time than that of the other, or where it is impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one who had the last clear opportunity to avoid
the impending harm but failed to do so, is chargeable with the consequences arising therefrom.

The rule is that, the antecedent negligence of a person does not preclude recovery of damages
caused by the supervening negligence of the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.

The doctrine of “Last clear chance” cannot apply if the:

1. Negligence of the plaintiff is concurrent with that of the defendant (in pari delicto);
2. Party charged is required to act instantaneously;

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 3. Injury cannot be avoided despite the application at all times of all the means to avoid the
injury (after the peril is or should have been discovered), at least in all instances where the
previous negligence of the party charged cannot be said to have contributed to the injury
at all.

Options available to recover damages in case of death or injuries to persons, which resulted
from a collision

Basis of Civil Plaintiff Defendant Liability of the Defense of Due

Liability Employer Diligence in the
(Damages) Selection and
Supervision of
Employee
Culpa Contractual
Contract of Passenger Common Carrier Direct and Not an available
Carriage Primary defense (Art.
1759, NCC).

Culpa Aquiliana
Quasi-delict 1. Passenger; or 1. Driver; Direct and This is a
2. Third person 2. Owner or primary under complete and
employer; Art. 2180, NCC. proper defense
3. Both (Art. 2180,
NOTE: Action NCC).
(Solidarily may proceed
liable, vicarious independently of
liability) the criminal
action.
Culpa Criminal
Crime 1. Passenger; or Driver Subsidiary The defense is
2. Third person liability under not available.
Art. 103, RPC. The judgment in
the criminal
NOTE: There action
must be a pronouncing the
judgment of employee to be
conviction also civilly liable
against the is conclusive on
negligent driver the employer not
and a finding of only as to the
insolvency. actuality of that
liability but also
as to the amount.

Distinctions between Culpa Contractual and Culpa Aquiliana

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 Culpa Contractual Culpa Aquiliana
Source of Obligation Contract Quasi-Delict
Liability of Employee No liability there being no Solidary liable with the
privity of contract employer
Availability of Defense Due diligence in the selection Due diligence in the selection
and supervision of the and supervision of the
employee is NOT A employee is a defense
DEFENSE
In What Capacity Liable Liable as a contracting party Liable as an employer

D. BILL OF LADING
It is a written acknowledgement of receipt of goods and agreement to transport them to a specific
place and to a named person or to his order.

A bill of lading is NOT indispensable for the perfection of the contract of carriage although the
issuance of the bill of lading can be demanded as a matter of right by the shipper.

NOTE: It may also be defined as an instrument in writing, (1) signed by a carrier or his agent,
(2) describing the freight so as to identify it, (3) stating the name of the consignor, (4) the terms of
the contract of carriage, and (5) agreeing or directing that the freight be delivered to the bearer, to
order, or to specified person at a specified place (Designer Baskets, Inc. vs. Air Asia Transport,
Inc., GR 184513, March 9, 2016).

NOTE: In maritime transportation, a bill of lading is issued by a common carrier as a contract,

receipt, and symbol of the goods covered by it. If it has no notation of any defect or damage in
the goods, it is considered as a “clean bill of lading”. A clean bill of lading constitutes prima facie
evidence of the receipt by the carrier of the goods as therein described (Eastern Shipping line, Inc.
vs. BPI/MS Insurance Corp., & Mitsui Sumitomo Insurance Co., Ltd., GR 182864, Jan. 12, 2015).

1. THREE-FOLD CHARACTER
1. As a receipt, it recites the date and place of shipment, describes the goods as to quantity,
weight, dimensions, identification marks and condition, quality, and value.
2. As a contract, it names the contracting parties, which include the consignee, fixes the route,
destination, and freight rate or charges, and stipulates the rights and obligations assumed
by the parties.
3. As a document of title, it regulates the relations between a carrier and a holder of the same.

In the absence of a bill of lading, their respective claims may be determined by legal proofs that
each of the contracting parties may present in conformity with law.

Parties to a bill of lading

1. Shipper
2. Carrier

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NOTE: A consignee, although not a signatory to the contract of carriage between the shipper and
the carrier, becomes a party to the contract by reason of either:
1. The relationship of agency between the consignee and the shipper/consignor;
2. The unequivocal acceptance of the bill of lading delivered to the consignee, with full
knowledge of its contents; or
3. Availment of the stipulation pour autrui, i.e., when the consignee, a third person, demands
before the carrier the fulfillment of the stipulation made by the consignor/ shipper in the
consignee’s favor, specifically the delivery of the goods/ cargoes shipped.

2 types of bill of lading

1. Negotiable- if issued to the bearer or to the order of any person named in such bill.
2. Non-negotiable- if issued to a specific person named in such bill.

Arrastre Operator
The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and a warehouseman. The relationship between the consignee and the common carrier is similar
to that of a consignee and the arrastre operator. Hence, the duty of the arrastre operator to take
care of the goods that are in his custody and to deliver them in good condition to the consignee
also devolves upon common carriers. Thus, the arrastre operator and the common carrier may be
liable in solidum for the proper deliver of the goods to the consignee.

2. DELIVERY OF GOODS
a. PERIOD OF DELIVERY
1. If period has been fixed- It must be made within such time, failure to do so, the carrier
shall pay the indemnity stipulated in the bill of lading, neither the shipper nor the consignee
being entitled to anything else (Art. 370, CC).
2. If no period of time fixed- The carrier shall be under the obligation to forward them with
the first shipment of the same or similar merchandise he may make to the point where he
must deliver them, and should he not do so, the damage occasioned by the delay shall be
suffered by him (Art. 358, CC).

Determination of indemnity if the same is not stipulated

If no indemnity has been stipulated and the delay exceeds the time fixed in the bill of lading, the
carrier shall be liable for the damages which the delay may have caused (Art. 370, CC).

b. DELIVERY WITHOUT SURRENDER OF BILL OF LADING

GR: The surrender of the bill of lading (by the consignee) to the carrier is necessary upon delivery
of the goods.

If the carrier fails to require such surrender:

1. If negotiable- action by the shipper may lie against the carrier
2. If non-negotiable- Action against the carrier does not lie

XPN: Surrender of the bill of lading is not necessary:

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 1. If the seller instructed the shipping company to deliver the cargoes to the buyer without
requiring the presentation of the bill of lading.
-The shipping company shall not be liable for releasing the cargoes to the buyer.

2. If surrender of the original bill of lading is not possible.

-Acknowledgement of the delivery by signing the delivery receipt suffices to discharge the
common carrier of its contractual obligation.

NOTE: The obligation of the carrier is also terminated if the goods are delivered even if the bill
of lading was not surrendered. The surrender of the bill of lading is not necessary for the discharge
of the obligation of the carrier (Art. 353, CC).

The consignee must give a receipt of the goods to the carrier in case of loss of the bill. This has
effect of surrender of the bill of lading (Art. 353, CC).

c. REFUSAL OF CONSIGNEE TO TAKE DELIVERY

Grounds for the refusal of a consignee to take delivery of the goods

1. When a part of the goods transported are delivered and the consignee is able to prove that
he cannot make use of the part without the others (Art. 365, CC).
2. If the cargo consists of liquids and they have leaked out, nothing remaining in the
containers but ¼ of their contents, on account of inherent defect of cargo (Art. 678, CC).
3. If the goods are damaged and such damage renders the goods useless for the particular
purpose for which there are to be used (Art. 365, CC).
4. When there is delay on account of the fault of the carrier (Art. 371, CC).

In all cases, the shipper may exercise the right of abandonment by notifying the carrier.
Ownership over damaged goods passes to the carrier and carrier must pay shipper the market value
of the goods at point of destination.

What is the rule if the consignee refuses to take the delivery?

If the consignee cannot be found at the residence indicated in the bill of lading, or if he refuses to
pay the transportation charges and expenses, or if he refuses to receive the goods, the municipal
judge, shall provide for their deposit at the disposal of the shipper, this deposit producing all the
effect of delivery without prejudice to third parties with a better right.

3. PERIOD FOR FILING CLAIMS

1. If the damage is apparent- Immediately after delivery; or
2. If the damage is NOT apparent- Within 24 hours from delivery (Art. 366, CC).

It applies in case of domestic transportation (inter-island) where there is damage to the goods
transported.

The filing of claim is a condition precedent for recovery of damages.

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Effect of paying the transportation charges in the filing of an action on an account of damages
to goods
1. If paid before checking the goods- The right to file a claim is not waived.
2. If paid after the goods were checked- the right to file a claim is already waived.

Doctrine of combined or connecting services

The carrier which delivered the goods to the consignee shall assume the obligations, rights, and
actions of those who preceded him in the conveyance of the goods.

The shipper or consignee should proceed against the one who executed the contract or against the
others who received the goods without reservation. But even if there is reservation, they are not
exempted from liabilities that they may have incurred by reason of their own acts (Art. 373, CC).

The carrier may then file a third-party complaint against the one who is really responsible. The
carrier is an indispensable party. But the shipper or consignee may sue all of them as alternative
defendants.

4. PERIOD FOR FILING ACTIONS

1. For coastwise or carriage within the Philippines, within 6 years if NO bill of lading has
been issued or within 10 years if a bill of lading has been issued.
2. For international carriage from foreign port to the Philippines, within 1 year from
delivery of goods or the date when the goods have been delivered.

NOTE: The 1 year period of prescription is NOT applicable to misdelivery or conversion of

goods.

E. MARITIME COMMERCE
Agents of maritime commerce
1. Shipowner and ship agents
2. Captains and masters of the vessel
3. Officers and crews of the vessel
4. Supercargoes

Shipowner of a vessel
The person in possession, management, control over the vessel, and the right to direct her
navigation. While in their possession, the ship owners also receive freight earned and paid.
Primarily and principally liable.

Ship agent
The person entrusted with provisioning or representing the vessel in the port in which it may be
found. Hence, whether acting as agent of the owner of the vessel or as agent of the character, he
will be considered as the ship agent and may be held liable as such, as long as he is the one that
provisions or represents the vessel. Primarily and principally liable.

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Supercargoes
Persons especially employed by the owner of the cargo to take charge of and sell to the best
advantage merchandise which has been shipped, and to purchase returning cargoes and to receive
freight as he may be authorized.

1. CHARTER PARTIES
Charter party contract
A charter party is a contract by which an entire ship, or some principal part thereof, is let by the
owner to another person for a specified time or use in consideration of the payment of freight.

Classes of charter party

1. Bareboat or demise
2. Contract of affreightment
a. Time charter
b. Voyage charter

a. BAREBOAT/ DEMISE CHARTER

The ship owner gives possession of the entire vessel to the charterer, in turn, the charterer supplies,
equips, and mans the vessel. The charterer is the owner pro hac vice.

As owner pro hac vice of the vessel, the charterer assumes the rights and liabilities of the owner
to third parties who deal with the vessel, it is the charterer and its agent who are liable for the
wages of seaman hired by the master of the vessel, as the master of the vessel is acting in behalf
of the charterer.

The charterer is considered the owner of the vessel for the voyage or service stipulated. The
charterer, not the owner of the vessel, is liable for vessel’s expenses, including seaman’s wages.

NOTE: The bareboat charter converts the carriage into a private carriage. However, the
charterer (not the owner) may be considered as common carrier if he operates it or accepts goods
for transportation for a fee as a business, then charterer may be considered as common carrier. The
owner may not be liable for loss because he is no longer a party (lecture by Atty. Aquino, Jurists).

CONTRACT OF AFFREIGHTMENT
The owner of the vessel leases a part or all of its space to haul goods for others. It can either be:
1. Time charter; or
2. Voyage/ trip charter.

b. TIME CHARTER
A vessel is chartered for a particular time or duration. While the ship owner still retains possession
and control of the vessel, the charterer has the right to use all vessel’s facilities. The charterer may
likewise designate vessel’s destination.

c. VOYAGE/TRIP CHARTER

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A vessel is chartered for a carriage of goods from one or more ports of loading to one or more
ports of unloading.

Bareboat/ Demise Charter Contract Contract of Affreightment

Negligence of the charterer gives rise to its Ship owner remains liable and carrier must
liability to others. answer for any breach of duty.
Charterer is regarded as owner pro hac vice Charterer is not regarded as owner. Ship owner
(for or this occasion only). Ship owner retains ownership over the vessel.
temporarily relinquishes possession and
ownership of the vessel.

Instances when a charter party may be rescinded

1. At the request of the charterer by:
a. Failure to place vessel at charterer’s disposal
b. Abandoning the charter and paying half the price
c. Return the vessel due to pirates, enemies, and bad weather
d. Error in tonnage or flag
e. Arrival at port for repairs- if repairs take less than 30 days, pay full freightage; if
more than, freightage in proportion to the distance covered.

2. At the request of the ship owner:

a. If extra lay days terminate without cargo being placed alongside vessel; and
b. Sale by the owner of the vessel before loading by the charterer.

3. Due to fortuitous event:

a. War-there is a governmental prohibition of commercial intercourse, intended to
bring about the entire cessation for the time being of all trade whatever.
b. Embargo-a proclamation or order of State, usually issued in times of war or
threatened hostilities, prohibiting the departure of hips or goods from some or all
the ports of such State until further order; or
c. Blockade- a sort of circumvallation around a place by which all foreign connection
and correspondence is, as far as human power can effect, to be cut off.
d. Prohibition to receive cargo at port of destination.
e. Inability of the vessel to navigate (Art. 640, CC).

“Jason Clause”
A shipowner (provided he had exercises due diligence to make the ship seaworthy and properly
manned, equipped, ang supplied) could claim a general average contribution from cargo, even
where the damage was caused by faulty navigation of the vessel, provided that the bill of lading
excluded liability for such faults.

2. LIABILITY OF SHIPOWNERS AND SHIPAGENTS

Three-fold character of the Captain
1. General agent of the ship owner
2. Vessel’s technical director

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 3. Government representative of the flag he navigates under

a. LIABILITY FOR ACTS OF CAPTAIN

Cases where the ship owner/agent shall be liable to the damages caused by the captain
1. Damages suffered by the vessel and its cargo by reason of want of skill or negligence on
his part;
2. Thefts committed by the crew, reserving his right of action against the guilty parties;
3. Losses, fines, and confiscations imposed on account of violation of customs, police, health,
and navigation laws and regulations;
4. Losses and damages caused by mutinies on board the vessel or by reason of faults
committed by the crew in the service and defense of the same, if he does not prove that he
made timely use of all his authority to prevent or avoid them;
5. Those cause by the misuse of the powers;
6. For those arising by reason of his going out of his course or taking a course which he should
not have taken without sufficient cause, in the opinion of the officers of the vessel, at a
meeting with the shippers or supercargoes who may be on board. No exceptions
whatsoever shall exempt him from his obligation;
7. For those arising by reason of his voluntarily entering a port other than that of his
destination, outside of the cases or without the formalities referred to in Art. 612; and
8. For those arising by reason of non-observance of the provisions contained in the regulations
on situations of lights and maneuvers for the purpose of preventing collisions (Art. 640,
CC).

Ship owner/ agent is not liable for the obligations contracted by the captain if the latter exceed his
powers and privileges inherent in his position of those which may have been conferred upon him
by the former. However, if the amount claimed were used for the benefit of the vessel, the ship
owner or ship agent is liable.

NOTE: The owner of a vessel shall be civilly liable in the proportion of their contribution to the
common fund, for the results of the acts of the captain (Art. 590, CC)

NOTE: A shipowner would only be liable for contracts made by the captain (a) when duly
authorized or (b) even when unauthorized, for ship repairs, or for equipping or provisioning
the vessel when the proceeds are invested therein (Art. 586, CC).

Problem:
While docking his vessel, “Taurus”, the master, thru negligence, damaged the wharf and the
merchandise loaded on the deck. The owner of the wharf and the damage d merchandise sued
the owner of the vessel and the master of the vessel for the damage.

a. What is the basis of the liability of the owner of the vessel with respect to the damage
to the wharf?
b. With respect to the damage to the merchandise?
c. Does the defense of exercise of diligence of a good father of a family lie? Reason.

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 Answer:
a. The basis of the liability of the shipowner with respect to the damaged wharf is tort.
There was damage due to negligence without any preexisting contractual relations
between the parties.
b. The basis of the liability with respect to the merchandise on deck is the contract of
carriage. There was a breach of contract because the goods were not carried safely to
their destination due to the negligence of the master.
c. The defense of exercise of diligence of a good father of a family will lie in case of tort
but not in case of contract in the latter, such defense is not available because the contract
was to carry the goods safely and unless loss is due to caso fortuito or force majeure,
there is a breach of contract. The due diligence of the shipowner is against his
employee, the master.

NOTE: The captain shall not be liable for the loss or injury to persons or cargo if the loss or the
injury is based on the following causes:
1. Force majeure;
2. Obligations contracted for the vessel’s benefit, except when the captain expressly agrees
to be liable.

A captain may not have himself substituted in the absence of consent from the ship agent, and
should he do so he shall be liable for all the acts of the substitute (Art. 640, CC).

LIMITED LIABILITY RULE/ Doctrine of Limited Liability (Real and Hypothecary nature
of Maritime Law)
Also called the “no vessel, no liability doctrine”, it provides that liability of ship owner is limited
to ship owner’s interest over the vessel. Consequently, in case of loss, the ship owner’s liability is
also extinguished. Limited liability likewise extends to ship’s appurtenances, equipment,
freightage, and insurance proceeds.

The ship owner’s or agent’s liability is merely co-extensive with his interest in the vessel, such
that a total loss of the vessel results in the liability’s extinction. The vessel’s total destruction
extinguishes maritime liens because there is no longer any res to which they can attach.

Rationale of the doctrine: The Real and Hypothecary nature of Maritime Law
To offset against innumerable hazards and perils in sea voyage and to encourage ship building and
maritime commerce. By abandonment, the ship owner and ship agent exempt themselves from
liability, thus, avoiding the possibility of risking his whole fortune in the business.

Cases in which the Doctrine of Limited Liability is allowed

1. Civil liability of the ship agent or ship owner for the indemnities in favor of third persons
(Art. 587, CC).
2. Civil liability of the co-owners of the vessel for the results of the acts of the captain (Art.
590, CC).
3. If the vessel and her cargo be totally lost, by reason of capture or shipwreck, all the rights
shall be extinguished, both as regards the right of the crew to demand wages and the right
of the ship agent to recover the advantages made (Art. 643, CC).

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 4. Extinction of civil liability incurred by the ship owner or agent in cases of maritime
collisions (Art. 640, CC).

Stipulations which may be inserted in the bill of lading to limit liability and their effects:
1. No liability- the carrier will not be liable at all for the negligent act of its crew and
employees. This is void for being contrary to public policy.
2. Limited liability- regardless of the value of the cargo, the maximum liability of the carrier
will be, for example, P500. This is also void for being contrary to public policy.
3. Qualified liability- this is the only stipulation in a bill of lading which can validly limit
liability.
NOTE: Under Qualified Liability, carrier fixes a maximum liability in the event the
shipper does not declare any value or a value up to a certain amount. Should a shipper
declare a higher value, and willing to pay higher freightage, the carrier shall accordingly
be liable for greater damage. In effect, carrier becomes an insurer for higher insurance.

b. EXCEPTIONS TO LIMITED LIABILITY

Instances where Doctrine of Limited Liability shall not apply
1. Repairs and provisioning of the vessel before the loss of the vessel (Art. 586, CC);
2. Insurance proceeds. If the vessel is insured, the proceeds will go to the persons entitled to
claim from the ship owner;
3. Claims of the crew under the Workmen’s Compensation Act;
4. When the ship owner is guilty of fault or negligence;
5. When the vessel is not abandoned;
6. When vessel is not seaworthy;
7. Injury or death to a passenger is due either to the fault of the shipowner, charterer, or other
person in possession or control of the vessel;
8. Concurring fault of said person and the captain or master of the vessel;
9. If the voyage is not maritime.

Problem:
On Act. 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping
Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance
Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were
consigned to Debenhams’ company. After it indemnified Debenhams, Empire as subrogee
filed an action for damages against CSC.
a. Assume that the vessel was seaworthy. Before departing, the vessel was advised by the
Japanese Meteorological Center that it was safe to travel to its destination. But while
at sea, the vessel received a report of a typhoon moving within its general path. To
avoid the typhoon, the vessel changed its course. However, it was repeatedly hit by
huge waves, foundered and eventually sank. The captain and the crew were saved
except 3 who perished. Is CSC liable to Empire? What principle of maritime law is
applicable? Explain.
b. Assume the vessel was not seaworthy as in fact its hull had leaked, causing flooding in
the vessel, will your answer be the same? Explain.
c. Assume the facts in question (b). can the heirs of the 3 crew members who perished
recover from CSC? Explain fully.

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 Answer:
a. No. the principle of limited liability will apply because the exclusively real and
hypothecary nature of Maritime law operates to limit the liability of the ship owner to
the value of the vessel, earned freightage and proceeds of the insurance, if any “no
vessel, no liability” expresses in a nutshell the limited liability rule. The total
destruction of the vessel extinguishes maritime lien as there is no longer any res to
which it can attach. In this case, the ship was seaworthy. It exercised extraordinary
diligence when it changed its course to avoid the typhoon but unfortunately, it was hit
by huge waves and sank. Since the vessel sank at no fault by CSC, it cannot be held
liable by virtue of “no vessel, no liability rule”
b. No. while as a rule, a ship owner’s liability is limited to the value of the vessel, the
same rule has no application when the carrier failed to overcome the presumption of
negligence. Such presumption is only rebutted when the carrier establishes that the
vessel is seaworthy. The vessel in this case is not seaworthy, thus, doctrine of limited
liability is inapplicable.
c. Yes. The heirs of the 3 members who perished can recover. This is because the heirs
may file a claim under the Workmen’s Compensation Claims. The Limited Liability
Rule does not apply.

3. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE

1. Collision
2. Averages
3. Shipwreck
4. Arrival under stress

a. GENERAL AVERAGE

Averages- all extraordinary or accidental expenses which may be incurred during the voyage
for the preservation of the vessel or cargo or both. Average may either be general or particular.

General Average Particular Average

Damages or expenses deliberately caused in Damages or expenses caused to the vessel or
order to save the vessel, its cargo, or both from cargo that did not inure to the common benefit
real and known risk. and borne by respective owners.
Both the ship and cargo are subject to the same No common danger to both the vessel and the
danger. cargo.
There is a deliberate sacrifice of part of the Expenses and damages are not deliberately
vessel, cargo, or both. made.
Damage or expenses incurred to the vessel, its Did not inure to common benefit and profit of
cargo or both, redounded to the benefit of the all persons interested in the vessel and her
respective owners. cargo.
All those who have benefited shall satisfy the Only the owner of the goods benefiting from
average. the damage shall bear the expense of average.

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Persons liable for the amount of loss
In general average- all persons having interest in the vessel and cargo therein at the time of
the occurrence of the average shall contribute (Art. 812, CC).

In particular average- The owner of the things which gave rise to the expenses or suffered
the damage shall bear the simple or particular average (Art. 810, CC);

*Requisites of general average (C D S )

1. Common danger present;
2. Deliberate sacrifice of part of the vessel or cargo;
3. Successful saving of vessel and/or cargo; and
4. Proper procedure and legal steps.
a. Assembly to be called by captain of all the cargo owners and other officers of the
vessel
b. Deliberation
c. Resolution of the captain
d. Entry of resolution in the logbook
e. Delivery of the minutes of the meeting to the maritime judicial authority of the first
port of arrival within 24 hours from arrival;
f. Ratification by captain under oath.

Goods not covered by general average even if not sacrificed

1. Goods not recorded in the books or records of the vessel (Art. 855(2), CC);
2. Fuel for the vessel if there is more than sufficient fuel for the voyage.

Jettison
Act of throwing overboard part of a vessel’s cargo or hull in hopes of saving a ship from sinking.

Goods jettisoned for the common safety, shall not pay freight; but its latter amount (freight lost)
shall be considered as general average, computing the same in proportion to the distance covered
when they were jettisoned (Art. 660, CC);

b. COLLISIONS AND ALLISIONS

Collision- is impact of two moving vessels. It is an impact or sudden contact of a vessel with
another whether both are in motion or one stationary.

Allision- is impact between a moving vessel and a stationary one.

Error in extremis- is the sudden movement made by a faultless vessel during the third zone of
collision with another vessel which is at fault under the second zone. Even if sudden movement is
wrong, no responsibility will fall on the faultless vessel.

Rules governing liabilities of parties in case of collision

1. One vessel at fault- The ship owner of such vessel shall be liable for all resulting damages.

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 2. Both vessels at fault- Each vessel shall suffer their respective losses but as regards the
owners of the cargoes, both vessels shall be jointly and severally (solidarily) liable.
3. Vessel at fault not known- Each vessel shall suffer its own losses and both shall be solidarily
liable for loses or damages on the cargo (Doctrine of Inscrutable Fault).

Doctrine of Inscrutable Fault- Under this doctrine, where fault is established but it cannot
be determined which of the two vessels were at fault, both shall be deemed to have been at
fault.

4. Fortuitous event- Each shall bear its own damage.

5. Third vessel at fault- the third vessel shall be liable for losses and damages sustained.

Protest in collision
The action for recovery of damages arising from collisions cannot be admitted if a protest or
declaration is not presented within 24 hours before the competent authority of the point where the
collision took place, or that of the first port of arrival of the vessel, if in Philippine territory, and
to the Filipino consul it is occurred in a foreign country (Art. 835, CC).

Failure to make a protest is not an impediment to the maintenance of a civil action based on quasi-
delict.

Instances when a protest is required

1. Arrival under stress (Art. 612 (8), CC);
2. Shipwreck (Arts. 601 (15), 843, CC);
3. If the vessel has gone through a hurricane or where the captain believes that the cargo has
suffered damages or averages (Art. 642, CC); and
4. Maritime collision (Art. 853, CC);

Persons who can file a maritime protest

1. In case of maritime collision, the passenger or other persons interested who may be on
board the vessel or who were in a condition who can make known their wishes (Art. 835-
836, CC) or the captain himself.

NOTE: The shipper can successfully maintain an action to recover losses and damages
arising from the collision notwithstanding his failure to file a maritime protest. The filing
thereof is required only on the part of the passenger, who at the time of collision, was
expected to know the circumstances of the collision. The failure of the passenger to file a
maritime protest will therefore prevent him from successfully maintaining an action to
recover his losses and damages (Art. 836, CC);

2. The captain in cases of:

a. Arrival under stress;
b. Shipwreck; or
c. If the vessel has gone through a hurricane or where the captain believes that the
cargo has suffered damages or averages.

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4. CARRIAGE OF GOODS BY SEA ACT (COGSA) (Commonwealth Act
No. 65; Public Act No. 521)

a. APPLICATION
It will only be applied in terms of loss or damage of goods transported to and from Philippine
ports in foreign trade.

It may also apply to domestic trade when there is a paramount clause in the contract. Paramount
Clause is a stipulation or clause either on the bill of lading or charter party stipulating the laws
that the parties agreed to be used of that particular transport. In the event that there will be a breach,
the parties shall follow the law stipulated in the paramount clause.

The Carriage of Goods by Sea Act applies up to the final port of destination even if the
transshipment was made on an inter-island vessel.

Up to when is COGSA provisions applicable?

From time when the goods have been discharged from the ship and given to the custody of the
arrastre operator is not covered by the COGSA.

Cases covered under the COGSA

It applies in case of non-delivery or damage, and NOT to misdelivery or conversion of goods.

Also, the deterioration of goods due to delay in their transportation is not covered by Sec. 6 of
COGSA.

b. NOTICES OF LOSS OR DAMAGE

Notice of claim
1. If the damage is not apparent- within 3 days from delivery; or
2. If the damage is apparent- immediately.

NOTE: The period is not mandatory. However, the prescription period of 1 year from delivery
for the filing of the case is a condition precedent or mandatory.

Failure to file notice of loss does not bar an action against the carrier of the action was filed
within 1 year. THERE IS NO CONSEQUENCE ON THE RIGHT TO BRING SUIT IF NO
NOTICE IS FILED UNLIKE UNDER THE CODE OF COMMERCE. It only gives rise to a
presumption that the goods are delivered in the same condition as they are shipped.

There is no consequence if the transportation charges and expenses are paid unlike under the Code
of Commerce.

c. PERIOD OF PRESCRIPTION
The suit for loss or damage should be brought within 1 year from:
1. Delivery of the goods, in case of damage; or
2. The date when the goods should have been delivered, in case of loss.

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The 1 year period is computed from the delivery of goods to the operator and not to the consignee.

The parties may agree to extend the 1 year period to file a case under the COGSA.

The term carriage of goods in the COGSA covers the period from the time the goods are loaded
to the vessel to the time they are discharged therefrom.

NOTE: Delivery to another vessel is not the delivery contemplated is it constitutes transshipment.
Transshipment-is the act of taking out cargo out of one ship and loading it in another, or the
transfer of goods from the vessel stipulated in the contract of affreightment to another vessel
before the place of destination named in the contract has been reached.

Instances when the one-year period applies

1. Amendment of pleadings for suing the wrong party
2. Filing of third party complaint
3. Loss or damage to cargo, excluding delay or misdelivery
4. Subrogation (Art. 2207, NCC);

The one year period is interrupted:

1. When an action is filed in court; or
2. When there is an agreement between the parties to extend it.

Persons who can give notice to, and bring suit against the carrier
1. The shipper;
2. The consignee; or
3. Any legal holder of the bill of lading like the indorsee, subrogee, or the insurer of the goods.

d. LIMITATION OF LIABILITY

Amount of the carrier’s liability under the COGSA

1. The liability limit is set at $500 per package or customary freight unless the nature and
value of such goods is declared by the shipper.
2. Shipper and carrier may agree on another maximum amount, but not more than amount of
damage actually sustained.

NOTE: When the packages are shipped in a container supplied by the carrier and the number of
such units is stated in the bill of lading, each unit, and not the container, constitutes the “package”.

Instances where there is no liability under COGSA

1. If the nature or value of goods knowingly and fraudulently misstated by shipper
2. If damage results from dangerous nature of shipment loaded without consent of carrier
3. If unseaworthiness not due to negligence
4. If deviation was to save life or property at sea.

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NOTE: Any clause, covenant or agreement in a contract of carriage relieving the carrier or the
ship from liability for loss or damage to or in connection with the goods or lessening such liability
otherwise than as provided, shall be null and void (Sec. 3, COGSA);

F. PUBLIC SERVICE ACT (Commonwealth Act No. 146)

Government agencies that replaces the Public Service Commission
1. Land Transportation Franchising and Regulatory Board (LTFRB)- land transportation. The
Land Transportation Office registers motor vehicles.
2. Maritime Industry Authority (MARINA)- water transportation.
3. National Telecommunications Commission- communication utilities and services, radio
communication systems, wire or wireless telephone and telegraph systems, radio and
television broadcasting systems and other similar public utilities.
4. Energy Regulatory Commission- electric or power companies.
5. Civil Aviation Authority- air transportation. The CAAP undertakes the maintenance and
operation of airports and other similar facilities. The CAAP also registers aircrafts.
6. Department of Transportation- trains or railroad companies.
7. Tool Regulatory Board- toll facilities.

1. DEFn INITION OF PUBLIC UTILITY

A “public utility” is a 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 (Metropolitan Cebu Water District vs. Adala, GR No. 168194).

2. NECESSITY FOR CERTIFICATE OF PUBLIC

CONVENIENCE
Certificate of Public Convenience- Permit issued by the relevant government agency for the
grantee to operate public utility for which no franchise, either municipal or legislative, is required
by law.

a. REQUISITES

i. CITIZENSHIP
The grantee must be a citizen of the Philippines or a corporation or entity 60% of which is owned
by such citizens;

ii. PROMOTION OF PUBLIC INTERESTS

The service will promote public interest and convenience in a proper and suitable manner.
NOTE: The overriding principle, still, is public interest, necessity, and convenience.

iii. FINANCIAL CAPABILITY

The grantee must have sufficient financial capability to undertake the services.

b. PRIOR OPERATOR RULE

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i. MEANING
The first licensee will be protected in his investment and will not be subjected to ruinous
competition.

Provides existing franchise operator preferential right within authorized territory as long as said
operator renders satisfactory and economical service. This rule subordinates the prior applicant
rule which gives first applicant priority only if things and circumstances are equal. A prior operator
must be given the opportunity to extend its transportation services before permitting a new operator
to operate in the territory of said prior operator.

ii. EXCEPTIONS
Where public interest would be better served by the new operator:
1. Where the old operator failed to make an offer to meet the increase in traffic;
2. Where the Certificate of Public Convenience granted to the new operator a maiden
certificate;
3. When the application of the rule would be conducive to monopoly.

iii. RUINOUS COMPETITION

The law contemplates that the first licensee will be protected in his investment and will not be
subjected to ruinous competition. It is not therefore, the policy of the law for the Public Service
Commission 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.

3. FIXING OF RATE
In the fixing of rates, the only standard which the legislature is required to prescribe for the
guidance of the administrative authority is that the rate be reasonable and just.

a. RATE OF RETURN
The rate of return is a judgment percentage which, if multiplied with the rate base, provides a fair
return on the public utility for the use of its property for service to the public. The rate of
return of a public utility is not prescribed by statute but by administrative and judicial
pronouncements. The Supreme Court has consistently adopted a 12% rate of return for public
utilities.

b. EXCLUSION OF INCOME TAX AS EXPENSE

Income tax should not be included in the computation of operating expenses of a public utility.
Income tax paid by a public utility is NOT part of operating expenses. In general, operating
expenses are those that are reasonably incurred in connection with business operations to yield
revenue or income.

4. UNLAWFUL ARRANGEMENTS
a. BOUNDARY SYSTEM

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Under this system the driver is engaged to drive the owner/operator’s unit and pays the latter a fee
commonly called boundary for the use of the unit. Whatever he earned in excess of that amount is
his income (Paguio Transport Corp. v. NLRC, G.R. No. 119500, Aug. 28, 1998).

The relationship between jeepney owners/operators on one hand and jeepney drivers on the other
under the boundary system is that of employer-employee and not of lessor-lessee (Martinez v.
NLRC, G.R. No. 117495, May 29, 1997).

b. KABIT SYSTEM
The kabit system is an arrangement whereby a person who has been granted a certificate of public
convenience allows other persons who own motor vehicles to operate them under his license,
sometimes for a fee or percentage of the earnings.

What is the reason behind the proscription against the kabit system?
The thrust of the law in enjoining the kabit system is not so much as to penalize the parties but to
identify the person upon whom responsibility may be fixed in case of an accident with the end
view of protecting the riding public. The policy therefore loses its force if the public at large is not
deceived, much less involved (Lim v. CA, G.R. No. 125817, Jan. 16, 2002).

One of the primary factors considered in the granting of a certificate of public convenience for the
business of public transportation is the financial capacity of the holder of the license, so that
liabilities arising from accidents may be duly compensated. The kabit system renders illusory such
purpose and, worse, may still be availed of by the grantee to escape civil liability caused by a
negligent use of a vehicle owned by another and operated under his license. If a registered owner
is allowed to escape liability by proving who the supposed owner of the vehicle is, it would be
easy for him to transfer the subject vehicle to another who possesses no property with which to
respond financially for the damage done (Lim v. CA, G.R. No. 125817, Jan. 16, 2002).

5. APPROVAL OF SALE, ENCUMBRANCE, OR LEASE OF

PROPERTY
Sec. 20. Acts requiring the approval of the Commission. - Subject to established limitations and
exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for
the owner, lessee or operator thereof, without the approval and authorization of the Commission
previously had –

(g) To sell, alienate, mortgage, encumber or lease its property, franchises, certificates, privileges,
or rights or any part thereof; or merge or consolidate its property, franchises privileges or rights,
or any part thereof, with those of any other public service. The approval herein required shall be
given, after notice to the public and hearing the persons interested at a public hearing, if it be
shown that there are just and reasonable grounds for making the mortgaged or encumbrance, for
liabilities of more than one year maturity, or the sale, alienation, lease, merger, or consolidation to
be approved, and that the same are not detrimental to the public interest, and in case of a sale, the
date on which the same is to be consummated shall be fixed in the order of approval: Provided,
however, that nothing herein contained shall be construed to prevent the transaction from being
negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public
service of any of its property in the ordinary course of its business.

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G. THE WARSAW CONVENTION (RA No. 9497) (NOW DEFUNCT)

1. APPLICABILITY
The Warsaw Convention applies to all international carriage of persons, luggage, or goods performed by aircraft for
reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking (Art. 1, WC).

International carriage
Any carriage in which, according to the contract made by the parties, the place of departure and the place of
destination, whether or not there be a break in the carriage or a transshipment, are situated either:
1. Within the territories of two High Contracting Parties; or
2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory
subject to the sovereignty, suzerainty, mandate, or authority of another Power, even though that Power is not
a party to the Convention (Art. 1(2), WC).

High Contracting Parties are the signatories to the Warsaw Convention and those which subsequently adhered to it.

A carriage to be performed by several successive air carriers is deemed, for the purpose of Warsaw Convention to be
one undivided carriage, if it has been regarded by the parties as a single operation, whether it has been agreed upon
under the form of a single contract or of a series of contracts (Art. 1(3), WC).

Such carriage does not lose its international character merely because one contract or a series of contracts is to be
performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority o same High
Contracting Party.

2. LIMITATION OF LIABILITY

a. LIABILITY TO PASSENGERS
GR: The carrier shall be liable for 250,000 francs for each passenger.

XPN: By special contract, the carrier and the passenger may agree to a higher limit of liability (Art. 22, WC).

b. LIABILITY FOR CHECKED BAGGAGE

GR: 250 francs per kilogram.

XPN: The passenger or consignor has made, at the time when the package was handed over to the carrier, a special
declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires.

c. LIABILITY FOR HANDCARRIED BAGGAGE

5,000 francs per passenger.

NOTE: The above figures have been amended by the Guatemala Protocol, viz:

1. Carriage of persons- $100,000

2. Checked-in articles- $1,000
3. Hand-carried baggage- $1,000

The Guatemala Protocol has not yet been ratifies, so either of the 2 currencies is till correct.

3. WILLFUL MISCONDUCT
Carrier is not entitled to the limitation of liability if the damage is cause by willful misconduct or default on its part
(Art. 25, WC). The definition of “willful misconduct” depends in some measures on which court is deciding the issue.
Some common factors that courts will consider are:
1. Knowledge that an action will probably result in injury or damage;
2. Reckless disregard of the consequences of an action; or
3. Deliberately failing to discharge a duty related to safety.

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NOTE: The courts may also consider other factors.

*THE MONTREAL CONVENTION (Dean Ceniza)

The Montreal Convention is a universal treaty, governing airline liability around the world.

It covers carriage of the following:

1. Passengers
2. Baggage and
3. Cargo

It amended the now defunct Warsaw Convention and its related protocols. Montreal Convention
was ratified by the Philippine Senate on Aug. 10, 2015, and became effective on Dec. 12, 2015.

Significant Terms of the Agreement

1. On the liability for death or bodily injury to a passenger
a. Adopted a two-tier liability for death or bodily injury to a passenger.
b. The defense that the carrier or its agent has taken all reasonable measures to avoid
the damage is no longer available under the Montreal Convention.
c. The first tier imposes strict liability on the airline carrier for damage sustained in
case of death or bodily injury of a passenger.
d. The carrier’s liability for damages shall not exceed 113,100 Special Drawing
Rights (“SDRs”).
e. The carrier’s liability immediately attaches for as long as the accident which
caused the death or injury took place on board the aircraft or in the course of any
of the operations of embarking or disembarking (Art. 17).
f. In the second tier of liability, the carrier can be liable for damages higher than
113,100 SCRs if the death or bodily injury to the passenger was due to the
former’s negligence or wrongful act or omission.
2. Liability for Checked in Baggage
a. In the case of destruction, or loss of, or of damage to, check-in baggage, the carrier
shall be liable for damages as long as the destruction, loss or damage took place
on board the aircraft or during any period within which the checked baggage was
under the carrier’s custody.
b. The carrier’s liability shall be up to 1,131 SDRs for each passenger. Only if he
has made a (1) special declaration of interest at the time of check-in, and has (2)
paid a supplementary sum if the case so requires, in such case, the carrier will be
liable to pay a sum not exceeding the declared sum.
3. Liability for Unchecked Baggage (hand-carried)
a. In case of unchecked baggage, including personal items, the carrier shall be liable
if the damage resulted from its fault or that of its agents (Art 17).
4. Period to file complaint
a. In case of damage to baggage, the complaint must file his or her written complaint
within 7 days from the date of receipt of checked-in baggage.
b. In case of delay of delivery, the complaint must be made at the latest 21 days
from the date of receipt (Art. 21).

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 NOTE: The time limitation for filing complaints are important since no action
can lie against the carrier if the complaints were made beyond the period stated.
XPN: Where carrier employed fraud.

Willful Misconduct- Carrier is not entitled to limitation of liability if the damage is caused by
willful misconduct or default on its part. “Willful misconduct” depends in some measures on which
court is deciding the issue. Some common factors that courts will consider are:
1. Knowledge that an action will probably result in injury or damage;
2. Reckless disregard of the consequences of an action; or
3. Deliberately failing to discharge a duty related to safety.

IV. BUSINESS ORGANIZATIONS

A. PARTNERSHIP
1. GENERAL PROVISIONS
a. DEFINITION
Partnership is a contract whereby two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of diving the profits among themselves
(Art. 1767, NCC).

NOTE: Two or more person may also form a partnership for the exercise of a profession (Art.
1767, NCC).

b. ELEMENTS
1. Two or more persons bound themselves to contribute money, property, or industry to a
common funds; and
2. They intend to divide the profits among themselves (Jarantilla vs. Jarantilla, GR No.
154486, Dec. 1, 2010).

c. CHARACTERISTICS (B O N C C P P P)
1. Bilateral- It is entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal;
2. Onerous- Each of the parties aspires to procure for himself a benefit through the giving of
something;
3. Nominate- It has a special name or designation in our law;
4. Consensual- Perfected by mere consent, upon the express or implied agreement of two or
more persons;
5. Commutative- The undertaking of each of the partners is considered as the equivalent of
that of the others;
6. Principal- It does not depend for its existence or validity upon some other contracts;

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 7. Preparatory- Because it is entered into as a means to an end, i.e., to engage in business or
specific venture for the realization of profits with the view of dividing them among the
contracting parties; and
8. Profit-oriented (Art. 1770, NCC).

d. RULES TO DETERMINE EXISTENCE

1. Except as provided by Art. 1825 of the NCC (partnership by estoppel), persons who are
not partners as to each other are not partners as to third persons;
2. Co-ownership or co-possession does not of itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
3. The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which
the return are derived;
4. The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such interference shall be drawn if such profits
were received in payment;
a. As a debt by installments or otherwise;
b. As wages of an employer or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partner;
d. As interest on a loan, though the amount of payment varies with the profits of the
business;
e. As the consideration for the sale of a goodwill of a business or other property by
installment or otherwise (Art. 1769, NCC).

NOTE: In sub-paragraph a-e, the profits in the business are not shared as profits of a partner
as a partner, but in some other respects or for some other purpose.

Who can form Partnerships?

1. Persons with legal capacity to enter into contracts
a. Natural persons should be at least 18 years old, not suffering from any legal
impediment such as insanity or civil interdiction
b. Juridical person de jure
2. Husband and wife can enter into particular partnerships but not universal partnerships
a. Reason: Husband and wife cannot sell and donate to one another
3. It used to be that corporations cannot enter into a partnership. But, under te Revised
corporation Code, corporations can now join partnerships.

Burden of proving the existence of a partnership

It rests on the party having the affirmative of that issue. The existence of a partnership must be
proved and will not be presumed.

However, when a partnership is shown to exist, the presumption is that it continues in the absence
of evidence to the contrary, and the burden of proof is on the person asserting its termination.

Doctrine of Delectus Personae

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No one can become a member of the partnership association without the consent of all the partners.
This rule is inherent in every partnership.

Under the doctrine of delectus personae, a partner has a right to choose with whom he wishes to
associate himself.

RATIO: This is because of the mutual trust among the partners and that this is a case of subjective
novation. There is subjective novation when there is a change in the parties to a contract. Their
consent thereto is necessary in order to bind them.

NOTE: Even if a partner will associate another person in his share in the partnership, the associate
shall not be admitted into the partnership without the consent of all the partners, even if the partner
having an associate should be a manager (Art. 1804, NCC). This element of delectus personae,
however, is true only in the case of a general partner, but not as regards a limited partner.

Doctrine of Mutual Agency

All the partners shall be considered agents and whatever any one of them may do alone shall bind
the partnership (Art. 1803(1); 1818, NCC). Authority is limited with respect to acts of
administration (acts of ownership- unanimous decision of all the partners are required). Except if
there is an appointed managing partner.

Rule that partners are guarantors of the obligation of the partnership

Under the rule that partners are guarantors of partnership obligations, the partners are liable to the
creditors of the partnership with their own property, even beyond their contributions (Art. 1803(1),
NCC).

e. PARTNERSHIP TERM
Partnership with a Fixed Term vs. Partnership at Will

Partnership with a Fixed Term

It is one in which the term of its existence has been agreed upon by the partners either:
1. Expressly- there is a definite period
2. Impliedly- a particular enterprise or transaction is undertaken

The mere expectation that the business would be successful and that the partners would be able to
recoup their investment is not sufficient to create a partnership for a term.

Fixing the term of the partnership contract

The partners may fix in their contract any term and they shall be bound to remain under such a
relation for the duration of the term.

Expiration of the partnership contract

The expiration of the term fixed or the accomplishment of the particular undertaking specified will
cause the automatic dissolution of the partnership.

Partnership at will

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One in which NO fixed term is specified and is NOT formed for a particular undertaking or venture
which may be terminated anytime by mutual agreement of the partners, or by the will of any one
partner alone; or one for a fixed term or particular undertaking which is continued by the partners
after the termination of such term or particular undertaking without express agreement.

Termination or dissolution of partnership at will

A partnership at will may be lawfully terminated or dissolved at any time by the express will of
all or any of the partners.

The partner who wants the partnership dissolved must do so in good faith, not that the attendance
of bad faith can prevent the dissolution of the partnership, but to avoid the liability for damages to
other partners.

f. PARTNERSHIP BY ESTOPPEL
It is one who, by words or conduct does any of the following:
1. Directly represent himself to anyone as a partner in an existing partnership or in a non-
existing partnership.
2. Indirectly represents himself by consenting to another representing him as a partner in
an existing partnership or in a non-existing partnership.

Elements before a partner can be held liable on the ground of estoppel

1. Defendant represented himself as partner or is represented by others as such, and did not
deny/refute such representation.
2. Plaintiff relied in such representation.
3. Statement of defendant is not refuted.

Liabilities in case of estoppel

1. When partnership is liable- If all actual partners consented to the representation, then the
liability of the person who represented himself to be a partner or who consented to such
representation and the actual partner is considered a partnership liability.
2. When liability is Pro Rata- When there is no existing partnership and all those represented
as partners consented to the representation, then the liability of the person who represents
himself to be a partner, and all who made and consented to such representation, is
considered a joint or pro-rata liability.
3. When liability is separate- When there is no existing partnership and not all but only some
of those represented as partners consented to the representation, or none of the partnership
in an existing partnership consented to such representation, then the liability will be
separate.

Partnership tort
There is a partnership tort where:
1. By any wrongful act or omission of any partner, acting in the ordinary course of business
of the partnership or with authority of his co-partners, loss or injury is caused to any person,
not being a partner in the partnership.
2. One partner, acting within the scope of his apparent authority, receives money or property
from third person, and misapplies it; or

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 3. The partnership, in the course of its business, receives money or property, and it is
misapplied by any partner while it is in the custody of the partnership.

NOTE: Partners are solidarily liable with the partnership for any penalty or damage arising from
a partnership tort.

g. PARTNERSHIP AS DISTINGUISHED FROM JOINT VENTURE

Joint Venture
It is considered as partnership. A joint venture is likened to a particular partnership or one which
“has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise
of a profession or vocation. However both are different in the sense that a joint venture is limited
to a single transaction, while a partnership generally relates to a continuing business of various
transactions of a certain kind.

It is an association of persons or companies jointly undertaking some commercial enterprise.

Generally, all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith,
and a duty which may be altered by agreement to share both in profits and losses.

NOTE: Sec. 36(h) of RA 11232 or the Revised Corporation Code of the Philippines provides for
the power of a corporation, “to enter into a partnership, joint venture, merger, consolidation,
or other commercial agreement with natural or juridical persons”.

Basis Partnership Joint Venture

Coverage Contemplates the undertaking of a Ordinarily limited to a single
general and continuous business of a transaction and not intended to pursue
particular kind. a continuous business.
Firm name Required to operate. Under a firm Has no firm name
name.
Transfer of The property used becomes the The property used remains undivided
property property of the business entity and property of its contributor.
hence of all the partners.
Power A partner acting in pursuance of the None of the co-venturers can bind the
firm business, binds not only himself as joint venture or his co-venturers.
a principal but as their agent as well,
also the partnership and the partners.
Firm name A partnership acquires personality after A joint venture has no legal
and following the requisites required by personality.
liabilities law.

NOTE: SEC registration is not

required before a partnership acquires
legal personality.

h. PROFESSIONAL PARTNERSHIP

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It is a partnership formed by persons for the sole purpose of exercising their common profession,
no part of the income of which is derived from engaging in any trade or business.

In a professional partnership, it is the individual partners who are deemed engaged in the practice
of profession and not the partnership. Thus, they are responsible for their own acts.

Prohibition in the formation of a professional partnership

Partnership between lawyers and members of other profession or non-professional persons should
not be formed or permitted where any part of the partnership’s employment consists of the practice
of law (Canon 9 of the Code of Professional Responsibility).

Prohibition in the firm name of a partnership for the practice of law

In the selection and use of firm name, no false, misleading, assumed, or trade names should be
used (Canon 3 of the Code of Professional Responsibility Professional Ethics).

i. MANAGEMENT

Modes of appointment of a manager

Appointment through the Articles of Appointment other than in the articles
Partnership
Power is irrevocable without just or lawful Power to act is revocable anytime, with or
cause. without cause (should be done by the
controlling interest)
NOTE: Vote required for removal of manager:

For just cause- Vote of the controlling

partners (controlling financial interest; greater
capital contribution).
Without cause or for unjust cause-
Unanimous vote.
Extent of Power
If he acts in good faith, he may do all acts of As long as he is a manager, he can perform all
administration (despite opposition of his acts of administration (if others oppose, he can
partners); be removed).

If he acts in bad faith, he cannot

Scope of the power of a managing partner

All acts of administration.

As a general rule, a partner appointed as manager has all the powers of a general agent as well as
all the incidental powers necessary to carry out the object of the partnership in the transaction of
its business. The exception is when the powers of the manager are specifically restricted.

Rule where there are two or more managers

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1. Without specification of their respective duties and without stipulation requiring unanimity
of action:
GR: Each may separately execute all acts of administration (unlimited power to administer).

XPN: If any of the managers opposes, decision of the majority prevails.

NOTE: In case of tie- Decision of the controlling interest (who are also managers) shall
prevail (Art. 1801, NCC).

2. With specification that none of the managing partners shall act without the consent of the others.
GR: Unanimous consent of all the managing partners shall be necessary for the validity of
the acts and absence or inability of any managing partner cannot be alleged.

XPN: Where there is an imminent danger of grave or irreparable injury to the partnership.

Rule when the manner of management has not been agreed upon
1. All partners shall be considered agents and whatever any one of them may do alone shall
bind the partnership, without prejudice to the provisions of Art. 1801 of the NCC. This
right is not dependent on the amount or size of the partner’s capital contribution or services
to the business.

NOTE: If two or more partners have been entrusted with the management of the
partnership without specification of their respective duties, or without a stipulation
that one of them shall not act without the consent of all the others, each one may
separately execute all acts of administration, but if any of them should oppose the acts of
the others, the decision of the majority shall prevail. In case of a tie, the matter shall be
decided by the partners owning the controlling interest (Art. 1801, NCC).

2. None of the partners may, without the consent of the others, make any important
alteration in the immovable property even if it may be useful to the partnership (Art. 1802-
1803, NCC).

2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND

PARTNERS
a. RIGHTS AND OBLIGATIONS OF THE PARTNERSHIP
1. Refund the amounts disbursed by partner in behalf of the partnership plus corresponding
interest from the time the expenses are made, not from the date of demand (e.g., loans and
advances made by a partner to the partnership aside from capital contribution);
2. Answer for obligations the partner may have contracted in good faith in the interest of the
partnership business;
3. Answer for risks in consequence of its management (Art. 1796, NCC).

b. OBLIGATIONS OF PARTNERS AMONG THEMSELVES

1. Contribution of property (Art. 1786, NCC);

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 Withdrawal or disposal of money or property by a contributing partner
Money or property contributed by a partner cannot be withdrawn or disposed of by the
contributing partner without the consent or approval of the partnership or of the other
partners because the money or property contributed by a partner becomes the property of
the partnership.

Who bears the risk of loss of things contributed? (Art. 1795, NCC)
Kinds of property/ thing Who bears the risk
Specific and determinate things which are Partners
not fungible where only the use is
contributed
Specific and determinate things the
ownership of which is transferred to the
partnership
Fungible things (Consumable) (use is Partnership
impossible without the things being
consumed or impaired)
Things brought and appraised in the
inventory

Effect if a partner fails to contribute the property which he promised to deliver to the
partnership
1. Partner becomes ipso jure a debtor of the partnership even in the absence of any
demand (Art. 1786, NCC);
2. Remedy of the other partner is not rescission but specific performance with damages
and interest from defaulting partner from the time he should have complied with his
obligation.

When the capital or part hereof which a partner is bound to contribute consists of goods,
their appraisal must be made in the manner prescribed in the contract of partnership, and
in the absence of stipulation, it shall be current prices, the subsequent changes thereof being
for the account of the partnership (Art. 1787, NCC).

2. Contribution of money and money converted to personal use (Art. 1788, NCC);

Rules regarding contribution of money to the partnership

1. To contribute on the date fixed the amount the partner has undertaken to contribute to
the partnership;
2. To reimburse any amount the partner may have taken from the partnership coffers and
converted to his own use;
3. To indemnify the partnership for the damages caused to it by delay in the contribution
or conversion of any sum for the partner’s personal benefit;
4. To pay the agreed or legal interest, if the partner fails to pay his contribution on time
or in case he takes any amount from the common fund and converts it to his own use.

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 Rules regarding obligation to contribute to partnership capital
Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the
capital of the partnership (Art. 1790, NCC). It is not applicable to an industrial partner
unless, besides his service, he has contributed capital pursuant to an agreement.

3. Prohibition in engaging in business for himself (Art. 1789, NCC);

Rules regarding the prohibition to engage in another business

Capitalist Partner Industrial Partner
Prohibition
Relative: Cannot engage in business (with Absolute: Cannot engage in business for
same kind of business with the himself, unless the partnership expressly
partnership) for his own account, unless permits him to do so.
there is a stipulation to the contrary.
(because as an industrial partner, he has to
devote his full time to the business of the
partnership)
Remedy
Capitalist partner, who violated shall: Capitalist partner may: Exclude him from
Bring to the common fund any profits the firm, or avail themselves of the benefits
accruing to him from said transaction; and which he may have obtained; Damages, in
personally bears all losses (Art. 1808, either case (Art. 1789, NCC).
NCC).

4. Contribute additional capital (Art. 1791, NCC);

Liability of a capitalist partner to contribute additional capital

GR: A capitalist partner is not bound to contribute to the partnership more than what he
agreed to contribute
XPNs:
1. In case of imminent loss of the business; and
2. There is no agreement to the contrary.

He is under obligation to contribute an additional share to save the venture. If he refuses to

contribute, he shall be obliged to sell his interest to the other partners.

Requisites before capitalist partners are compelled to contribute additional capital

1. Imminent loss of the business of the partnership;
2. Majority of the capitalist partners are of the opinion that an additional contribution to
the common fund would save the business;
3. Capitalist partner refuses deliberately to contribute (not due to financial inability);
4. There is no agreement to the contrary.

NOTE: The refusal of the partner to contribute his additional share reflects his lack of
interest in the continuance of the partnership. It shall be obliged to sell his interest to the
other partners except if there is an agreement to the contrary (Art. 1791, NCC).

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 It is to be noted that the industrial partner is exempted from the requirement to
contribute an additional share. Having contributed his entire industry, he can do nothing
further.

5. Managing partner who collects debt (Art. 1792, NCC);

*Obligations of managing partners who collect his personal receivable from a person
who also owes the partnership
1. Apply sum collected to 2 credits in proportion to their amounts.
2. If he received it for the account of partnership, the whole sum shall be applied to
partnership credit.

-even though he may have given a receipt for his own credit only.
Requisites:
At least 2 debts, one where the collecting partner is creditor and the other, where the
partnership is the creditor;
1. Both debts are demandable;
2. Partner who collects is authorized to manage and actually manages the partnership.

NOTE: The debtor is given the right to prefer payment of the credit of the partner if it
should be more onerous to him in accordance with his right to application of payment (Art.
1252, NCC).

Reason for applying payment to partnership credit

The law safeguards the interests of the partnership by preventing the possibility of their
being subordinated by the managing partner to his own interests to the prejudice of the
other partners.

6. Partner who receives share of partnership credit (Art. 1793, NCC);

Obligation of a partner who receives share of partnership credit

To bring to the partnership capital what he has received even though he may have given
receipt for his share only.

Requisites:
1. A partner has received in whole or in part, his share of the partnership credit;
2. Other partners have not collected their shares;
3. Partnership debtor has become insolvent.

7. Damages to partnership (Art. 1794, NCC);

Rule with regard to the obligation of a partner as to damages suffered by the partner
through his fault

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 GR: Every partner is responsible to the partnership for damages suffered by it through his
fault and he cannot compensate them with the profits and benefits which he may have
earned for the partnership by his industry.

XPN: The courts may equitably lessen this responsibility if through the partner’s
extraordinary efforts in other activities of the partnership, unusual profit has been realized
(Art. 1794, NCC).

Set-off of damages caused by a partner

GR: The damages caused by a partner to the partnership cannot be offset by the profits or
benefits which he may have earned for the partnership by his industry.

Ratio: The partner has the obligation to secure benefits for the partnership. Hence, the
profits which he may have earned pertain as a matter of law or right, to the partnership.

XPN: If unusual profits are realized through the extraordinary efforts of the partner at fault,
the courts may equitably mitigate or lessen his liability for damages. This rule rests on
equity.

8. Keep the partnership books (Art. 1805, NCC);

Duty of the partner with respect to keeping the partnership books

The partnership books shall be kept, subject to any agreement between partners, at the
principal place of business of the partnership (Art. 1805, NCC).

Duty to keep partnership book belongs to managing or active partner

The duty to keep true and correct books showing the firm’s accounts, such books being at
all times open to inspection of all members of the firm, primarily rests on the managing or
active partner or the particular partner given record-keeping duties (Art. 1805, NCC).

9. Render information (Art. 1806, NCC);

Duty of the partners with respect to information affecting partnership

Partners shall render on demand true and full information of all things affecting the
partnership to:
1. Any partner; or
2. Legal representative of any deceased or any partner under legal disability (Art. 1806,
NCC).

NOTE: Under the same principle of mutual trust and confidence among partners, there
must be no concealment between them in all matters affecting the partnership. The
information, to be sure, must be used only for a partnership purpose.

10. Accountable as fiduciary (Art. 1807, NCC).

Accountability of partners to each other as fiduciary

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 Every partner must account to the partnership for any benefit, and hold as trustee for it any
profits derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or from any use
by him of his property (Art. 1807, NCC).

Duty of a partner to act with utmost good faith towards co-partners continues even
after dissolution
The duty of a partner to act with utmost good faith towards his co-partner continues
throughout the entire life of the partnership even after dissolution for whatever reason or
whatever means, until the relationship is terminated, i.e., the winding up of partnership
affairs is completed.

Failure to disclose facts, when there is a duty to reveal them, as when parties are bound by
confidential relations, constitutes fraud (Art. 1339, NCC).

RIGHTS OF PARTNERS
1. Right to reimbursement for amounts advances to the partnership and to indemnification for
risks in consequence of management (Art. 1796, NCC);
2. Right on the distribution of profits and losses (Art. 1797, NCC);

NOTE: The agreement to contribute to a common fund and intent to divide profits
constitute partnership. It is founded upon an express trust. It is imprescriptible unless
repudiated.

Rules regarding a stipulation excluding a partner in the sharing of profits and losses
GR: Such stipulation is void (Art. 1799, NCC);

XPN: Industrial partner is not liable for losses (Art. 1797(2), NCC). However, he is not
exempted from liability insofar as third persons are concerned (loss is different from
liability). Industrial partners can seek reimbursement from other partners.

Rules regarding distribution of profits and losses

1. Distribution of profits
a. The partners share in the profits according to their agreement.
b. In the absence of such:
i. Capitalist partner- in proportion to his contribution
ii. Industrial partner- what is just and equitable under the
circumstances

NOTE: If the industrial partner has contributed capital other than his services, he shall also
receive a share in the profits in proportion to his capital.

2. Distribution of losses
a. The partners share in the losses according to their agreement.
b. In the absence of such, according to their agreement as to profits.

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 c. In the absence of profit agreement, in proportion to his capital
contribution.

3. Right to associate another person with him in his share without the consent of the other
partners (Sub-partnership) (Art. 1804, NCC);

NOTE: Such partnership formed between a member of a partnership and a third person for
a division of the profits coming to him form the partnership enterprise is termed
subpartnership.

4. Right to free access and to inspect and copy at any reasonable hour the partnership books
(Art. 1805, NCC);
5. Right to formal account as to partnership affairs (even during existence of partnership):
a. If he is wrongfully excluded from the partnership business or possession of its
property by his co-partners;
b. If the right exist under the terms of any agreement;
c. Duty to account as provided by Art 1807;
d. Whenever there are circumstanced render it just and reasonable;

6. Right to have the partnership dissolved; and

7. Property rights of a partner (Art. 1810, NCC);
a. His rights is specific partnership property;
b. His interest in the partnership (share in the profits and losses); and
c. His right to participate in the management.

c. OBLIGATIONS OF PARTNERSHIP/PARTNERS TO THIRD PERSONS

1. Every partner shall operate under a firm name (Art. 1815, NCC);

NOTE: Persons who, not being partners, include their names in the firm name do not
acquire the rights of a partner but they shall be subject to the liability of a partner (Art.
1816, NCC) insofar as third persons without notice are concerned.

2. All partners (capitalist and industrial) shall be liable pro rata with all their property and
after all the partnership assets have been exhausted, for the contracts which may be entered
into in the name and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate
obligation to perform a partnership contract.
a. Pro rata
b. Subsidiary (Art. 1816, NCC);
XPN: All partners shall be liable solidarily with the partnership for everything
chargeable to the partnership under Art. 1822 and 1823 (Art. 1824, NCC);

Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business
of the partnership or with the authority of co-partners, loss or injury is caused to any person, not being a partner
in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner
so acting or omitting to act.

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 Art. 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority receives money or property of a third
person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a third person and the
money or property so received is misapplied by any partner while it is in the custody of the partnership.

Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to the partnership
under Articles 1822 and 1823.

NOTE: Any stipulation against the liability laid down in Art 1816 shall be void
except as among the partners (Art. 1817, NCC);

NOTE: A partner is liable for his pro rata share. Dissolution of a partnership
caused by the termination of the particular undertaking specified in the agreement
does not extinguish obligations, which must be liquidated during the “winding up”
of the partnership affairs (Art. 1830 (par.1(a), NCC);

3. Partner as an agent of the partnership (Art. 1818, NCC);

4. Conveyance of real property belonging to the partnership (Art. 1819, NCC);
5. Admission or representation made by any partner concerning partnership affairs within the
scope of his authority is evidence against the partnership (Art. 1820, NCC);
6. Notice to partner of any matter relating to partnership affairs operates as notice to
partnership except in case of fraud:
a. Knowledge of partner acting in the particular matter acquired while a partner
b. Knowledge of the partner acting in the particular matter then present to his mind
c. Knowledge of any other partner who reasonably could and should have
communicated it to the acting partner (Art. 1821, NCC);

7. Partners and the partnership are solidarily liable to 3rd persons for the partner’s tort or
breach of trust (Art. 1822-24, NCC);
8. Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations
b. His separate property for subsequent obligations (Art. 1826, NCC);

9. Creditors of partnership re preferred in partnership property and may attach partner’s share
in partnership assets (Art. 1827, NCC);

NOTE: On solidary liability, Art. 1816 should be construed together with Art. 1824. While
the liability of the partners is merely joint in transactions entered into by the partnership, a third
person who transacted with said partnership may hold the partners solidarily liable for the
whole obligation in the case of the third person falls under Arts. 1822-23.

Effect of the acts of partners acting as an agent of the partnership

Acts of a Partner Effect
Acts for apparently carrying on in the usual way the With binding effect except:
business of the partnership When the partner so acting has in fact no authority to act
for the partnership in the particular matter, and the

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 person with whom he is dealing has knowledge of the
fact that he has no such authority (Art. 1818(1), NCC);
Acts not in the ordinary course of business Do not bind partnership unless authorized by other
partners (Art. 1818, NCC);
Acts of strict dominion or ownership GR: One or more but less than all the partners have no
authority
Assigning partnership property in trust for creditors;
Disposing of goodwill of business; XPN: Authorized by the other partners; or
Doing an act which would make it impossible to carry Partners have abandoned the business (Art. 1818(3),
on the ordinary business of partnership; NCC);
Confessing a judgment;
Entering into a compromise concerning a partnership
claim or liability;
Submitting partnership claim or liability to arbitration;
Renouncing claim of partnership.
Acts in contravention of a restriction on authority Partnership is not liable to 3rd persons having actual or
presumptive knowledge of the restriction (Art. 1818(4),
NCC);

Effect of conveyance of a real property

Type of Conveyance Effect
Title in the partnership’s name; Conveyance passes title but partnership can recover,
Conveyance in partnership name unless:
1. Conveyance was done in the usual way of
business, and
The partner so acting has the authority to act
for the partnership; or

2. The property which has been conveyed by the

grantee or a person claiming through such
grantee to a holder for value without
knowledge that the partner, in making the
conveyance, has exceeded his authority.
Title in the partnership’s name; Conveyance in the Conveyance does not pass title but only equitable
partner’s name interest, provided:
Conveyance was done in the usual way of business, or
the partner so acting has the authority to act for the
partnership.
Title in the name of 1 or more partners, and the Conveyance passes title but the partnership may
record does not disclose the right of the partnership; recover such property if the partners’ act does not bind
Conveyance in the name of partner/s in whose name the partnership:
title stands The partner so acting has no authority to act for the
partnership, and the person with whom he is dealing has
knowledge of the fact unless the purchaser of hi
assignee, is a holder for value, without knowledge.
Title in the name of 1 or more or all partners or 3rd Conveyance will only pass equitable interest, provided:
person in trust for partnership; The act is one within the authority of the partner, and
Conveyance executed in partnership name or in conveyance was done in the usual was of the business.
name of partners
Title in the names of all the partners; Conveyance will pass all the rights in such property.
Conveyance executed by all the partners

3. DISSOLUTION AND WINDING UP

DISSOLUTION

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Final stages of partnership
1. Dissolution
2. Winding up; and
3. Termination

Dissolution Winding up Termination

A change in the relation of the Settling the partnership business Point in time when all
partners caused by any partner or affairs after dissolution. partnership affairs are wound up
ceasing to be associated in or completed; the end of the
carrying on the business. partnership life.
It is that point in time when the It is the final step after It signifies the end of the
partners cease to carry on the dissolution in the termination of partnership life. It takes place
business together. It represents the partnership. after both dissolution and
the demise of a partnership. winding up have occurred.
Thus, any time a partner leaves
the business, the partnership is
dissolved.

Causes of dissolution (Art. 1830, NCC)

1. Without violating the agreement:
a. Termination of the definite term or specific undertaking
b. Express will of any partner in good faith, when there is no definite term and no
specific undertaking
c. Express will of all partners (except those who have assigned their interests or
suffered them to be charged for their separate debts) either before or after the
termination of any specifies term or particular undertaking
d. Expulsion of any partner in good faith of a member

2. Violating the agreement

3. Unlawfulness of the business
4. Loss
a. Specific thing promised as contribution is lost or perished before delivery
b. Loss of a specific thing contributed before or after delivery, if only the use of such
is contributed

NOTE: The partnership shall not be dissolved by the loss of the thing when it occurs after
the partnership has acquired the ownership thereof.

5. Death of any of the partners

NOTE: When any partner dies and the business is continued without any settlement of
accounts as between hi or his estate, the surviving partners are held liable for continuing
the business despite the death of a partner. Creditors can file the appropriate action (action
for the collection of sum of money against the “partnership at will” and if there are no
sufficient funds, the creditors may go after the private properties of the remaining partners
(Art. 1816, NCC). Creditors may also sue the estate of the deceased. The estate is not
excused from the liability of the partnership even if the partner already died but only up to

115
 the time he remained a partner (Art. 1829, 1835(2), NCC). However, the liability of the
deceased partner shall be subject first to the payment of his separate debts (Art. 1835,
NCC);

6. Insolvency of any partner or of the partnership

7. Civil interdiction of any partner
8. By decree of court under Article 1831
a. A partner has been declared insane or of unsound mind
b. A partner becomes in any other way incapable of performing his part of the
partnership contract
c. A partner has been guilty of such conduct as tends to affect prejudicial the carrying
of the business
d. A partner willfully or persistently commits a breach of the partnership agreement
e. The business of the partnership can only be carried on at a loss
f. Other circumstances render a dissolution equitable.

Effects of dissolution
1. Partnership is NOT terminated;
2. Partnership continues for a limited purpose;
3. Transaction of new business is prohibited.

As to previous obligations, the dissolution of partnership does not mean that the partners can evade
previous obligations entered into.

As to new obligations, the dissolution spares the former partners from new obligations entered into
by the partnership without their consent, implied or express, unless the obligation are essential for
the winding up of partnership affairs.

Dissolution does not automatically result in the termination of the legal personality of the
partnership, nor the relations of the partners among themselves who remain as co-partners until
the partnership is terminated.

A partner cannot be expelled from the partnership without agreement thereto

In the absence of an express agreement to that effect, there exist no right or power of nay member,
or even a majority of the members, to expel all other members of the firm at will. Nor can they at
will forfeit the share or interest of a member or members and compel him or them to quit the firm,
even paying what is due him.

The expulsion has the effect of decreasing number of the partners, hence, the dissolution. The
expulsion must be mad in good faith. The partner expelled in bad faith can claim damages.

Effect of dissolution on the authority of a partner

GR: The partnership ceases to be a going concern

XPN: The partner’s power of representation is confined only to acts incident to winding up or
completing transactions begun but not then finished (Art. 1832, NCC).

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NOTE: Subject to the qualifications set forth in Articles 1833 and 1834 in relation to Article 1832:
1. In so far as the partners themselves are concerned- The authority of any partner to bind
the partnership by a new contract is immediately terminated when the dissolution is not by
the act, insolvency, or death of a partner.
2. When the dissolution is by the act, insolvency, or death, the termination of authority
depends upon whether or not the partner had knowledge or notice of dissolution (Art. 1833,
NCC);

Liability of a partner where the dissolution is caused by the act, death, or insolvency of a
partner
GR: Each partner is liable to his co-partners for his share of any liability created by any partner
for the partnership, as if the partnership has not been dissolved.

XPNs: Partners shall not be liable when:

1. The dissolution, being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
2. The dissolution, being by the death or insolvency of a partner, the partner acting for the
partnership has knowledge or notice of the death or insolvency (Art. 1833, NCC);

After the dissolution of a partnership, can a partner still bind the partnership?
GR: A partner continues to bind partnership even after dissolution in the following cases:
1. Transactions to wind up partnership affairs or to complete transactions unfinished at
dissolution;
2. Transactions which would bind partnership if dissolution had not taken place, provided the
other party/obligee:
a. Had extended credit to partnership prior to dissolution; and had no
knowledge/notice of dissolution; or
b. Did not extend credit to partnership; had known partnership prior to dissolution;
AND had no knowledge/ notice of dissolution/ fact of dissolution not advertised in
a newspaper of general circulation in the place where partnership is regularly
carried on (Art. 1834(1), nos.1-2, NCC);

XPNs: Partner cannot bind the partnership anymore after dissolution:

1. Where dissolution is due to unlawfulness to carry on business; or
2. Where partner has become insolvent; or
3. Act is not appropriate for winding up or for completing unfinished transactions; or
4. Partner is unauthorized to wind up partnership affairs, except by transaction with one who:
a. Had extended credit to partnership prior to dissolution; AND had no knowledge or
notice of dissolution; or
b. Did not extend credit to partnership prior to dissolution; Had known partnership
prior to dissolution; AND had no knowledge/ notice of dissolution/ fact of
dissolution not advertised in a newspaper of general circulation in the place where
partnership is regularly carried on (Art. 1834(3), NCC);

117
 5. Completely new transactions which would bind the partnership if dissolution had not taken
place with third persons in bad faith.

Does dissolution of a partnership discharge existing liability of a partner?

GR: Dissolution does not discharge the existing liability of a partner (Art. 1835(1), NCC).

XPN: Said liability is discharged when there is an agreement between:

1. Partner himself;
2. Persons continuing the business; and
3. Partnership creditors (Art. 1835(2), NCC);

Liability of the estate of a deceased partner

In accordance with Article 1816, the individual property of a deceased partner shall be liable for
all obligations of the partnership incurred while he was partner. Note that the individual creditors
of the deceased partner are to be preferred over partnership creditors with respect to the separate
property of said deceased partner.

Order of priority in the distribution of assets during the dissolution of a limited partnership
In settling the accounts after dissolution, the liabilities of the partnership shall be entitled to
payment in the following order:
1. Those creditors, in the order of priority as provided by law, except those to limited partners
on account of their contributions and to general partners;
2. Those to limited partners in respect to their share of the profits and other compensation by
way of income on their contributions;
3. Those to limited partners in respect to the capital of their contributions;
4. Those to general partners other than for capital and profit;
5. Those to general partners in respect to profits;
6. Those to general partners in respect to capital (Art. 1863, NCC);

NOTE: Subject to any statement in the certificate or to subsequent agreement, limited partners
share in the partnership assets in respect to their claims for capital, and in respect to their claims
for profits or for compensation by way of income on their contribution respectively, in proportion
to the respective amounts of such claims (Art. 1863, NCC);

WINDING UP OF THE PARTNERSHIP

It is during this time after dissolution that partnership business or affairs are being settled.

Order of payment in winding up

1. In a general partnership
a. Those owing to creditors other than partners
b. Those owing to partners other than for capital or profits
c. Those owing to partners in respect of capital
d. Those owing to partners in respect to profits (Art. 1839(2), NCC);

2. In a limited partnership

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 a. Those to creditors, in the order of priority as provided by law, except those to
limited partners on account of their contributions, and to general partners.
b. Those to limited partners in respect to their share of the profits and other
compensation by way of income on their contributions.
c. Those to limited partners in respect to the capital of their contributions.
d. Those to general partners other than for capital and profits.
e. Those to general partners in respect to profits.
f. Those to general partners in respect to capital.

Doctrine of marshalling of assets

The doctrine of marshalling of assets provides that:
1. Partnership creditors have preference in partnership assets.
2. Separate or individual creditors have preference in separate or individual properties.
3. Anything left from either goes to the other.
NOTE: The doctrine of marshalling of assets involves the ranking of assets in a certain order
toward the payment of outstanding debts.

Rights of a partner where dissolution is not in contravention of the agreement

Unless otherwise agreed, the rights of each partner are as follows:
1. To have the partnership property applied to discharge the liabilities of partnership; and
2. To have the surplus, if any, applied, to pay in case the net amount owing to the respective
partners.

Rights of a partner where dissolution is in contravention of the agreement

The rights of a partner vary depending upon whether he is the innocent or guilty partner.
1. Rights of partner who has not caused the dissolution wrongfully:
a. To have partnership property applied for the payment of its liabilities and to receive
in case his share of the surplus.
b. To be indemnified for the damages caused by the partner guilty of wrongful
dissolution.
c. To continue the business in the same name during the agreed term of the
partnership, by themselves or jointly with others.
d. To possess partnership property should they decide to continue the business.

2. Rights of partner who has wrongfully caused the dissolution

a. If the business is not continued by the other partner, to have the partnership property
applied to discharge its liabilities and to receive in cash his share of the surplus less
damages caused by his wrongful dissolution
b. If the business is continued:
i. To have the value of his interest in the partnership at the time of the
dissolution, less any damages caused by his dissolution to his co-partners,
ascertained and paid in cash, or secured by bond approved by the court; and
ii. To be released from all existing and future liabilities of the partnership.

Rights of injured partner where partnership contract is rescinded

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 1. Right of a lien on, or retention of, the surplus of partnership property after satisfying
partnership liabilities for any sum of money paid or contributed by him;
2. Right of subrogation in place of partnership creditors after payment of partnership
liabilities; and
3. Right of indemnification by the guilty partner against all debts and liabilities of the
partnership.

Settlement of accounts between partners

1. Assets of the partnership include:
a. Partnership property (including goodwill)
b. Contributions of the partners

2. *Order of application of the assets:

a. First, those owing to partnership creditors
b. Second, those owing to partners other than for capital and profits such as loans
given by the partners or advances for business expenses
c. Third, those owing for the return of the capital contribution by the partners
d. Fourth, the share of the profits, if any, due to each partner.

Partner’s lien
It is the right of every partner to have the partnership property applied, to discharge partnership
liabilities and surplus assets, if any, distributed in cash to the respective partners, after deducting
what may be due to the partnership from them as partners.

Effects when the business of a dissolved partnership is continued

1. Creditors of old partnership are also creditor of the new partnership who continues the
business of the old one without liquidation of the partnership affairs.
2. Creditors have an equitable lien on the consideration paid to the retiring/deceased partner
by the purchaser when retiring/deceased partner sold his interest without final settlement
with creditors.
3. Rights of retiring/ estate of the deceased partner:
a. To have the value of his interest ascertained as of the date of dissolution; and
b. To receive as ordinary creditor the value of his share in the dissolved partnership
with interest or profits attribute to use of his right, at his option.

NOTE: The right to demand on accounting of the value of his interest accrues to any partner or
his legal representative after dissolution in the absence of an agreement to the contrary.

4. LIMITED PARTNERSHIP
It is one formed by two or more persons having as members one or more general partners and one
or more limited partners, the latter not being personally liable for partnership debts (Art. 1843,
NCC);

General partner vs. Limited partner

Basis General Limited

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Liability Personally liable for partnership Liability extends inly to his capital
obligations. contributions. Not liable with his personal
properties to answer for the obligations of
the partnership.
Right in When manner of management has not No participation in management.
Management agreed upon, all general partners have
equal right in the management of the
business.
Contribution Money, property, or industry. Cash or property only, not services.
If Proper Proper party proceedings by/ against No proper party to proceedings by/against
Party to partnership. partnership, unless:
Proceedings He is also a general partner; or
By or Where the object of the proceeding is to
Against enforce a limited partner’s right or liability
Partnership to the partnership.
Assignment Interest is not assignable without consent Interest is freely assignable.
of interest of other partners.
Firm Name It must operate under a firm name, which It must also operate under a firm name,
may or may not include the name of the followed by the word “Limited”.
partners.
GR: The surname of a limited partner shall
NOTE: Those, who, not being members of not appear in the partnership name.
the partnership, include their name in the
firm name, shall be subject to the liability XPNs:
of a partner (Art. 1815, NCC). It is also the surname of a general partner;
prior to the time when the limited partner
became such, the business had been carried
on under a name in which his surname
appeared.

NOTE: A limited partner whose surname

appears in a partnership name is liable as a
general partner to partnership creditors
who extend credit to the partnership
without actual knowledge that he is not a
general partner (Art. 1846, NCC).
Prohibition a. The capitalist partner cannot engage for No prohibition against engaging in
to Engage in their own account in any operation which business.
Other is of the kind of business in which the
Business partnership is engaged, unless there is a
stipulation to the contrary.

b. If he is an industrial partner- in any

business for himself.
Effect of Retirement, death, insolvency, insanity of Does not have same effect; rights are
Death, general partner dissolves partnership. transferred to legal representative.
Insolvency,
Retirement,
Insanity

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 Creation As a rule, it maybe constituted in any form, Created by the members after substantial
by contract or conduct of the parties. compliance in good faith of the
requirements set forth by law.
Composition/ Composed only of general partners. Composes of at least one general partner
Membership and one limited partner.

Characteristics of limited partnership

1. It is formed by compliance with the statutory requirements.
2. One or more general partners control the business and are personally liable to creditors.
3. One or more limited partners contribute to the capital and share in the profits but do not
participate in the management of the business and are not personally liable for partnership
obligations beyond their capital contributions.
4. The limited partners may ask for the return of their capital contributions under conditions
prescribed by law.
5. Partnership debts are paid out of common fund and the individual properties of general
partners.

FORMATION AND AMENDMENT OF LIMITED PARTNERSHIP

Essential requirements for the formation of limited partnership

1. Certificate of Articles of Limited Partnership which states the matters enumerated in Art.
1844, must be signed and sworn; and
NOTE: Among the contents of the Certificate of Articles of Partnership should be the
name of the partnership, adding thereto the word “limited”.

2. Certificate must be filed for record in the office of the SEC.

NOTE: Strict compliance with legal requirements is not necessary. It is sufficient that there
is substantial compliance in good faith. If there is no substantial compliance, the
partnership becomes general partnership as far as third persons are concerned, in which
the member are liable as general partners.

Cancellation of certificate or articles of limited partnership

1. When the partnership is dissolved
2. When all the limited partners ceased to be such (Art. 1864, NCC);

Instances when a certificate of limited partnership can be amended

1. It must fall under the following changes and conditions:
a. There is a change in the name of the partnership or in the amount or character of
the contribution of any limited partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retired, dies, becomes insolvent or insane, or is sentences to civil
interdiction and the business is continued under Article 1860;
f. There is a change in the character of the business of the partnership;
g. There is a false or erroneous statement in the certificate;

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 h. There is a change in the time as stated in the certificate for the dissolution of the
partnership or for the return of a contribution;
i. A time is fixed for the dissolution of the partnership, or the return of a contribution,
no time having been specified in the certificate;
j. The members desire to make a change in any other statement in the certificate in
order that it shall accurately represent the agreement among them (Art. 1864, NCC);

2. Must be signed and sworn to by all of the members including the new members if some
added; in case of subrogation, the assigning limited partner must also sign.
3. Must be recorded in the SEC.

Instances when a general partner needs consent or ratification of all the limited partners
When he:
1. Does nay act in contravention of the certificate;
2. Does any act which would make it impossible to carry on the ordinary business of the
partnership;
3. Confesses judgment against partnership;
4. Possesses partnership property/ assigns rights in specific partnership property other than
for partnership purpose;
5. Admits person as general partner;
6. Admits person as limited partner- unless authorized in certificate; or
7. Continues business with partnership property on death, retirement, civil interdiction,
insanity, or insolvency of general partner unless authorized in the certificate (Art. 1850,
NCC);

RIGHTS AND OBLIGATIONS OF A LIMITED PARTNER

Rights of a limited partner (Art. 1851, NCC)

1. To have partnership books kept at principal place of business;
2. To inspect/copy books at reasonable hours;
3. To have on demand true and full information of all things affecting partnership;
4. To have formal account of partnership affairs whenever circumstances render it just and
reasonable;
5. To ask for dissolution and winding up by decree of court;
6. To receive share of profits/ other compensation by way of income; and
7. To receive return of contributions provided the partnership assets are in excess of all its
liabilities.

Transactions allowed or prohibited in a limited partnership

1. Allowed
a. Granting loans to partnership
b. Transacting business with partnership
c. Receiving pro rata share of partnership assets with general creditors if he is not also
a general partner.

2. Prohibited

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 a. Receiving/holding partnership property as collateral security
b. Receiving any payment, conveyance, release from liability if it will prejudice right
of 3rd persons

NOTE: The prohibition is not absolute because there is no prohibition if the partnership
assets are sufficient to discharge partnership liabilities to persons not claiming as general
or limited partners.

Substituted limited partner

It is a person admitted to all the rights of a limited partner who has died or assigned his interest in
the partnership.

Rights and liabilities of a substituted limited partner (Art. 1859, NCC)

GR: He has all the rights and powers and is subject to all the restrictions and liabilities of his
assignor.

XPN: Those liabilities which he was ignorant of at the time that he became a limited partner and
which could not be ascertained from the certificate.

Requirements for the admission of a substituted limited partner

1. All the members must consent to the assignee becoming a substituted limited partner or the
limited partner, being empowered by the certificate must give the assignee the right to
become a limited partner;
2. The certificate must be amended in accordance with Art. 1865 of the NCC; and
3. The certificate as amended must be registered in the SEC.

Basis of preference given to limited partners over other limited partners

Priority or preference may be given to some limited partners over other limited partners as to the:
1. Return of their contributions;
2. Their compensation by way of income; or
3. Any other matter.

NOTE: In the absence of such statement in the certificate, even if there is an agreement, all limited
partners shall stand on equal footing in respect to these matters.

Requisites for return of contribution of a limited partner (Art. 1857, NCC)

1. All liabilities of the partnership have been paid or if they have not yet been paid, the assets
of the partnership are sufficient to pay such liabilities;
2. The consent of all the members (general and limited partners) has been obtained except
when the return may be rightfully demanded; and
3. The certificate of limited partnership is cancelled or amended.

When return of contribution is a matter of right

When all liabilities of a partnership, except liabilities to general partners and to limited partners on
account of their contributions, have been paid or there remains property of the partnership

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sufficient to pay them and the certificate is cancelled or so amended as to set forth the withdrawal
or reduction:
1. On the dissolution of the partnership;
2. Upon the arrival of the date specified in the certificate for the return; or
3. After the expiration of 6-month notice in writing given by him to the other partners if no
time is fixed in the certificate for the return of the contribution for the dissolution of the
partnership.

NOTE: Even if a limited partner has contributed property, he has only the right to demand and
receive cash for his contribution. The exceptions are:
1. When there is stipulation to the contrary in the certificate; or
2. When all partners (general and limited partners) consent to the return other than in the form
of cash.

Liabilities of a limited partner

1. To the partnership
Since limited partners are not principals in the transaction of a partnership, their liability
as a rule, is to the partnership, not to the creditors of the partnership. The general partners
cannot however waive any liability of the limited partners to the prejudice of such creditors.

2. To the partnership creditors and other partners

a. A limited partner is liable for partnership obligations when he contributed services
instead of only money or property to the partnership;
b. When he allows his surname to appear in the firm name;
c. When he fails to have a false statement in the certificate corrected, knowing it be
false;
d. When he takes part in the control of the business;
e. When he receives partnership property as collateral security, payment, conveyance,
or release in fraud of partnership creditors;
f. When there is failure to substantially comply with the legal requirements governing
the formation of limited partnerships.

3. To separate creditors
As in a general partnership, the creditor of a limited partner may, in addition to other
remedies allowed under existing laws, apply to the proper court for a charging order
subjecting the interest in the partnership of the debtor partner for the payment of his
obligation.

Requisites for waiver or compromise of liabilities

1. Is made with the consent of all partners; and
2. Does not prejudice partnership creditors who extended credit or whose claims arose before
the cancellation or amendment of the certificate.

When may a limited partner have the partnership dissolved

1. When his demand for the return of his contribution is denied although he has a right to such
return; or

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 2. When his contribution is not paid although he is entitled to its return because the other
liabilities of the partnership have not been paid or the partnership property is insufficient
for their payment.

Effect of retirement, death, civil interdiction, insanity, or insolvency of a partner

1. General partner- the partnership is dissolved (Art. 1860, NCC) unless the business in
continued by the remaining general partners:
a. Under the right stated in the certificate; or
b. With the consent of all the partners.

2. Limited partner- the partnership is not dissolved except all limited partners cease to be
such.

Rights of the executor/ administrator on the death of the limited partner

1. All the rights of a limited partner for the purpose of settling his estate
2. To have the same power as the deceased has to constitute his assignee as substituted limited
partner.

In settling accounts after dissolution, the liabilities of the partnership shall be entitled to
payment in the following order
1. Those creditors, in the order of priority as provided by law except those to limited partners
on accounts of their contributions and to general partners
2. Those to limited partners in respect to their share of the profits and other compensation by
way of income on their contributions
3. Those to limited partners in respect to the capital of their contributions
4. Those to general partners in respect to profits
5. Those to general partners in respect to capital (Art. 1863, NCC);

GR: A limited partner is not a proper party to proceedings:

1. By a partnership; or
2. Against a partnership

XPNs:
1. If he is also a general partner.
2. Where the object is to enforce a limited partner’s right against or liability to the partnership
(Art. 1866, NCC);

B. CORPORATIONS (Republic Act No. 11232)

1. DEFINITION OF CORPORATION
A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes, and properties expressly authorized by law or incident to its existence (Sec.
2, RCC).

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ATTRIBUTES OF A CORPORATION

1. It is an artificial being
A corporation is a legal or judicial person with a personality separate and distinct from individual
stockholders or members and from any other legal entity into which it may be connected or related.

2. It is created by operation of law

GR: A legislative grant or authority is required for the creation of a corporation, either by a special
incorporation law or charter or by means of general corporation law.

XPN: For corporations by prescription, such authority is not necessary.

NOTE: A corporation y prescription is one which has exercised powers for an indefinite period
without interference on the part of the sovereign power and which by fiction of law, is given the
status of a corporation.

NOTE: Article XII, Section 16 of the 1987 Constitution provides that Congress shall not, except
by general law, provide for the formation, organization, or regulation of private corporations.
Government-owned and controlled corporations may be created or established by special charters
in the interest of the common good and subject to the test of economic viability.

Private corporations owned or controlled by the government can only be created by special law
often referred to as “Charters”.

NOTE: A private corporation may be created only under a general law, the Corporation Code.
Only public corporations (GOCCs) may be created under a special law or special charters or
charters. Where a private corporation is created under a special law, there is no attempt at a valid
incorporation and it cannot claim a de facto status.

NOTE: GOCCs has three attributes: (a) First, its organization as stock or non-stock corporation;
(b) Second, the public character of its functions (vested with functions relating to public needs);
(c) Third, government ownership over the same.

NOTE: The government owns a stock or non-stock corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the corporate capital stock. In a non-stock
corporation, the controlling interest of the government is affirmed when “at least majority of the
members are government officials holding such membership by appointment or designation” or
there is otherwise “substantial participation of the government in the selection” of the corporation’s
governing board.

NOTE:
Franchise- A franchise includes any special privilege or right affected with public interest,
conferred by the State on corporations or persons and which does not belong to the citizens of the
country, generally as a matter of common right.

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3. It enjoys the right of succession
A corporation has a capacity of continuous existence irrespective of the death, withdrawal,
insolvency, or incapacity of the individual stockholders or members and regardless of the transfer
of their interest or shares of stock.

A corporation shall have a perpetual existence unless its Articles of Incorporation provided
otherwise (Sec. 11, RCCP).

4. It has the powers, attributes, and properties expressly authorized by law or incident to its
existence.

Theory of Special Capacities/Limited Capacity Doctrine

No corporation, under the Code, shall possess or exercise any corporate powers, 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. The corporation’s capacity
is limited to such express, implied, and incidental powers.

If the act of the corporation is not one of those express, implied, or incidental powers, the act is
ultra vires.

2. CLASSES OF CORPORATION
1. As to organizers
a. Public- by the State only; and
b. Private- by private persons alone or with the State.
2. As to functions:
a. Public- government of a portion of the State; and
b. Private- usually for profit-making functions.
3. As to governing law:
a. Public-Special Laws and Local Government Code; and
b. Private- Law on Private Corporations (The RCCP).
4. As to legal status:
a. De jure corporation- corporation organized in accordance with requirements of
law;
b. De facto corporation- a corporation where there exists a flaw in its incorporation.
The requisites for its existence are (Sec. 19, RCCP):
i. The existence of a valid law under which it may be incorporated;
ii. An attempt in good faith to incorporate;
iii. Use of corporate powers.

NOTE:
(1) Issuance of certificate of incorporation by the SEC is a minimum requirement
of continued good faith. However, a corporation may be de jure corporation
even in the absence of By-laws.
(2) If there is substantial compliance, de jure corporation results; only colorable
compliance results in de facto corporation.

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 (3) A corporation created through an invalid special law cannot be a de facto
corporation; the first and the second elements are missing.
(4) The due incorporation and right to exercise corporate powers of a de facto
corporation cannot be inquired into collaterally in a private suit to which the
corporation is a party. Inquiry shall be only through quo warranto proceedings
filed by the Solicitor General (Sec. 19, RCCP).
5. Corporation by estoppel- group of persons which holds itself out as a corporation and
enters into a contract with a third person on the strength of such appearance cannot be
permitted to deny its existence in an action under said contract.

NOTE: This is actually not a real corporation.

(1) Those who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners (meaning up to their personal properties). Those who
were not aware of the defect are liable only up to their investment.
(2) The Supreme Court ruled in one case that all those who derived benefit from the
transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.
(3) A person who contracted with an officer who signed for the corporation prior to the
corporation’s incorporation may also be estopped from saying that the contracting
party is not the corporation. Both the corporation and the other contracting party are
bound.
6. Corporation by prescription- A corporation that was not formally organized as such, but
has been duly recognized by immemorial usage as a corporation, with rights and duties
maintainable at law. Ex. Roman Catholic Church.
7. As to existence of stocks:
a. Stock corporation- a corporation in which (1) capital stock is (2) divided into
shares and is authorized to (3) distribute to holders of such shares dividends or
allotments of the surplus profits on the basis of the shares held (Sec. 3, RCCP).
b. Non-stock corporation- a corporation which does NOT have a capital stock or
does not issue stocks and does not distribute dividends or allotment of surplus
profits to its member.
8. As to laws of incorporation:
a. Domestic Corporation- corporation formed, organized, or existing under
Philippine laws.
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.
9. As to the number of components:
a. Corporate aggregate- a corporation that is formed by and is composed of two or
more stockholders or members.
b. Corporation Sole- A corporation that is organized and formed by one person (who
may be the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder
of a religious denomination, sect, or church). This applies to religious corporations
where a corporation sole is allowed for purposes of administering and managing as
trustee, the affairs, property and temporalities of any religious denomination, sect

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 or church (Sec. 107 and Sec. 108, RCCP). The rules on stock corporations
suppletorily apply to a corporation sole. It has no nationality.
c. One Person Corporation (OPC)- A corporation with a single stockholder, who
may be a natural person, a trust, or an estate (Sec. 116, RCCP). No other person/
entity, outside those mentioned in Section 116 of the RCCP, may form a One
Person Corporation (OPC). An OPC is a stock Corporation. Submission of By-
Laws is not required for an OPC (Sec. 119, RCCP).
10. Other Corporations:
a. Close Corporation- defined in Section 95 of the RCCP
SEC. 95. Definition and Applicability of Title. – A close corporation, within the meaning of this
Code, is one whose articles of incorporation provides that:
(a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding twenty (20);
(b) all the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and
(c) the corporation shall not list in any stock exchange or make any public offering of its
stocks of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided, That other Titles in
this Code shall apply suppletorily, except as otherwise provided under this Title.

b. Special Corporations
i. Educational Corporations- they are governed by special laws and by the
general provisions of the RCCP (Sec. 105, RCCP).
ii. Religious Corporations- may be classified into (Sec. 107, RCCP):
1. Corporation Sole (Sec. 108, RCCP); and
2. Religious Society- a religious society or religious order, or diocese,
synod, or district organization is a religious denomination, sect or
church that is incorporated for the administration of its temporalities
or for the management of its affairs, properties, and estate (Sec. 114,
RCCP).
11. Corporations going public vs. Corporations going private
A corporation is deemed to be “going-public” when it decides to list its shares in the stock
exchange. This includes corporation 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, this also includes close or closely-held corporations.
12. Real Estate Investment Trust (REIT)
A stock corporation established in accordance with the Corporation Code of the Philippines
and the rules and regulations promulgated by the SEC principally for the purpose of owing
income-generating real estate assets (Sec. 3(cc), RA No. 9856).

3. NATIONALITY OF CORPORATIONS

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a. CONTROL TEST
Uses the nationality of the controlling stockholders or members of the corporation.

1. The Foreign Investment Act of 1991 (RA No. 7042) gives the definition of a “Philippine
National”-
1. 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;
2. A corporation organized abroad and registered as doing business in the Philippines
under the general law on corporation of which 100% of the capital stocks entitled to
vote belong to Filipinos.

2. Philippines National under Foreign Investment

Where a corporation and its non-Filipino stockholders own stocks in SEC-registered enterprise,
1. at least 60% of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines, and
2. at least 60% of the members of the Board of Directors of each of both corporations must
be citizens of the Philippines, in order that the corporation shall be considered a Philippine
national. (Sec. 3(a), RA No. 7042, as amended by RA NO. 8179 or the Foreign Investment
Act).
Example:
X corporation owns 65% of the outstanding shares, entitled to vote in A corporation.
The 70% shares outstanding entitled to vote in X corporation are owned by Pedro, a
Filipino and 4 out of 5 directors are also Filipinos. A corporation is a Philippine national
in this example.

However, A corporation is not a Philippine national if 70% of the shares outstanding

entitled to vote in X corporation (which owns 65% of A corporation) belongs to aliens.
The same conclusion will be reached even if only 55% of the shared outstanding entitled
to vote in X belong to aliens but more than 60% of its directors are aliens (4 of 5 directors
are aliens).

3. A corporation organized in another country and registered to do business in the

Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by
Filipinos is also a Philippine National for investment purposes.

b. GRANDFATHER RULE
Grandfather Rule is the method of attributing the shareholding of a given corporate shareholder to
the second or even the subsequent tier of ownership in a corporation. This is consistent with the
rule that the “beneficial ownership” of corporations engaged in nationalized activities must reside
in the hands of Filipino citizens. In the case of a multi-tiered corporation, the stock attribution rule
must be allowed to run continuously along the chain of ownership until it finally reaches the
individual stockholders (Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines, Corp., GR No. 195580, Jan. 28, 2015).

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The Grandfather Rule is a method of determining the nationality of a corporation that owns shares
in another corporation by breaking down the equity structure of the stakeholders of the corporation.

1. The percentage of shares held by the second corporation in the first is multiplied by the
latter’s own Filipino equity, and the product of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary corporation.

The CONTROL TEST is the primary test. However, the Grandfather Rule applies if:
(1) the Filipino equity is less than 60% of the outstanding capital of a corporation that owns
shares in a partly nationalized enterprise- at least 60% must be owned by Philippine
nationals; or
(2) there is an attempt to circumvent the nationalization requirement or when there is doubt
as to the real owners, as in the case where there is layering.

Rules governing the application of the Grandfather Rule

1. The Grandfather Rule should be used in determining the nationality of a corporation
engaged in a partly nationalized activity. This applies in cases where the stocks of a
corporation are owned by another corporation with foreign stockholders exceeding 40%
of the capital stock of the corporation.
2. The Grandfather Rule will not apply in cases where the 60-40 Filipino-Alien equity
ownership in a particular natural resource corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder corporation is deemed to be held by Filipinos.
3. When there is doubt as to the actual extent of Filipino equity in the investee corporation,
the SEC is not precluded from using the Grandfather Rule.

The Grandfather Rule is a “method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder” (Dean Cesar Villanueva).

4. CORPORATE JURIDICAL PERSONALITY

a. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
The doctrine of corporate juridical personality states that a corporation is a juridical entity with
legal personality separate and distinct from those acting for and in its behalf and, in general, from
the people comprising it.

i. LIABILITY FOR TORT AND CRIMES

Tort- A corporation is LIABLE for tort. It is liable when the act was committed by the officer or
agent under express direction or authority from the stockholders or members acting as a body or
generally from the directors as the governing body.

Criminal liability- Generally, corporations CANNOT BE CRIMINALLY LIABLE because there

is no law making them criminally liable. Corporations are incapable of intent; hence, they cannot

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commit felonies that are punishable under the RPC. Under the present RPC and special penal laws,
crimes are personal in nature and so generally, a corporation cannot likewise commit crimes that
are punishable under special laws. In addition, the penalty of imprisonment cannot be imposed.

1. If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees, or other officers thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the crime and the penalty thereof.
A corporation cannot be arrested and imprisoned; hence, it cannot be penalized for a crime
punishable by imprisonment.
2. Criminal liability under RCCP- The RCCP now provides that if the offender is a
corporation, the penalty may, at the discretion of the court, be imposed upon such
corporation responsible for the violation of the provisions of the RCCP or indispensable to
its commission (Sec. 114, RCCP).

ii. RECOVERY OF DAMAGES

Moral Damages- Moral damages cannot be rewarded in favor of corporations because they do
not have feelings and mental state. They may not even claim moral damages for besmirched
reputation. However, the Supreme Court ruled that a corporation can recover moral damages under
Art. 2219(7) if it was the victim of defamation.

b. DOCTRINE OF PIERCING THE CORPORATE VEIL

The doctrine stems from the theory/ attribute that a corporation is a legal entity distinct from the
persons composing it. This theory was adopted for the purpose of convenience and to serve the
ends of justice.

i. GROUNDS FOR APPLICATION OF DOCTRINE (S D J)

When the veil of corporate fiction is used as: (a) A shield to perpetuate fraud; (b) To defeat
pubic convenience; or (c) Justify wrong or defend crime. This fiction shall be disregarded and
the individuals composing it will be treated identically.

It applies to the following circumstances:

a. if the fiction is used to perpetrate fraud (Fraud Test)
b. if the complete control of one corporate entity to another which perpetuated the
wrong is the proximate cause of the injury (Control Test)
c. if a certain corporation is only an adjunct or an extension of the personality of the
corporation (Alter ego or Instrumentality Test)
d. if the fiction is pierced to make the stockholders liable for the obligation of the
corporation (Objective Test)

ii. TEST IN DETERMINING APPLICABILITY

The following elements must be established to justify the piercing of the veil of corporate fiction
under the test that is often used by the Supreme Court which is called the Instrumentality Rule
or the Three-Prolonged Control Test.
1. Control- not mere stock control, but complete domination- not only of finances, but of
policy and business practice in respect to the transaction attacked and must have been such

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 that the corporate entity as to this transaction has at the time no separate mind, will, or
existence of its own;
2. Such control must have been used by the defendant to commit a fraud or wrong to
perpetuate the violation of a statutory or other positive legal breach of duty, or a dishonest
and an unjust act in contravention of the plaintiff’s legal right; and
3. The said control and breach of duty must have proximate caused the injury or unjust loss
complained of.

The following are the tests in determining the applicability of the doctrine of piercing the corporate
veil (ECAO):
1. When the corporation is used to defeat public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation (Equity Cases)
2. In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime (Control Test)
3. In Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation (Sarona vs. NLRC, Royale Security Agency, et al., G.R. No.
185280, January 18, 2012).
4. The Objective test where the end result in piercing the veil of corporate fiction is to make
the stockholders liable for debts and obligations of the Corporation not to make the
Corporation liable for the debts and obligations of the stockholders (Umali v CA, G.R. No.
89561, September 13, 1990).

5. CAPITAL STRUCTURE
a. NUMBER AND QUALIFICATIONS OF INCORPORATORS

Incorporators- Those stockholders 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.

1. Incorporators must not be more than 15- 1 incorporator is sufficient for a One Person
Corporation; for other corporations, there must be 2 or more incorporators.
2. If the incorporator is a natural person, he or she must be of U;
3. Each incorporator must be a stockholder of the stock corporation or a member of the non-
stock corporation to be formed- the incorporator in a stock corporation must own or
subscribe to at least 1 share.

*NOTES:
1. Incorporators are NO LONGER limited to natural persons. Juridical person such as
partnership, associations, or corporations can now be incorporators.
2. Although there is no express requirement under Sec. 10 of the RCCP, the partnership,
association, or corporations must also be duly organized under existing laws.

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 3. Natural persons who are licensed to practice a profession, and partnerships or associations
organized for the purpose of practicing a profession, shall NOT be allowed to organize as
a corporation unless otherwise provided under special laws (Sec. 10, RCCP).

Corporators- Those who compose a corporation whether as stockholder or shareholders in a stock

corporation or as members in a non-stock corporations (Sec. 5, RCCP). Incorporators are
corporators only if they remain to be stockholders or members; incorporators cease to be
corporators if they (incorporators) transfer or sell all their shares, but they remain to be
incorporators.

Stockholders and Members- Stockholders are persons who hold or own shares in a stock
corporation, while members are those who compose the non-stock corporation.

Board or Directors or Trustees- The Board of Directors is the governing body in a stock
corporation, while the Board of Trustees is the governing body in a non-stock corporation. The
Board exercises the powers of the corporation. Under the RCCP, the number of directors of a
stock corporation shall not be more than 15, the number of trustees may be more than 15, except
for educational corporations and religious society (Sec. 13(f), Sec. 106, Sec. 114, RCCP). There
is no more minimum number of directors or trustees prescribed in the RCCP, except for
educational corporations and religious society, which, under Sec. 106 and 114 of the RCCP,
shall have not less than 5 nor more than 15 trustees.

Corporate Officers- They are the officers who are identified as such in the Corporation Code
(RCCP), the Articles of Incorporation or the By-laws of the Corporation.

b. SUBSCRIPTION REQUIREMENTS

No minimum Capital
No minimum authorized capital stock is required under the RCCP (Sec. 12, RCCP). There is
also no minimum subscribed capital and no minimum paid-up capital.

The 25% subscribed and 25% paid-up requirement applies only to increase in capital stock (Sec.
37, RCCP).

c. CORPORATE TERM

GR: A corporation shall have perpetual existence unless its Articles of Incorporation provides
otherwise (Sec. 11, 13(d), 14, RCCP).

Retroactive Effect
Corporations with certificate of incorporation issued prior to the effectivity of the RCCP, and
which continue to exist, shall have perpetual existence, unless the corporation, upon vote of its
outstanding capital stock, notifies the SEC that it elects to retain its specific corporate term
pursuant to its Articles of Incorporation (Sec. 11, RCCP).

With Corporate Term

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If a corporate term is stipulated or of existing corporations opt to retain their existing terms, the
specific period may be extended or shortened by amending the Articles of Incorporation.
1. NO EXTENSION may be made earlier than 3 years prior to the original or subsequent
expiry date(s) unless there is justifiable reasons for an earlier extension as may be
determined by the SEC.
2. The extension of the corporate term shall take effect only on the day following the original
or subsequent expiry date(s). however, the 3-year requirement does not apply to shortening
of corporate term.

Revival of Corporate Term

No extension can be made after the expiration of the term. The remedy is revival. A corporation
whose term has expired may apply for a revival of its corporate existence, together with all the
rights and privileged under its certificate of incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. Upon approval by the SEC, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it perpetual
existence, unless its application for revival provides otherwise (Sec. 11, RCCP).
1. No application for revival of certificate of incorporation of banks, banking and quasi-
banking institutions, preneed, insurance and trust companies, non-stock savings, and loan
associations, pawnshops, corporations engaged in money service business, and other
financial intermediaries shall be approved by the SEC unless accompanied by a favorable
recommendation of the appropriate government agency.

d. CLASSIFICATION OF SHARES
The classification of shares must be provided for in the Article of Incorporation and the Stock
Certificates. Classification cannot be made by the Board alone.

i. PREFERRED SHARES VERSUS COMMON SHARES

Common shares- the most common type of shares which enjoy no preference.

Preferred shares- par value shares, which enjoy preference in the distribution of dividends and in
the distribution of corporate assets upon liquidation, or such other preferences as stated in the
Articles of Incorporation (Sec. 6, RCCP).
a. Cumulative- the shareholder is entitled to recover dividends in arrears. While dividend
declaration may not be compelled, once it is declared, the shareholder is entitled to the said
arrears.
b. Non-cumulative- not entitled to arrears, only to present dividends.
c. Participating- participates with common shares after receiving its dividends at preferred
rate.
d. Non-participating- where there is no such participation.

NOTE:
a. Preferred shares must have par value (Sec. 6, RCCP).
b. Preferred shares cannot have, as its preference, fixed demandable annual interest because
they represent investment to, rather than a debt of the corporation. Preference do not give
them a lien upon the property nor make them creditors of the corporation. Preferred shares
are not entitled to payment of dividends as a matter of right.

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 c. The board of directors, where authorized in the Articles of Incorporation, may fix the terms
and conditions of preferred shares of stock or any series thereof. Such terms and conditions
shall be effective upon filing of a certificate thereof with the SEC (Sec. 6, RCCP). The
Board of Directors cannot be given blanket authority to fix the terms, conditions, and rights
of preferred shares; sufficient guidelines should be spelled out in the Articles of
Incorporation.

ii. SCOPE OF VOTING RIGHTS SUBJECT TO CLASSIFICATION

Voting shares
Shares with a right to vote. If the stock is originally issued as voting stock, it may not thereafter be
deprived of the right to vote without the consent of the holder.

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 (Sec. 6, RCCP).

Nature of the right to vote

One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental
to the ownership of corporate stock, and such is a property right (Castillo v. Balinghasay, 440
SCRA 442, 2004).

Limitations on 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 in the third paragraph of
Sec. 6 of the RCCP.

Instances when non-voting shares are entitled to vote

The non-voting shares may still vote in the following matters:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
d. Incurring, creating or increasing bonded indebtedness;
e. Increase or decrease of capital stock;
f. Merger or consolidation of the corporation with another corporation or other
corporations;
g. Investment of corporate funds in another corporation or business in
accordance with the corporation code; and
h. Dissolution of the corporation (Sec. 6, RCCP).

2. Preferred and redeemable shares may be deprived of the right to vote unless otherwise
provided in the Code (Sec. 6, RCCP).

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 3. Fractional shares of stock cannot be voted unless they constitute at least one full share (Sec.
40, RCCP).
4. Treasury shares have no voting rights as long as they remain in the treasury (Sec. 56,
RCCP).
5. Delinquent stocks shall not be entitled to vote or be represented at any stockholder’s
meeting (Sec. 70, RCCP).
6. A transfer of stock cannot vote if his transfer is not registered in the stock and transfer book
of the corporation (Sec. 62, RCCP).
7. A stockholder is still entitled to vote even if his/her shares are mortgaged or pledged unless
he/she authorizes the creditor in writing to vote and the written authority is recorded in the
corporate books (Sec. 54, RCCP).

iii. FOUNDER’S SHARES

Classified as such in the Articles of Incorporation, which may be given certain rights and privileges
not enjoyed by others. However, if the right is the exclusive right to vote and be voted for as
director, it must be for a period not exceeding 5 years counted from the date of issuance of a
certificate of incorporation by the SEC. (Sec. 7, RCCP).

iv. REDEEMABLE SHARES

Are shares issued by the corporation, which it may redeem or purchase from their holders upon
expiration of the period fixed, whether or not there exists unrestricted retained earnings in the
corporate books (Sec. 8, RCCP).
Limitations on the issuance of redeemable shares
1. Redeemable shares may be issued only when expressly provided in the Articles of
Incorporation (Sec. 8, RCCP).
2. The terms and conditions affecting said shares must be stated both in the Articles of
Incorporation and in the certificate of stock representing such share.
3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless
otherwise provide in the Code.
4. The corporation is required to maintain a sinking fund to answer for redemption price if
the corporation is required to redeem.
5. The redeemable shares are deemed retired upon redemption unless otherwise provided in
the Articles of Incorporation.
6. Unrestricted retained earnings is not necessary before shares can be redeemed but there
must be sufficient assets to pay the creditors and to answer for operations. Redemption
cannot be made if such redemption will result in insolvency or inability of the corporation
to meet its obligations.

vi. TREASURY SHARES

These are shares that have been issued and fully paid for but have thereafter been reacquired by
the issuing corporation by purchase, donation, redemption, or through some other lawful means.
Treasury shares may be disposed of again for a reasonable price to be fixed by the Board (Sec. 9,
RCCP).
a. Treasury shares are still considered issued.
b. They are considered fully paid.
c. They are not considered outstanding shares as they are held by the issuing corporation.

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 d. They are not entitled to dividends or to vote until they are reissued. A corporation cannot
declare dividends in favor of itself.
e. Generally, treasury shares, being unrealized income, are not part of earned or surplus
profits, and thereafter are not distributable as dividends, either in cash or stocks. However,
if there are retained earnings arising from the business of the corporation, treasury shares,
being the property of the corporation, may be distributed as property dividends not stock
dividends.

6. INCORPORATION AND ORGANIZATION

a. PROMOTER
A self-constituted organizer who finds an enterprise or venture and helps to attract investors, forms
a corporation and launches it in business, with a view to promoting profits.

i. LIABILITY OF PROMOTER
The promoter is personally liable for contracts or agreements with third persons contracted in
behalf of the future corporation if the corporation does not ratify the same or unless the agreement
was expressly made subject to such approval or ratification.

The promoter should remit to the corporation profits that he derived that properly pertain to the
corporation.

ii. LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS

The corporation is not bound by the contract entered into by the promoter before incorporation
unless the contract is ratified.

b. SUBSCRIPTION CONTRACT
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase
or some other contract (Sec. 59, RCCP).

How does one become a shareholder in a corporation?

A person becomes a shareholder the moment he: (1) enters into a subscription contract with an
existing corporation (he is a stockholder upon acceptance of the corporation of his offer to
subscribe whether the consideration is fully paid or not); (2) purchase treasury shares from the
corporation; or (3) acquires shares from existing shareholders by sale or any other contract, or
through other modes of acquiring ownership like succession.

c. PRE-INCORPORATION SUBSCRIPTION AGREEMENT

Entered into before the incorporation and irrevocable for a period of at least 6 months from the
date of subscription unless: (a) all other subscribers consent to the revocation, or (b) if the
corporation fails to incorporate within the same 6-month period or within a longer period stipulated
in the contract of subscription (Sec. 60, RCCP).

NOTE:Pre-incorporation subscription cannot be revoked after filing the Articles of Incorporation

with the SEC even if the filing is prior to the expiration of the 6-month period (Sec. 60, RCCP).

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d. CONSIDERATION FOR STOCKS

Valid consideration for subscription agreements (Sec. 61, RCCP).

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued value
of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amount transferred from unrestricted retained earnings to stated capital (this is in case
of stock dividends);
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. *Shares of stock in another corporation; and/or
8. *Other generally accepted form of consideration.

NOTES:
1. Shares of stock and generally accepted form of consideration are new considerations
added by the RCCP;
2. Promissory notes or future services are NOT valid considerations;
3. A corporation cannot set-off the unpaid subscription with the unpaid salaries of the
shareholder employee;
4. The consideration provided under Sec. 61 of the RCCP applies to bonds.
5. Stocks shall NOT be issued for a consideration less than the par or issued price thereof,
otherwise, it shall be considered as watered stocks.

e. ARTICLES OF INCORPORATION
i. CONTENTS (Sec. 13, 14 RCCP).
1. Name of corporation which must include the terms “Inc.”, “Corporation”, or “OPC” (in
case of a One Person Corporation);
2. Purpose/s, indicating the primary and secondary purposes;
3. Place of principal office;
4. Term of corporate existence, if the corporation does not opt for perpetual existence;
5. Names, nationalities, and residential addresses of incorporators;
6. Number of directors and trustees which shall not be more than 15;
7. Names, nationalities, and residences of the first directors, trustees;
8. In a stock corporation, amount of authorized capital stock (ACS) and number of shares into
which the ACS is divided;
9. In a stock corporation, a statement that all or some of the shares are with par value
indicating the par value per share and the number of shares with such par value, and shares
without par value (if any);
10. In a stock corporation, if all the shares are without par value, the capital stock and a
statement that the shares are without par value.
11. In a stock corporation, name of subscriber/s, their nationality/ies, number of shares
subscribed, amounts subscribed and amounts paid by subscribers;

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 12. In a non-stock corporation, the amount of capital or money contributed or donated, the
persons who contributed or donated, their nationalities and residence addresses;
13. Name of treasurer elected by subscribers and the certification of the treasurer that the
information set forth in the seventh (on the ACS and number of shares into which the ACS
is divided) and eighth (number of shares subscribed and details of subscriptions) clauses
of the Articles, and that the paid-up portion of the subscription in cash and/or property for
the benefit and credit of the corporation has been duly received;

NOTE: There is no more Treasurer’s Affidavit and the certification of the treasurer is
incorporated in the Articles but the Treasurer must sign the Articles of Incorporation.

14. If the corporation engages in a nationalized industry, a statement that no transfer of stock
will be allowed and recorded in the corporate books if it will reduce the stock ownership
of Filipinos to a percentage below the required legal minimum; and
15. Arbitration agreement- this covers disputes between the corporation, its stockholders or
members which arise from the implementation of the Articles of Incorporation or Bylaws
or from Intra-corporate relations; however, criminal offenses or interest of third parties is
non-arbitrable (Sec. 181, RCCP).
NOTE: Inclusion of an arbitration agreement in the Articles is optional.

ii. NON-AMENDABLE ITEMS

Grounds When Articles of Incorporation or Amendment May be Disapproved

The Commission may disapprove the articles of incorporation or any amendment thereto if the
same is not compliant with the requirements of this Code: Provided, That the Commission shall
give the incorporators, directors, trustees, or officers as reasonable time from receipt of the
disapproval within which to modify the objectionable portions of the articles or amendment. The
following are ground for such disapproval:

1. The articles of incorporation or any amendment thereto is not substantially in accordance

with the form prescribed herein;
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral
or contrary to government rules and regulations;
3. The certification concerning the amount of capital stock subscribed and/or paid is false;
and
4. The required percentage of Filipino ownership of the capital stock under existing laws or
the Constitution has not been complied with.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-

banking institutions, preneed, insurance and trust companies, NSSLAs, pawnshops and other
financial intermediaries shall be approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles or
amendment is in accordance with law (Sec. 16, RCCP).

NOTE: Accomplished Fact Rule

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These are entries in the Articles of Incorporation that cannot be amended because they are
accomplished facts. Example, the names of the incorporators and the original directors cannot be
amended because the same are accomplished facts. The incorporators and original directors are
always the same even if there is a change in the stockholders or directors.

f. CORPORATE NAME; LIMITATIONS ON USE OF CORPORATE NAME

Corporate Names that are not allowed: Distinguishability Test

1. No corporate name shall be allowed by the SEC if:
a. It is NOT DISTINGUISHABLE form that already reserved or registered for the use
of another corporation;
b. It is already protected by law; or
c. Its use is contrary to existing law, rules, and regulations (Sec. 17, RCCP).

2. The corporate name is not distinguishable even if it contains one or more of the following:
a. The word “corporation’, “company”, “incorporated”, “limited”, “limited liability”,
or any abbreviation of such words; and
b. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations,
different tenses, spacing, or number of the same word or phrase.

NOTE: Under the RCCP, If the name applied for is similar to that of a registered
corporation, the applicant is required to add one or more distinctive words to the
proposed name to make it distinguishable.

g. REGISTRATION, INCORPORATION, AND COMMENCEMENT OF

CORPORATE EXISTENCE
A person or group of persons desiring to incorporate shall (1) submit the intended corporate
name to the Commission for verification. If the Commission finds that the name is distinguishable
from a name already reserved or registered for the use of another corporation, not protected by law
and is not contrary to law, rules and regulation, the name shall be reserved in favor of the
incorporators. The incorporators shall then submit their (2) articles of incorporation and bylaws
to the Commission.

If the Commission finds that the submitted documents and information are fully compliant with
the requirements of this Code, other relevant laws, rules and regulations, the (3) Commission shall
issue the certificate of incorporation.

A private corporation organized under this Code (4) commences its corporate existence and
juridical personality from the date the Commission issues the certificate of incorporation under its
official seal thereupon the incorporators, stockholders/members and their successors shall
constitute a body corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law (Sec. 18, RCCP).

h. ELECTION OF DIRECTORS AND TRUSTEES (Sec. 23, RCCP)

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Each stockholder or member shall have the right to nominate any qualified director or trustee,
except when the exclusive right (to vote and be voted for in the election of directors) is reserved
for holders of founder’s shares for a limited period of 5 years, as provided in Sec. 7 of the RCCP.
In stock corporations, each stockholder entitled to vote has the total number of votes not
exceeding the number of shares owned by the same stockholder as shown in the books of the
corporation at the time fixed in the By-Laws, or if the By-Laws is silent at the time of the election,
multiplied by the whole number of directors to be elected.

1. Stockholders have the option to adopt any of the following:

a. Straight Voting- every stockholder “may vote such number of shares for as many
persons as there are directors” to be elected.
b. 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”.
c. Cumulative Voting by Distribution- a stockholder may distribute his votes among
as many candidates as he shall see fit.

NOTE: Cumulative voting is not available in non-stock corporations unless

provided in the Articles of Incorporation or in the By-laws; hence, the general rule
is that members may cast as many votes as there are trustees to be elected but may
not cast more than 1 vote for 1 candidate.

2. Election should be at large in stock corporations-

All shareholders holding voting shares have the right to vote (Sec. 6 and 23, RCCP). The
stockholders who can vote are stockholders who are not delinquent, who are stockholders
of record at the time fixed in the By-Laws, or if the By-Laws is silent, at the time of the
election (Sec. 23, RCCP).

a. Non-stock corporation- there can be election by region in a non-stock corporation,

because the right to vote in a non-stock corporation may be limited, broadened or
denied in the Articles of Incorporation or By-laws. There can be no voting by
district or region in a stock corporation.
b. Quorum- at all elections of directors and trustees, there must be present, either in
person or through a representative authorized to act by written proof, the owners of
majority of the outstanding capital stock, or if there be no capital stock, a majority
of the members entitled to vote (Sec. 23, RCCP).
c. How to vote- the stockholders and members may vote: (1) personally by
attending the meeting; (2) through a proxy; or (3) through remote
communication or in absentia (deemed present for purposes of quorum).
i. Voting through remote communication or in absentia is allowed only (a)
when authorized by the by-laws, or (b) when authorized by a majority of
the directors, or (c) even without a provision in the By-laws, in corporations
vested with public interest (Sec. 23, RCCP).

d. Who is duly Elected- Nominees with the highest number of votes shall be declared
elected. The rule is Plurality of votes.

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i. ADOPTION OF BY-LAWS
For the adoption of bylaws by the corporation, 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 in case
on nonstock corporations, shall be necessary. The bylaws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A copy thereof, duly certified by a
majority of the directors or trustees and countersigned by the secretary of the corporation, shall be
filed with the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, bylaws maybe adopted and filed prior
to incorporation; in such case, such bylaws shall be approved and signed by all incorporators and
submitted to the Commission, together with the articles of incorporation.

In all cases, bylaws shall be effective only upon the issuance by the Commission of a certification
that the bylaws are in accordance with this Code.

The Commission shall NOT accept for filing the bylaws or any amendment thereto of any bank,
banking institution, building and loan association, trust company, insurance company, public
utility, educational institution, or any other corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect that such by laws
or amendments are in accordance with law (Sec. 45, RCCP).

i. CONTENTS OF BYLAWS
1. The time, place, and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings and mode of
notifying the stockholders or members thereof;
3. The required quorum in meetings of stockholders or members and the manner of voting
therein;
4. The modes by which a stockholder, member, director or trustees may attend meetings and
cast their votes;
5. The form for proxies of stockholders and members and the manner of voting them;
6. The directors' or trustees' qualifications, duties and responsibilities, the guidelines for
setting the compensation of directors or trustees and officers, and the maximum number of
other board representations that an independent director or trustee may have which shall,
in no case, be more than the number prescribed by the Commission;
7. The time for holding the annual election of directors or trustees and the mode or manner of
giving notice thereof;
8. The manner of election or appointment and the term of officers other than directors or
trustees;
9. The penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing stock certificates; and
11. Such other matters as may be necessary for the proper or convenient transaction of its
corporate affairs for the promotion of good governance and anti-graft and corruption
measures.

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An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code.

ii. BINDING EFFECTS

1. As to the Corporation and its components- binding not only upon the corporation, but
also on its stockholders, members, and those having direction, management and control of
its affairs.
2. As to Third Persons- not binding unless there is actual knowledge. Third persons are not
even bound to investigate the contents because they are not bound to know the By-laws
which are merely provisions for the government of a corporation and notice to them will
not be presumed.

iii. AMENDEMENTS
May be made by the (1) stockholders/ members together with the Board of Directors or Trustees,
or (2) by the Board only. However, the amendment or new by-laws shall only be effective upon
issuance of a certification by the SEC that the same is in accordance with the RCCP and other
relevant laws (Sec. 47, RCCP).

1. Stockholders/ members (at a regular or special meeting) together with Board: majority
of the board, plus majority of the outstanding capital stock or members may amend or
repeal the by-laws or adopt new by-laws.
2. *By the Board as delegated by 2/3 of outstanding capital stock or 2/3 of members.
Note that the delegated authority can be revoked by a MAJORITY OF THE
OUTSTANDING CAPITAL STOCK or majority of the members (Sec. 47, RCCP).

j. *EFFECTS OF NON-USE OF CORPORATE CHARTER

*It must organize and commence business (Sec. 21, RCCP)

1. Organize and Commence Business- When the corporation does NOT (a) formally
organize, and (b) commence its business within 5 years from the date of its incorporation,
its Certificate of Incorporation shall be DEEMED REVOKED as of the day following the
end of the 5-year period (Sec. 21, RCCP).
2. Organize- the requirement to organize is complied with when the following are performed:
(a) adoption, filing by the corporation and approval by the SEC of the corporate By-laws
after incorporation; (b) election of Directors of Trustees and of officers; and (c)
establishment of the principal office; and (d) providing for the subscription and payment
of the capital stock; (e) taking such steps as are necessary to endow the legal entity with
capacity to transact the legitimate business for which it was created.
3. Commencement Business- The corporation “shall be considered to have commenced the
transaction of its business when it has performed preparatory acts geared toward the
fulfillment of the purposes for which it was established such as but not limited to the
following”: (a) entering into contracts or negotiation for lease or sale of properties to be
used as business or factory site; (b) making plans for and the construction of the factory;
(c) taking steps to expedite the construction of the company’s working equipment.

*Delinquent Status for Non-Operation

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 1. Continuous Non-Operation- If a corporation commenced its business but subsequently
becomes inoperative for a period of at least 5 consequence years, the SEC may, upon
notice and hearing, place the corporation under DELINQUENT STATUS (Sec. 21,
RCCP).
a. A delinquent corporation shall have period of 2 years to resume operations and
comply with all requirements that the SEC shall prescribe. Upon compliance by the
corporation, the SEC shall issue an order lifting the delinquent status. Failure to
comply with the requirements and resume operations within the period given by the
SEC shall cause the REVOCATION of the corporation’s certificate of
incorporation (Sec. 21, RCCP).
2. Failure to Submit Report- A corporation may also be places under DELINQUENT
STATUS if it fails to comply with the reportorial requirements 3 times, consecutively or
intermittently within a period of 5 years (Sec. 177, RCCP).

7. CORPORATE POWERS
1. Express powers – granted by law, the Corporation Code, and its Articles of Incorporation
or Charter, and administrative regulations;
2. Inherent/incidental powers – not expressly stated but are deemed to be within the
capacity of corporate entities;
3. Implied/necessary powers – exists as a necessary consequence of the exercise of the
express powers of the corporation or the pursuit of its purposes as provided for in the
Charter.

a. GENERAL POWERS; THEORY OF GENERAL CAPACITY (Sec. 35, RCCP)

Theory of General Capacity

The General Powers of a Corporation also called Theory of General Capacity are the
following:
1. Sue and be sued in its corporate name;
2. Right of succession;
3. Adopt and use a corporate seal;
4. Amend Articles of Incorporation;
5. Adopt, amend, or repeal By-Laws;
6. For stock corporations- issue and sell stocks to subscribers and to sell treasury stocks; for
non-stock corporations- admit members;
7. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise
deal with real and personal property- including bonds and securities of other corporations-
as the transaction of its lawful business may reasonably and necessarily require;
8. Enter into partnership, joint venture, merger, consolidation, or any commercial agreement
with natural or juridical persons;
9. Make reasonable donations for public welfare, or for hospital, charitable, cultural,
scientific, civic, or similar purpose.
Prohibition: Foreign corporations shall not give donations in aid of any political party or
candidate or for purpose of partisan political activity
NOTE: (Unlike the previous rule, this prohibition applies to foreign corporations only and
does not include domestic corporations);

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 10. Establish pension, retirement, and other plans for the benefit of director, trustees, officers,
and employees; and
11. Exercise other powers essential or necessary to carry out its purpose/s.

b. SPECIFIC POWERS; THEORY OF SPECIFIC CAPACITY (Sec. 36-43,

RCCP)
Theory of Specific Capacity
The specific powers of a corporation, also called Theory of Specific Capacity, are the following:
1. Extend or shorten corporate terms (Sec. 36, RCCP);
2. Increase or decrease capital stock (Sec. 37, RCCP);
3. Incur, create, or increase bonded indebtedness (Sec. 37, RCCP);
4. Deny pre-emptive right (Sec. 37, RCCP);
5. Sell, dispose, lease, encumber property and assets (including all or substantially all of
corporate assets) (Sec. 39, RCCP);
6. Purchase or acquire own shares (Sec. 40, RCCP);
7. Invest in another corporation, business, or for any other purpose (Sec. 41, RCCP);
8. Declare dividends (Sec. 42, RCCP);
9. Enter into management contract (even if it is called a service contract, operating agreement
or otherwise)- the management undertaking to manage or operate all or substantially all of
the business of the corporation (Sec. 43, RCCP);

c. POWER TO EXTEND OR SHORTEN CORPORATE TERM (Sec. 36, RCCP)

A private corporation may extend or shorten its term as stated in the articles of incorporation when:
1. approved by a majority vote of the board of directors or trustees, and
2. ratified at a meeting by the stockholders or members representing at least two-thirds (2/3)
of the outstanding capital stock or of its members.

Written notice of the proposed action and the time and place of the meeting shall be sent to the
stockholders or members at their respective place of residence as shown in the books of the
corporation, and must be deposited to the addressee in the post office with postage prepaid, served
personally, or when allowed in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with the rules and regulations of the Commission on the use of
electronic data messages. In case of extension of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in this Code.

d. POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR,

CREATE, INCREASE BONDED INDEBTEDNESS (Sec. 37, RCCP)
Increase of capital stocks may be done to raise more funds for the corporation or for expansion
purposes.
1. What are the ways of increasing capital stock?
a. By increasing the number of shares and retaining the par value;
b. By increasing the par value of existing shares without changing the number of
shares;
c. By increasing the number of shares and increasing the par value.
2. What are the ways of decreasing the capital stock?
a. By decreasing the number of shares and retaining the par value;

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 b. By decreasing the par value of existing shares without changing the number of
shares; or
c. By decreasing the number of shares and decreasing the par value.
3. Approvals
Aside from the required vote of the Board and the 2/3 vote of the outstanding capital stock,
a corporation cannot increase or decrease its capital stock or incur, create, or increase its
bonded indebtedness without prior approval of the SEC. The application for approval
with the SEC should be filed within 6 months from the date of approval by the Board and
the stockholders. The period may be extended for a justifiable reason. The approval of the
Philippine competition commission may likewise be necessary in some cases (Sec. 37,
RCCP).
4. Required subscription
In case of increase of capital stock, 25% of the increase in capital stock must be
subscribed and at least 25% of the subscription must be paid either in actual cash or
property (Sec. 37, RCCP).
5. Bond
Is an indebtedness that is covered by security. It is security under the Securities Regulation
Code that must be registered with the SEC (Sec. 37, RCCP). A non-stock corporation may
incur, create, or increase bonded indebtedness when approved by majority of its Board and
2/3 of its members in a meeting called for the purpose.

e. POWER TO DENY PRE-EMPTIVE RIGHTS

All stockholders of a stock corporation shall enjoy preemptive right (preferential right) to
subscribe to all issues or disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an amendment
thereto:
Provided, That such preemptive right shall not extend to shares issued in compliance with
laws requiring stock offerings or minimum stock ownership by the public; or to shares
issued in good faith with the approval of the stockholders representing two-thirds (2/3) of
the outstanding capital stock in exchange for property needed for corporate purposes
or in payment of previously contracted debt (Sec. 38, RCCP).

f. POWER TO SELL OR DISPOSE CORPORATE ASSETS

1. Requisites for Sale, Lease, Exchange, Mortgage, Pledge or other disposition of all or
substantially all of a corporation’s assets including goodwill.
a. Approval by a majority vote of the Board;
b. Approval of stockholders representing 2/3 of outstanding capital stock or 2/3 of
members;
c. The stockholders’/members’ approval should be in a meeting duly called for such
purpose;
d. There must be written notice of the proposed action and of the time and place of
the meeting in accordance with Section 39;
e. It must comply with the formalities of the Bulk Sales Law;
f. It must comply with the requirements of the Philippines Competition Act, and other
related laws;

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 g. It must not have been disapproved or abandoned by the Board after approval by the
stockholders.
NOTE: Sec. 39 states that after the authorization or approval by the stockholders
or members, the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the right of third parties under the contract relating
thereto, without further action or approval by the stockholders or members.
2. When covered/Test
A sale or other disposition shall be deemed to cover substantially all corporate property
and assets if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated. The value must
be computed on the basis of the net asset value as shown in the corporation’s latest financial
statements (Sec. 39, RCCP).

Hence, no stockholders’/members’ approval is necessary if:

a. Disposition of the corporate property and assets is necessary in the usual and regular
course of business of the corporation, or
b. If the proceeds of the sale or other disposition of such property and assets shall be
appropriated for the conduct of its remaining business.

3. Effect on creditors
NELL DOCTRINE
GR: the transferred/ buyer of all or substantially all of the assets (or even shares) will not
be liable for the debts of the transferor.

XPN:
1. If there is an express assumption of liabilities;
2. There is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser becomes a continuation of the seller.

4. Business-Enterprise Transfer
The fourth exception (purchaser is the continuation of the seller)- case when transferee/
buyer will be liable for debts of the transferor- is known as the Business Enterprise
Transfer and is covered by Section 39, RCCP. The transferor transfers both its assets and
business and the transferor is left with its juridical existence devoid of its industry or
earning capacity.

g. POWER TO ACQUIRE OWN SHARES (Sec. 40, RCCP)

A stock corporation may purchase or acquire its own shares if the following are complied with:
1. It has unrestricted retained earnings in its books to cover the shares to be purchased/
acquired; and
2. There exists legitimate corporate purposes for the purchase/acquisition, including but not
limited to the following:
a. To eliminate fractional shares arising out of stock dividends;

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 b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
the sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the RCCP.

h. POWER TO INVEST CORPORATE FUNDS IN ANOTHER

CORPORATION OR BUSINESS (Sec. 41, RCCP)

1. The approval/ratification by stockholders representing 2/3 of the outstanding capital stock

or 2/3 of the members is necessary only if the investment of corporate funds is in another
corporation, business, or for any purpose other than the primary purpose for which the
corporation was organized (Sec. 41, RCCP).
2. Where the investment by the corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary (Sec. 41, RCCP).

i. POWER TO DECLARE DIVIDENDS (Sec. 42, RCCP)

1. Who may declare dividends?
a. Board of Directors alone- for cash, property dividends.
b. Board of Directors, with the approval of stockholders representing not less than 2/3 of
Outstanding Capital in a meeting called for the purpose- for stock dividends.

2. What are the conditions that must be present to declare dividends?

a. Unrestricted retained earnings;
b. Resolution of the Board, or for stock dividends, Board approval with the concurrence
of 2/3 of outstanding capital.

3. Can the board be compelled to declare dividends every year?

No. declaration of dividends is discretionary upon the Board; it is part of the Board’s
business judgment. Dividends are payable only when there are profits earned by the
corporation and as a general rule, even if there are exiting profits, the Board of Directors
has the discretion to determine whether or not dividends are declared.

XPN: Stock corporations are prohibited from retaining surplus profits in excess of 100%
of their paid-in capital stock.
1. However, even if the retained surplus profits are in excess of 100% of the paid-in capital
stock, the Board may still refuse to declare dividends if:
a. Justified by definite corporate expansion projects/ programs approved by the
Board; or
b. The corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet been secured.
c. It can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation.

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 2. Dividends can be declared only in favor of stockholders. Thus, it cannot be provided
in a management contract that the managing corporation as such is entitled to
dividends.

4. Dividends cannot be declared out of the capital

Exception: Wasting Assets Corporation- 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.

5. (1) What can be included in unrestricted retained earning?

Unrestricted Retained Earnings shall only include accumulated profits and gains realized out
of the normal and continuous operations of the company after deducting therefrom
distributions of stockholders and transfers to capital stock or other accounts and which is:
a. Not appropriated by its Board of Directors for corporate expansion projects and
programs;
b. Not covered by a restriction for dividend declaration under a loan agreement;
and
c. Not required to be retained under special circumstances obtaining in the
corporation such as when there is a need for a special reserve for probable
contingencies.

(2) Gains on sale of the corporation’s real properties can be considered part of
retained earnings. The sale can be part of the business of the corporation. However, there
must be surplus profits. Hence, the corporation cannot distribute gains from sale of real
properties as dividends if the value of the remaining assets after distribution is less than the
amount of legal or stated capital or liabilities.

(3) Treasury shares can be distributed by way of dividends, but only as property
dividends. Treasury shares cannot be declared as stock dividends or cash dividends
because they are not considered part of earned or surplus profits.

6. Other Rules Concerning Dividends

1. Stockholders are entitled to dividends pro rata based on the total number of outstanding
shares held by them and not on the amount paid for the shares.
2. 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 belong
to the transferee.
3. The stockholder’s right to be paid dividends accrues as soon as the declaration is made in
accordance with Sec. 42 RCCP. From that time, the stockholder can already demand
payment thereof.
4. Stock dividends can be declared at a premium (at a value higher than par value).
5. Even unpaid subscribers are entitled to dividends.
6. Effect of Delinquency- delinquent shareholders are still entitled to dividends. However,
(a) cash dividends due on delinquent stock shall first be applied to the unpaid balance on

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 the subscription plus costs and expenses, and (b) stock dividends shall be withheld from
the delinquent stockholders until their unpaid subscription is fully paid (Sec. 42, RCCP).

j. POWER TO ENTER INTO MANAGEMENT CONTRACT (Sec. 43, RCCP).

No corporation shall conclude a management contract with another corporation unless such
contract is approved by the board of directors and by the stockholders owning at least the majority
of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock
corporation, or both the managing and the managed corporation, at a meeting duly called for the
purpose: Provided, That
a. Where a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing corporation; or
b. 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, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in
the case of a nonstock corporation.

These shall apply to any contract whereby a corporation undertakes to manage or operate all or
substantially all of the called services contracts, operating agreements or otherwise: Provided,
however, That such service contracts or operating agreements which relate to the exploration,
development exploitation or utilization of natural resources may entered into such periods as may
be provided by the pertinent laws or regulations.

No management contracts shall be entered into for period longer that five (5) years for any one
term.

k. LIMITATIONS

i. ULTRA VIRES ACTS

No corporation shall possess or exercise corporate powers other than those conferred by this Code
or by its articles of incorporation and except as necessary or incidental to the exercise of the powers
conferred (Sec. 44, RCCP).

(a) APPLICABILITY OF ULTRA VIRES DOCTRINE

1. Ultra vires acts of the corporation- An ultra vires act is one committed outside the object
for which a corporation is created as defined by the law of its organization and therefore
beyond the power conferred upon it by law.
2. Ultra vires act vs. Illegal acts- the term ultra vires is distinguished from an illegal act for
the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
3. Distinguished from Acts that do not comply with formalities- If certain procedures or
formalities are prescribed in the Articles of Incorporation or By-laws and the same are not
complied with, the resulting act is not ultra vires act of the corporation. Thus, if the By-

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 laws prescribes a procedure in entering into contracts and the same was not complied with
when the contract involved in the case was executed, the contract may be valid as to third
persons who are not familiar with the By-laws.
4. Distinguished from Unauthorized acts- The act may be within the powers of the
corporation but not within the powers of the particular officer. The latter is not an ultra
vires act of the corporation but is sometimes referred to as an ultra vires act of the officer.
The law on agency applies.

(b) CONSEQUENCES OF ULTRA VIRES ACTS

Ultra vires acts entered into by the board of directors bind the corporation, and the courts will not
interfere unless terms are oppressive and unconscionable (Gamboa vs. Victoriano, G.R. No. L-
43324. May 5, 1979).

1. Executed contract – courts will not set aside or interfere with such contracts;
2. Executory contracts – no enforcement even at the suit of either party (void and
unenforceable);
3. Partly executed and partly executory – principle of “no unjust enrichment at expense of
another” shall apply;
4. Executory contracts apparently authorized but ultra vires – the principle of estoppel
shall apply.

l. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION

A subscription contract is indivisible. Consequently, where stocks were subscribed and part of the
subscription contract price was not paid, the whole subscription shall be considered delinquent
and not only the shares which correspond to the amount not paid.

NOTE: This is called the Doctrine of Individuality (Indivisibility) of Subscription. A

subscription is one entire and indivisible whole contract. It cannot be divided into portions.

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

m. DOCTRINE OF EQUALITY OF SHARES

The classification of shares, their corresponding rights, privileges, or restrictions, and their stated
par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all
respects to every other share, except as otherwise provided in the articles of incorporation and in
the certificate of stock (Sec. 6, RCCP).

n. TRUST FUND DOCTRINE

The capital stock, property, and other assets of the corporation are regarded as equity in trust for
the payment of the corporate creditors. 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 for the
satisfaction of their credits. A corporation may not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.

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Money received for subscription of increase of authorized capital are not covered by the trust fund
doctrine prior to the approval of such increase by the SEC.

Distribution of Assets and the Trust Fund Doctrine

The Trust Fund Doctrine provides that subscriptions to the capital stock of the corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This
doctrine is the underlying principle and/or is articulated in the following:
1. Procedure for the distribution of capital assets, embodied in the Corporation Code, which
allows the distribution of corporate capital only in 3 instances: (1) amendment of the
Articles of Incorporation to reduce the authorized capital stock; (2) purchase of redeemable
shares by the corporation, regardless of the existence of unrestricted retained earnings; and
(3) dissolution and eventual liquidation of the corporation.
2. Sec. 40 of the RCCP on the power of a corporation to acquire its own shares; and
3. Sec. 139 of the RCCP on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.

CORPORATE POWERS
i. HOW EXERCISED

(a) BY THE SHAREHOLDERS

The shareholders participate in controlling the affairs of the corporation by exercising their right
to vote. They can elect the directors who will actually govern the corporation and they can also
vote on important matters that are still reserved to them by the Corporation Code.

(b) BY THE BOARD OF DIRECTORS (E C C)

Unless otherwise provided in this Code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all properties of the corporation (Sec. 22,
RCCP).
They elect the officers who carry out the policies that they have established.

(c) BY THE OFFICERS

Immediately after their election, the directors of a corporation must formally organize and elect:
(a) a president, who must be a director; (b) a treasurer, who must be a resident; (c) a secretary, who
must be a citizen and resident of the Philippines; and (d) such other officers as may be provided in
the bylaws. If the corporation is vested with public interest, the board shall also elect a compliance
officer. The same person may hold two (2) or more positions concurrently, except that no one shall
act as president and secretary or as president and treasurer at the same time, unless otherwise
allowed in this Code.

The officers shall manage the corporation and perform such duties as may be provided in the by-
laws and/or as resolved by the board of directors (Sec. 24, RCCP).

Who may exercise the powers of the corporation?

The Board of Directors/ Trustees exercises the powers of the corporation (Sec. 22, RCCP).
Generally, the Board alone, without the concurrence of the stockholders/ members, may exercise

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the powers. The stockholders/ members cannot overrule the directors in the latter’s exercise of the
corporate powers.

1. When not exercised by the Board-

The powers are not exercised by the Board directly if: (1) there is a management contract
(Sec. 43, RCCP); and (2) the powers of the Board are delegated by majority vote (of the
Board) to an executive committee (Sec. 34, RCCP).
2. Powers that cannot be exercised by or cannot be delegated to the executive committee
(Sec. 34, RCCP)
1. Approval of action requiring concurrence of stockholders;
2. Filling of vacancies in the board;
3. Adoption, amendment, or repeal of by-laws;
4. Amendment or repeal of board resolution which by its express terms cannot be
amended or repealed; and
5. Distribution of cash dividends to stockholders.

NOTE: The executive committee is composed of at least 3 directors and may be

created by the Board if the By-laws so provide (Sec. 34, RCCP). The Board may not
by itself create the executive committee if there is no provision in the By-laws.
However, the Board, as the governing body, may create special committees of
temporary or permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.

3. In some cases, corporate officers like the President can also bind the corporation. The
authority of such individuals to bind the corporation is generally derived from:
a. Law;
b. Corporate By-laws; or
c. Authorization from the Board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business.

4. A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him, and
these include:
a. Powers that, in the usual course of the particular business, are incidental to those
expressly provided;
b. Powers that may be implied from the powers intentionally conferred;
c. Powers added by custom and usage, as usually pertaining to the particular officer
or agent; and
d. Such apparent powers as the corporation has caused the person dealing with the
officer or agent to believe that it has conferred.

5. An officer may also bind the corporation if he has apparent authority. Apparent
authority is derived not merely from practice. Its existence may be ascertained through:
a. The general manager in which the corporation holds out an officer or agent as
having the power to act or, in other words, the apparent authority to act in general,
with which it clothes him; or

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 b. The acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of ordinary powers.

Instances where concurrence/ratification of the stockholders/members is necessary for the

exercise of the powers of the corporation
1. Approval by majority of the Board and concurrence or ratification of the stockholders
representing at least 2/3 of the outstanding capital (or 2/3 of the members whenever
applicable) is necessary in the exercise of the following:
a. To extend or shorten corporate term (Sec. 36, RCCP);
b. To increase/ decrease corporate stock (Sec. 37, RCCP);
c. To incur, create, or increase bonded indebtedness (Sec. 37, RCCP);
d. To deny pre-emptive right after incorporation- since the denial is required to be in
the Articles of Incorporation or any amendment thereto, and approval of
amendments to the Articles of Incorporation requires the cote or written assent of
stockholders representing 2/3 of the outstanding capital stock or 2/3 of the members
(Sec. 15, RCCP);
e. To sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 39,
RCCP);
f. To invest in another corporation, business other than the primary purpose like the
secondary purpose (Sec. 41, RCCP);
g. To declare stock dividends (Sec. 42, RCCP);
h. To enter into a management contract if (Sec. 43, RCCP):
i. A stockholder or stockholders representing the same interest of both the
managing and the managed corporation own or control more than 1/3 of the
total outstanding capital entitled to the vote of the managing corporation; or
ii. A majority of the members of the board or directors of the managing
corporation also constitute a majority of the member of the board of the
managed corporation;

NOTE: The 2/3 vote of the outstanding stock or of the members applies to
the managed corporation (Sec. 43, RCCP).

i. To amend the Articles of Incorporation (Sec. 15, RCCP);

j. Voluntary dissolution where creditors are affected (Sec. 135, RCCP).

2. Approval at a meeting duly called for the purpose by the stockholders representing
majority of the outstanding capital, or majority of the members, is necessary, together with
Board approval, in the following instances:
a. To enter into a management contract under circumstances not covered by either of
the 2 instances stated above (to enter into management contract).
NOTE: The majority vote of the outstanding capital or of the members is required
for both the managed and managing corporation (Sec. 43, RCCP).
b. To adopt, amend, or repeal the By-laws (Sec. 46 and 48, RCCP).
c. Voluntary dissolution where no creditors is affected (Sec. 134, RCCP).

3. Without Board resolution, the stockholders/ members may by:

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 a. 2/3 outstanding capital or of the members- delegate to the Board the power to
amend the By-laws (Sec. 48, RCCP).
b. Majority of outstanding capital or of the members- revoke the power of the Board
to amend the By-laws, which was previously delegated (Sec. 47, RCCP).

8. STOCKHOLDERS AND MEMBERS

a. FUDAMENTAL RIGHTS OF A STOCKHOLDER
1. Direct or indirect participation in management;
2. Voting rights (Sec. 6 and 57, RCCP);
3. Right to remove directors (Sec. 27, RCCP);
4. Proprietary rights:
a. Right to dividends;
b. Appraisal right (Sec. 80, RCCP);
c. Right to issuance of stock certificate for fully paid shares (Sec. 63, RCCP);
d. Proportionate participation in the distribution of assets in liquidation (Sec. 139,
RCCP);
e. Right to transfer of stocks in corporate books (Sec. 62, RCCP);
f. Pre-emptive right (Sec. 38, RCCP);
5. Right to inspect books and records (Sec. 73, RCCP);
6. Right to be furnished with the most recent financial statement/ financial report (Sec. 74,
RCCP);
7. Right to recover stocks unlawfully sold for delinquent payment of subscription.
8. Right to the issuance of new certificates in lieu of lost, stolen, or destroyed certificates (Sec.
71, RCCP).
9. Right to file individual suit, representative suit, and derivative suits.

b. PARTICIPATE IN MANAGEMENT

i. PROXY
Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members (Sec. 57, RCCP).

1. Proxy form- in writing, in any form authorized by the By-laws, signed by the stockholder
or member, and received by the corporate secretary within a reasonable time before the
schedules meeting (Sec. 57, RCCP). Each notice of meeting shall include a proxy form
(Sec. 50, RCCP).
2. Period of validity- unless otherwise provided in the proxy form, it shall be valid only for
the meeting for which it is intended.

No proxy shall be valid and effective for a longer period than 5 years at any one time (Sec.
57, RCCP).

ii. VOTING TRUST (Sec. 58, RCCP).

One or more stockholders of a stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a

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period not exceeding 5 years at any time: Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years
but shall automatically expire upon full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Commission; otherwise, the agreement
is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees,
stating that they are issued pursuant to said agreement. The books of the corporation shall state
that the transfer in the name of the trustee or trustees is made pursuant to the voting trust agreement.

The trustee or trustees shall execute and deliver to the transferors, voting trust certificates, which
shall be transferable in the same manner and with the same effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to examination by any
stockholder of the corporation in the same manner as any other corporate book or record: Provided,
That both the trustor and the trustee or trustees may exercise the right of inspection of all corporate
books and records in accordance with the provisions of this Code.

Any other stockholder may transfer the shares to the same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions
of said agreement.

No voting trust agreement shall be entered into for purposes of circumventing the laws against
anticompetitive agreements, abuse of dominant position, anti-competitive mergers and
acquisitions, violation of nationality and capital requirements, or for the perpetuation of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire
at the end of the agreed period. The voting trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock
shall be reissued in the name of the trustors.

The voting trustee or trustees may vote by proxy or in any manner authorized under the bylaws
unless the agreement provides otherwise.

iii. CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED

(a) BY A MAJORITY VOTE

Approval at a meeting duly called for the purpose by the stockholders representing majority of
the outstanding capital, or majority of the members, is necessary, together with Board approval, in
the following instances:
1. To enter into a management contract under circumstances not covered by either of the 2
instances:
a. A stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or

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 b. 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.
NOTE: The majority vote of the outstanding capital or of the members is required for both
the managed and managing corporation (Sec. 43, RCCP).

2. To adopt, amend, or repeal the By-laws (Sec. 46 and 48, RCCP).

3. Voluntary dissolution where no creditors is affected (Sec. 134, RCCP).
4. Without Board resolution, the stockholders/ members may by majority of outstanding
capital or of the members, revoke the power of the Board to amend the By-laws, which
was previously delegated (Sec. 47, RCCP).

(b) BY A TWO-THIRDS (2/3) VOTE

Approval by majority of the Board and concurrence or ratification of the stockholders representing
at least 2/3 of the outstanding capital (or 2/3 of the members whenever applicable) is necessary
in the exercise of the following:
1. To extend or shorten corporate term (Sec. 36, RCCP);
2. To increase/ decrease corporate stock (Sec. 37, RCCP);
3. To incur, create, or increase bonded indebtedness (Sec. 37, RCCP);
4. To deny pre-emptive right after incorporation- since the denial is required to be in the
Articles of Incorporation or any amendment thereto, and approval of amendments to the
Articles of Incorporation requires the cote or written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of the members (Sec. 15, RCCP);
5. To sell, dispose, lease, encumber all or substantially all of corporate assets (Sec. 39, RCCP);
6. To invest in another corporation, business other than the primary purpose like the
secondary purpose (Sec. 41, RCCP);
7. To declare stock dividends (Sec. 42, RCCP);
8. To enter into a management contract if (Sec. 43, RCCP):
a. A stockholder or stockholders representing the same interest of both the managing
and the managed corporation own or control more than 1/3 of the total outstanding
capital entitled to the vote of the managing corporation; or
b. A majority of the members of the board or directors of the managing corporation
also constitute a majority of the member of the board of the managed corporation;

NOTE: The 2/3 vote of the outstanding stock or of the members applies to the
managed corporation (Sec. 43, RCCP).

9. To amend the Articles of Incorporation (Sec. 15, RCCP);

10. Voluntary dissolution where creditors are affected (Sec. 135, RCCP).
11. Without Board resolution, the stockholders/ members may by 2/3 outstanding capital or
of the members, delegate to the Board the power to amend the By-laws (Sec. 48, RCCP).

(c) BY CUMULATIVE VOTING

1. 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.

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 2. Cumulative voting by distribution – a stockholder may cumulate his shares by
multiplying 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 in stock v nonstock

Cumulative voting in case of non-stock corporations is allowed only if it is provided in the AOI.
The 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. Cumulative voting is mandatory in stock
corporations to protect the rights of minority stockholders.

iv. MANNER OF VOTING (Sec. 57, RCCP)

Manner of Voting; Proxies. –

Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members.

When so authorized in the bylaws or by a majority of the board of directors, the stockholders
or members of corporations may also vote through remote communication or in absentia:
Provided, That the votes are received before the corporation finishes the tally of votes.

A stockholder or member who participates through remote communication or in absentia, shall be

deemed present for purposes of quorum.

The corporation shall establish the appropriate requirements and procedures for voting through
remote communication and in absentia, taking into account the company’s scale, number of
shareholders or members, structure and other factors consistent with the basic right of corporate
suffrage.

Proxies shall be in writing, signed and filed, by the stockholder or member, in any form authorized
in the bylaws and received by the corporate secretary within a reasonable time before the scheduled
meeting. Unless otherwise provided in the proxy form, 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 any
one time.

c. PROPRIETARY RIGHTS

i. RIGHT TO DIVIDENDS
The board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock to all stockholders on the
basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholders until their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.

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Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock, except: (a) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (b) when the corporation is prohibited
under any loan agreement with financial institutions or creditors, whether local or foreign, from
declaring dividends without their consent, and such consent has not yet been secured; or (c) when
it can be clearly shown that such retention is necessary under special circumstances obtaining in
the corporation, such as when there is need for special reserve for probable contingencies (Sec. 42,
RCCP).

ii. APPRAISAL RIGHT

(a) WHEN AVAILABLE

Right of dissenting stockholder to withdraw from the corporation and demand payment of the
fair value of his/her shares, which right is exercised after dissenting from or voting against
proposed corporate acts involving fundamental changes in the corporate structure (Sec. 80,
RCCP).

Upon demand for payment of the fair value of shares, all rights accruing to the shares shall be
suspended, provided that if the dissenting stockholder is not paid the value of his/her shares within
30 days after the award, the voting and dividend rights shall be immediately restored (Sec. 82,
RCCP).

(b) MANNER OF EXERCISE OF RIGHT

Instances when appraisal right may be exercised:

1. In case of change in corporate term, including extension or shortening of corporate term or
changing from perpetual existence to one with a fixed term (Sec. 11, 36, and 80(a), RCCP);
2. In case an amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares; or
b. Authorizing preferences in any respect superior to those of outstanding shares of
any class (Sec. 15, 80, RCCP);
3. In case of sale, lease, exchange, transfer, mortgage, pledge, or other disposition of all or
substantially all of the corporate property and assets (Sec. 39, 80, RCCP);
4. In case of merger or consolidation (Sec. 76, 80, RCCP);
5. In case of investment of corporate funds for any purpose other than the primary purpose of
the corporation (Sec. 41, 80, RCCP).

Rules for exercise of appraisal right:

1. The stockholder must be a dissenting stockholder- he voted against the proposed action
(Sec. 81, RCCP);
2. The stockholder must make a written demand on the corporation within 30 days after the
vote was taken;
3. The proposed action is any one of the instances enumerated above;
4. The price to be paid is the fair value of the shares on the date before the vote was taken;

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 5. The fair value shall be agreed upon but in case there is no agreement within 60 days from
the date the vote was taken, the fair value shall be determined by a majority of 3
disinterested persons one of whom shall be named by the stockholder, another by the
corporation, and the third by the 2 who were chosen (Sec. 81, RCCP);
6. The dissenting shareholder shall submit his certificates of stock within 10 days from
demanding payment for notation that the shares are dissenting shares (Sec. 85, RCCP).

The right of appraisal is extinguished or lost when:

1. The shareholder withdraws the demand with the corporation’s consent (consent of the
corporation is necessary) (Sec. 83, RCCP);
2. The proposed action is abandoned or rescinded by the corporation (Sec. 83, RCCP);
3. The SEC approves the action (Sec. 83, RCCP);
4. The dissenting stockholder fails to make a demand within the 30-day period provided in
Sec. 81;
5. There is TRANSFER of the shares by the dissenting shareholder (Sec. 85, RCCP); and
6. The dissenting stockholder fails to submit his/her stock certificate/s within 10 days from
demand of payment. Termination of the appraisal right shall be at the option of the
corporation (Sec. 85, RCCP).

iii. RIGHT TO INSPECT

1. Requirements for the exercise of the right of inspection and reproduction

Corporate records, regardless of the form in which they are stored, shall be opened to inspection
by any director, trustee, stockholder or member in person or by a representative and a written
demand may be made by said director/ trustee, stockholder/ member to secure copies of or
excerpts from the record under the following conditions (Sec. 73, RCCP):
1. The right must be exercised at reasonable hours on business days;
2. The director, trustee, stockholder, or member has not improperly used any information he
secured through any previous examination;
3. Demand is made in good faith or for a legitimate purpose;
4. The inspecting or reproducing party must respect and is bound by confidentiality rules
under prevailing laws such as the Intellectual Property Code, Data Privacy Act, Securities
Regulation Code, and the Rules of Court; and
5. The requesting party who is not a stockholder or member of record, or who is a competitor,
director, officer, controlling stockholder or otherwise represents the interest of a
competitor shall have no right to inspect or demand reproduction of corporate records.

NOTE: A stockholder or member is also entitled to a copy of the audited financial

statement of the corporation. The corporation is obliged to furnish the stockholder/ member
such copy within 10 days from receipt of the written request. If the total assets or total
liabilities are less than P600,000.00, the financial statement may be certified under oath by
the treasurer and the president (Sec. 74, RCCP).

2. Remedies
a. Summary Investigation- If the corporation denies or does not act on a demand for
inspection and/or reproduction of corporate books or records, the aggrieved party may

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 report such denial or inaction to the SEC within 5 days from receipt of such report, the SEC
shall conduct a summary investigation and issue an order directing the inspection or
reproduction of the requested records;
b. Mandamus- is a proper remedy if the stockholder is being improperly deprived of his right
to inspect;
c. Criminal action- under Sec. 161 of the RCCP.

3. The right to inspect is available even if the corporation has already been dissolved (Example:
its certificate of incorporation was revoked) and its assets are pending liquidation.

iv. PREEMPTIVE RIGHT (Sec. 38, RCCP)

A pre-emptive right is the shareholders’ right to subscribe to all issue or disposition of shares of
any class (including sale or re-issuance of treasury shares) in proportion to their stockholdings.
The purpose of pre-emptive right is to enable the shareholder to retain his proportionate control in
the corporation and to retain his equity in the surplus.

Pre-emptive right is not available in the following:

1. Shares issued to comply with laws requiring stock offering or minimum stock ownership
by the public;
2. Shares issued in good faith, with the approval of the stockholders representing 2/3 of the
outstanding capital stock, in payment of previously contracted debt (Sec. 38 RCCP);
3. In case pre-emptive right is denied in the Articles of Incorporation (Sec. 38, RCCP);
4. Shares issued in good faith, with the approval of the stockholders representing 2/3 of the
outstanding capital stock, in exchange for property needed for corporate purposes (Sec.
38, RCCP);
5. If one shareholder does not want to exercise his pre-emptive right, the other shareholders
are not entitled to purchase the corresponding shares of the shareholder who declined. But
if nobody purchased the same and later on the Board re-issues the shares, the pre-emptive
right applies.

NOTE: The denial of pre-emptive right cannot be expressed in the By-laws only. However, the
by-laws may fix reasonable procedure for the exercise of the pre-emptive right like the reasonable
time to exercise the same; otherwise the Board may provide for such period.

v. RIGHT TO VOTE
Stockholders’ Meeting- A stockholder is given the right to participate in the corporate affairs by
giving him the (1) right to attend meetings upon due notice and the (2) right to vote thereat in
person, or through a proxy or by a majority of the Board, through remote communication or
in absentia (Sec. 57, RCCP).

The classification of shares, their corresponding rights, privileges, or restrictions, and their stated
par value, if any, must be indicated in the articles of incorporation. Each share shall be equal in all
respects to every other share, except as otherwise provided in the articles of incorporation and in
the certificate of stock. The shares in stock corporations may be divided into classes or series of
shares, or both. No share may be deprived of voting rights except those classified and issued as

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“preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there
shall always be a class or series of shares with complete voting rights (Sec. 6, RCCP).

Limitations on Right to Vote

1. Where the Articles of Incorporation provides for classification of shares pursuant to Sec.
6, non-voting shares are not entitles to vote except as provided in the 3 rd par. Of Sec. 6,
RCCP.
Holders of nonvoting shares shall nevertheless be entitled to vote on the following
matters:
(a)Amendment of the articles of incorporation;
(b)Adoption and amendment of bylaws;
(c)Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
(d)Incurring, creating, or increasing bonded indebtedness;
(e)Increase or decrease of authorized capital stock;
(f)Merger or consolidation of the corporation with another corporation or other
corporations;
(g)Investment of corporate funds in another corporation or business in accordance
with this Code; and
(h)Dissolution of the corporation (Sec. 6(c), RCCP).

2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise
provided in the Code (Sec. 6, RCCP).
3. Fractional shares of stock cannot be voted unless they constitute at least 1 full share (Sec.
40, RCCP).
4. Treasury shares have no voting rights as long as they remain in the treasury (Sec. 56,
RCCP).
5. Delinquent stocks shall not be entitled to vote or be represented at any stockholder’s
meeting (Sec. 62, RCCP).
6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer
book of the corporation (Sec. 62, RCCP).
7. A stockholder is still entitled to vote even if his/her shares are mortgaged or pledged unless
he/she authorizes the creditor in writing to vote and the written authority is recorded in the
corporate books (Sec. 54, RCCP).

d. REMEDIAL RIGHTS

i. INDIVIDUAL SUIT
Those brought by the shareholder in his own name against the corporation when a wrong is directly
inflicted against him.

ii. REPRESENTATIVE SUIT

Those brought by the stockholder in behalf of himself and all other stockholders similarly situated
when a wrong is committed against a group of stockholders.

iii. DERIVATIVE SUIT

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Those brought by one or more stockholder(s)/ member(s) in the name and on behalf of the
corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are the ones to be sued or have control of the
corporation.

Requisites of Derivative Action- A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, Provided, That:
1. 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 alleges the same with 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 act or acts complained of;
4. The suit is not nuisance or harassment suit; and
5. The corporation is impleaded as a plaintiff.

e. OBLIGATIONS OF A STOCKHOLDER
1. Liability to the corporation for unpaid subscription (Sec. 66-69, RCCP)

What are the remedies of corporation to enforce payment of stocks?

a. Extrajudicial Delinquency sale at public auction- this remedy is available upon
failure of the stockholder to pay the unpaid subscription or balance thereof within
the grace period of 30 days specified in the contract of subscription (Sec. 67,
RCCP);
b. Judicial auction (Sec. 69, RCCP).
c. Collection from cash dividends and withholding of stock dividends (Sec. 42,
RCCP).

What does the term unpaid claim mean (for purposes of declaring the shareholder
delinquent)?
It refers to any unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe to the corporation arising from any other transaction.

Call- A declaration by the board of directors that the unpaid subscriptions are due and
payable to the corporation (Sec. 66, RCCP).
a. A call is necessary if no time to make payment is stated in the subscription
agreement. A call is not necessary if: (1) there is a time fixed in the agreement for
payment; or (2) if the corporation becomes insolvent.
b. Notice of call is necessary to bind the stockholders.

Procedure for Collection and Delinquency Sale

a. Call whenever required must be made by the Board.
b. Notice of call- the stockholders are given notice of the board resolution by the
corporate secretary, either personally or by registered mail.
c. When delinquent- if the stockholders concerned do not pay within 30 days from
the date specified in the contract of subscription or in the call, all the stocks covered

165
 by the subscription shall be declared delinquent and shall be subject to sale under
Section 67 (Sec. 66, RCCP).
d. Notice of sale- served on the subscribers either personally or registered mail and
publication in a newspaper of general circulation in the province or the city where
principal office is located once a week or 2 consecutive weeks.
Notice of sale shall state the amount due on each subscription plus accrued
interest, and the date, time, and place of the sale which shall not be less than
30 days nor more than 60 days from the date the stocks become delinquent.
e. Sale- such number of shares as may be necessary to pay the amount due on
subscription, plus interest and other amounts due, will be sold at public auction.
The winner- the highest bidder is the person offering to pay the full amount
of the balance on the subscription with accrued interest, costs of
advertisements, and expenses of sale for the smallest number of shares or
fraction of a share (Sec. 66, RCCP).

What are the effects of stock delinquency? (Sec. 70, RCCP).

a. Deprives the stockholder the right:
2. To be voted for;
3. To vote; or
4. To representation at any stockholders’ meeting.
b. Delinquent stockholder shall not be entitled to any of the rights of a stockholder;
his rights are suspended except that he shall still be entitled to dividends subject to
the provisions of Sec. 42 of the RCCP.
c. Delinquent stocks shall be subject to delinquency sale.
NOTE: if the delinquent stockholder is a director, he shall continue to be director
but he cannot run for re-election.

5. Liability to the corporation for interest on unpaid subscription if so required by the By-
Laws (Sec. 65, 66 RCCP);
SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to stocks shall be liable to the corporation
for interest on all unpaid subscriptions from the date of subscription, if so required by and at the rate
of interest fixed in the subscription contract. If no rate of interest is fixed in the subscription contract,
the prevailing legal rate shall apply.

SEC. 66. Payment of Balance of Subscription. – Subject to the provisions of the subscription
contract, the board of directors may, at any time, declare due and payable to the corporation unpaid
subscriptions and may collect the same or such percentage thereof, in either case, with accrued
interest, if any, as it may deem necessary. Payment of unpaid subscription or any percentage thereof,
together with any interest accrued shall be made on the date specified in the subscription contract
or on the date stated in the call made by the board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder liable for interest at the legal rate on such
balance, unless a different interest rate is provided in the subscription contract. The interest shall be
computed from the date specified, until full payment of the subscription. If no payment is made
within 30 days from the said date, all stocks covered by the subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders
otherwise.

6. Liability to the creditors of the corporation for unpaid subscription subject to the Limited
Liability Rule;

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 Limited Liability Rule- A stockholder is personally liable for the financial obligations of
the corporation to the extent of his unpaid subscription. While stockholders are generally
not liable, the stockholders may be liable if they have not paid or have not fully paid the
subscription price and the corporation is insolvent or it cannot comply with its obligations.

This is still consistent with the separate personality of the corporation because the unpaid
subscriptions are assets of the corporation in the form of “receivables” that can be made to
answer for corporate obligations. The personality of the corporation is not actually pierced
to make the stockholder liable; the stockholder is just being made to pay a debt to the
corporation.

7. Liability for watered stock (Sec. 64, RCCP)

Watered stocks- are those issued NOT in exchange for its equivalent either cash, property,
share, stock dividends, or services; thus, the issuance of such stocks is prohibited.

A director or officer of a corporation shall be liable to the corporation or its creditors,

solidarily with the stockholder concerned for the difference between the value received at
the time of issuance of the stock and the par value or issued value of the same, if he/she:
1. Consents to the issuance of stock for a consideration less than its par or issued
value- including those issued without consideration (bonus share) or issued as
fully paid when the corporation has received a lesser sum of money than its par
or issued value (discounted share);
2. Consents to the issuance of stocks for a consideration other than cash (e.g.,
property or service), valued in excess of its fair value; or
3. Having knowledge of the insufficient consideration, does not file a written
objection with the corporate secretary (Sec. 64, RCCP).

8. Liability for dividends unlawfully paid (Sec. 42, RCCP).

SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders
until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued
without the approval of stockholders representing at least two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock, except: (a) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (b) when the corporation is prohibited
under any loan agreement with financial institutions or creditors, whether local or foreign, from
declaring dividends without their consent, and such consent has not yet been secured; or (c) when it
can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.

9. Administrative, civil, and criminal liability of a stockholder responsible for violation of the
RCCP or for acts indispensable to the violation of the RCCP (Sec. 171, RCCP).

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 SEC. 171. Liability of Directors, Trustees, Officers, or Other Employees. – If the offender is a
corporation, the penalty may, at the discretion of the court, be imposed upon such corporation
and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for
the violation or indispensable to its commission.

f. MEETINGS

i. REGULAR OR SPECIAL
ii. NOTICE OF MEETING
Kinds of Meeting Date of Meeting Required Notice Record Date
(Sec. 49, RCCP).
Regular Meeting of 1. Held annually on a 1. Within the period The stock and transfer
Stockholders/ date fixed in the By- provided in the By- book or membership
Members Laws; or Laws, or required in a book shall be closed
law, or regulation; or at least 20 days before
2. If there is no date in the meeting date.
the By-Laws- on any 2. In the absence of
date after April 15 of number 1 above- at If the By-Laws
each year as least 21 days prior to provides for a longer
determined by the the meeting. period, that period
Board. shall prevail.
NOTE: The written
notice may be sent
through electronic
mail or other manner,
pursuant to guidelines
issued by the SEC.
Special Meeting of 1. Any time deemed 1. Within the period The stock and transfer
Stockholders necessary; or provided in the By- book or membership
Laws; or book shall be closed 7
2. As provided in the days prior to the
By-Laws. 2. If there is no scheduled meeting
provision in the By- date.
Laws- at least 1 week
prior to the meeting. The By-Laws may
provide for a longer
period, which period
shall prevail.

Who will call a special meeting of stockholders

1. The officer designated in the Articles or By-Laws;
2. Board of Directors or Trustees if nobody is designated to call in the Articles and By-Laws;
or
3. SEC, upon petition of a stockholder/ member, if there is no person authorized to call or the
person authorized unjustly refuses to call a meeting (Sec. 49, RCCP).

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Rules on waiver of notice to stockholders
1. General waiver in the Articles of Incorporation or By-Laws is NOT allowed;
2. Waiver may be express or implied;
3. A stockholder is deemed to have waived the notice of meeting if he attends such meeting,
except when the stockholder/ member attends the meeting for the express purpose of
objecting to the transaction of any business because the meeting was not lawfully called or
convened (Sec. 49, RCCP).

iii. PLACE AND TIME OF MEETINGS (Sec. 50, RCCP).

Stockholders’ or members’ meetings, whether regular or special, shall be held in the principal
office of the corporation as set forth in the articles of incorporation, or, if not practicable, in the
city or municipality where the principal office of the corporation is located: Provided, That any
city or municipality in Metro Manila, Metro Cebu, Metro Davao, and other Metropolitan areas
shall, for purposes of this section, be considered a city or municipality.

Notice of meetings shall be sent through means of communication provided in the bylaws, which
notice shall state the time, place and purpose of the meetings.

Each notice of meeting shall further be accompanied by the following:

a. The agenda for the meeting;
b. A proxy form which shall be submitted to the corporate secretary within a reasonable
time prior to the meeting;
c. When attendance, participation, and voting are allowed by remote communication or
in absentia, the requirements and procedures to be followed when a stockholder or
member elects either option; and
d. When the meeting is for the election of directors or trustees, the requirements and
procedure for nomination and election.

All proceedings and any business transacted at a meeting of the stockholders or members, if
within the powers or authority of the corporation (if not ultra vires), shall be valid even if the
meeting is improperly held or called: Provided, That (1) all the stockholders or members of the
corporation are present or duly represented at the meeting and (2) not one of them expressly states
at the beginning of the meeting that the purpose of their attendance is to object to the transaction
of any business because the meeting is not lawfully called or convened.

iv. QOURUM
A quorum shall consist of stockholders representing a majority of the outstanding capital stock or
a majority of the members, unless otherwise provided in the RCCP or in the By-Laws. (Sec. 51,
RCCP).Thus, for instance the quorum for a stockholders’/members’ meeting for the election of
directors/trustees upon order by the SEC (after verification of the unjustified non-holding of such
election) under Sec. 25 of the RCCP, may be less than a majority of the outstanding capital stock
or members (Sec. 25 (4th par.), RCCP). Moreover, under Sec. 96 of the RCCP, the Articles of
Incorporation of a close corporation may provide for a greater quorum and voting requirements in
stockholder’s meetings.

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NOTE: (1) There is no distinction between disputed and undisputed shares; (2) the stockholders
of record at the time of the meeting can attend the meeting unless a different rule is provided in
the By-Laws; (3) A stockholder or member who participates through remote communication or in
absentia shall be considered present for purposes of quorum (Sec. 57, RCCP).

Excluded from the Computation of Quorum

1. Delinquent shares or members;
2. Non-voting shares or members

XPN: In case the meeting is for the approval of matters where non-voting shares are given the
right to vote (Sec. 6 (3rd par.), RCCP), the quorum should include all outstanding stocks, that
is, of any class, including preferred and redeemable shares, but excluding treasury shares
(Sec. 6 (par. 4), RCCP).

v. MINUTES AND AGENDA OF MEETINGS

At each regular meeting of stockholders or members, the board of directors or trustees shall
endeavor to present to stockholders or members:

The minutes of the most recent regular meeting which shall include, among others:
a. A description of the voting and vote tabulation procedures used in the previous
meeting;
b. A description of the opportunity given to stockholders or members to ask
questions and a record of the questions asked and answers given;
c. The matters discussed and resolutions reached;
d. A record of the voting results for each agenda item;
e. A list of the directors or trustees, officers and stockholders or members who
attended the meeting; and
f. Such other items that the Commission may require in the interest of good
corporate governance and the protection of minority stockholders.

A director, trustee, stockholder, or member may propose any other matter for inclusion in the
agenda at any regular meeting of stockholders or members.

A stockholder or member may propose the holding of a special meeting and items to be included
in the agenda.

9. BOARD OF DIRECTORS AND TRUSTEES

a. REPOSITORY OF POWERS
Unless otherwise provided in this Code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all properties of the corporation (Sec. 22,
RCCP).

b. TENURE, QUALIFICATIONS, AND DISQUALIFICATIONS OF

DIRECTORS

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TENURE
Directors shall be elected for a term of 1 year from among the holders of stocks registered in the
corporation’s books, while trustees shall be elected for a term not exceeding 3 years from among
the members of the corporation. Each director and trustee shall hold office until the successor is
elected and qualified. A director who ceases to own at least 1 share of stock or a trustee who ceases
to be a member of the corporation shall cease to be such (Sec. 22, RCCP).

QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS

1. Stock Corporation- must own at least 1 share of the capital stock of the corporation in his own
name;
Non-Stock Corporation- must be a member (Sec. 22, RCCP).
-He must be a stockholder in his own right. It mut be legal title not beneficial title. If a director
ceases to be a stockholder or a trustee ceases to be a member, he or she shall cease to be a director
or trustee without need of further action (Sec. 22, RCCP).

Examples:
1. The stockholder-trustor in a voting trust agreement cannot be a director because he only has beneficial title; the
trustee can be elected as director because he has legal title;
2. A stockholder who was elected as a director is automatically disqualified the moment he sells all his shares; the
purchaser cannot claim that he or she assumed the rights of the stockholder as director after the purchase;
3. A person is disqualified as Director if he is a mere pledgee of the shares.

2. *Disqualification
A person shall be disqualified from being a director, trustee, or officer of any corporation if, within
5 years prior to the election or appointment as such, the person was:

1. Convicted by final judgment:

a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. For violating this Code; and
c. For violating Republic Act No. 8799, otherwise known as “The Securities
Regulation Code”;

2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the

Commission, the primary regulatory agency, or the Philippine Competition Commission may
impose in its promotion of good corporate governance or as a sanction in its administrative
proceedings.

3. He must be of legal age.

4. Other qualifications
He must possess other qualifications as may be prescribed by law and in the By-Laws of the
corporation.

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NOTE:
(1) There is no citizenship requirement for director. However, the members of the board must
comply with the same proportion of maximum equity participation under nationalization laws. For
example, for public utilities, foreigners are limited to 40% of the number of Directors;
(2) There is no more residence requirement; the requirement that majority of the directors/ trustees
must be residents of the Philippines under Sec. 23 of the Corporation Code was deleted by the
RCCP;
(3) The directors’ annual compensation cannot exceed 10% of net income before income tax (Sec.
29, RCCP).

c. REQUIREMENT OF INDEPENDENT DIRECTORS

The Board of corporations vested with public interest shall have independent directors
constituting at least 20% of such board (Sec. 22, RCCP).

Independent Director- An independent director is a person who, apart from shareholdings and
fees received from the corporation, is independent of management and free from any business or
other relationship which could, or could reasonably be perceived to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director (Sec. 22, RCCP).

Independent directors must be elected by the shareholders present or entitled to vote in absentia
during the election of directors. Independent director shall be subject to rules and regulations
governing their qualifications, disqualifications, voting requirements, duration of term and term
limit, maximum number of board memberships and other requirements prescribed by the SEC
(Sec. 22, RCCP).

d. ELECTIONS (Sec. 23, RCCP)

Each stockholder or member shall have the right to nominate any qualified director or trustee,
except when the exclusive right (to vote and be voted for in the election of directors) is reserved
for holders of founders’ shares for a limited period of 5 years, as provided in Sec. 7 of the RCCP.

In stock corporations, each stockholder entitled to vote has the total number of votes not
exceeding the number of shares owned by the same stockholder as shown in the books of the
corporation at the time fixed in the By-Laws, or of the By-Laws is silent, at the time of the election,
multiplied by the whole number of directors to be elected.

Stockholders have the option to adopt any of the following:

a. Straight voting- every stockholder “may vote such number of shares for as many
persons as there are directors” to be elected.
b. 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”.
c. Cumulative Voting by distribution- a stockholder may distribute his votes among
as many candidates as he shall see fit.

NOTE: Cumulative voting is not available in non-stock corporations unless

provided in the Articles of Incorporation or in the By-Laws; hence the general rules

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 is that members may cast as many votes as there are trustees to be elected but may
not cast more than 1 vote for 1 candidate (Sec. 23 (par. 5), RCCP).

Election should be at large in stock corporations- All shareholders holding voting shares have
the right to vote (Sec. 6 and 23, RCCP). The stockholders who can vote are the stockholders, who
are not delinquent, who are stockholders of record at the time fixed in the By-Laws, or if the By-
Laws is silent, at the time of the election. (Sec. 23, RCCP).

Non-stock corporation- There can be election by region in a non-stock corporation, because the
right to vote in a non-stock corporation may be limited, broadened or denied in the Articles of
Incorporation or By-Laws (Sec. 88, RCCP). There can be no voting by district or region in a stock
corporation.

ii. QUORUM
At the elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proof, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote (Sec.
23, RCCP).

How to vote- The stockholders and members may vote: (1) personally by attending the meeting;
(2) through a proxy; or (3) through a remote communication or in absentia.

Voting through remote communication or in absentia is allowed only (a) when authorized by
the By-Laws; (b) when authorized by a majority of the directors, or (c) even without a provision
in the By-Laws, in corporations vested with public interest (Sec. 23, RCCP).

Who is duly Elected

Nominees with the highest number of votes shall be declared elected. The rule is Plurality of votes.

e. REMOVAL (Sec. 27, RCCP)

1. Requisites of removal
a. It must take place either at a regular meeting or special meeting of the stockholders
or members duly called for the purpose;
b. There must be previous notice to the stockholders or members of the intention to
propose a removal at the meeting;
c. The removal must be by a vote of the stockholders representing at least 2/3 of
outstanding capital stock or 2/3 of members; and
d. The director may be removed with or without cause unless he was elected by the
minority, in which case, it is required that there is cause for removal (Sec. 27,
RCCP).

2. Call- The call of the special meeting must be made by the corporate secretary upon the
order of the President or written demand of stockholders representing majority of the
outstanding capital stock, or a majority of the members entitled to vote, otherwise the
meeting is void (Sec. 27, RCCP). If there is no secretary, or he latter refuses or fails to call

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 a meeting, the notice may be signed by a stockholder or member making the demand (Sec.
27, RCCP).

3. Removal of Disqualified Director/ Trustee by SEC- The SEC shall, motu proprio or
upon verified complaint, and due notice and hearing, order the removal of a director or
trustee elected despite the disqualification, or whose disqualification arose or is discovered
subsequently to an election (Sec. 27, RCCP). The removal shall be without prejudice to
sanctions that the SEC may impose on the Board who, with knowledge of the
disqualification, refuse or failed to remove the director or trustee concerned.

f. FILLING OF VACANCIES (Sec. 28, RCCP)

Filing of vacancies in the Board

The replacement of Director or Trustee must be elected:
1. By the stockholders or members, if the vacancy occurs because of:
a. Removal;
b. Expiration of term;
c. The ground is other than removal or expiration of term (e.g., death, resignation,
abandonment) where the remaining directors do not constitute quorum;
d. Increase in the number of directors or trustees (Sec. 28, RCCP).
2. By the board if the remaining directors/ trustees constitute a quorum- cases not
reserved to stockholders or members, like vacancies arising from resignation or death of
directors or trustees.

When election of replacement should be made

1. When the vacancy is due to term expiration- on the day of such expiration at a meeting
called for that purpose.
2. When the vacancy occurs as a result of removal by the stockholders or members- the
election may be held on the same day of the meeting authorizing the removal and this fact
must be so stated in the agenda and notice of said meeting.
3. In all other cases of vacancy- the election must be held no later than 45 days from the
time the vacancy arose.

Replacement of Hold-Over Directors

The term of Directors is 1 year. Directors must be replaced by the stockholders or members in an
election when their term of office expires. The loss of right of the directors is automatic upon the
expiration of their term. However, if the election is not held, the director whose term expired can
continue to function in a holdover capacity. If one of the holdover directors resigns, the
remaining holdover directors cannot replace him even if they constitute quorum. The power of the
remaining members of the board to fill in a vacancy applies only if a director resigns before the
expiration of his term. With respect to the board authority to replace, Sec. 29 contemplates a
vacancy occurring within the director’s term of office.

Even if a director was invalidly removed, he cannot be ordered reinstated to his position if his term
already expired and a valid election of new directors in the annual meeting was held.

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Creation of Emergency Board (Sec. 28, RCCP)
The remaining Directors or Trustees, even if there is no quorum, may elect a temporary
Replacement Director/ Trustee subject to the following requirements:
1. The remaining directors or trustees do not constitute a quorum;
2. There is a need for emergency action;
3. The action is necessary to prevent grave, substantial, and irreparable loss or damage to the
corporation;
4. The temporary replacement must come from the officers of the corporation;
5. The temporary replacement must be elected by a unanimous vote of the remaining directors
or trustees; and
6. Notice must be given to the SEC within 3 days from the creation of an emergency Board.

Limitations:
a. The action by the designated director or trustee shall be limited to the emergency
action necessary; and
b. The term shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or trustee, whichever comes
earlier.

Non-Holding of Election
When the term of the directors or trustees expired and the meeting for the election or new directors
or trustees was not held, a new date should be fixed which shall not be later than 60 days from the
original scheduled date (Sec. 25, RCCP).

1. Power of the SEC- if no new date has been designated, or if the rescheduled election is
likewise not held, the SEC may, upon the application of the stockholder, member, director
or trustee, and after verification of the unjustified non-holding of the election, summarily
order that an election be held. The SEC shall have the power to issue such orders as may
be appropriate, including orders directing the issuance of a notice stating the time and place
of the election, designating presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote (Sec. 25, RCCP).
2. Majority Not needed for Quorum- Notwithstanding any provision of the Articles of
Incorporation or By-laws to the contrary, the shares of stock or membership represented at
such meeting and entitled to vote shall constitute a quorum for purposes of conducting an
election under Sec. 25 of the RCCP. A majority is therefore no longer required (Sec. 29,
RCCP).

g. COMPENSATION (Sec. 29, RCCP)

Compensation of Directors or Trustees
In the absence of any provision in the by-laws fixing their compensation, the directors or trustees
shall not receive any compensation in their capacity as such, except for reasonable per diems:
Provided however, That the stockholders representing at least a majority of the outstanding
capital stock or majority of the members may grant directors or trustees with compensation and
approve the amount thereof at a regular or special meeting.

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In no case shall the total yearly compensation of directors exceed 10% percent of the net income
before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their own per diems or
compensation.

Corporations vested with public interest shall submit to their shareholders and the Commission,
an annual report of the total compensation of each of their directors or trustees.

h. DISLOYALTY (Sec. 33, RCCP)

Disloyalty of a Director (Doctrine of Corporate Opportunity)
Where a director, by virtue of such office, acquires a business opportunity which should belong to
the corporation, thereby obtaining profits to the prejudice of such corporation, the director must
account for and refund to the latter all such profits, unless the act has been ratified by a vote of
the stockholders owning or representing at least 2/3 of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in
the venture.

i. BUSINESS JUDGMENT RULE

Questions of policy or management are left solely to the honest decision of officers and directors
of a corporation and the courts are without authority to substitute their judgment for the judgment
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 or the SEC. The directors are
also not liable to the stockholders in performing such acts.

j. SOLIDARY LIABILITIES FOR DAMAGES

k. PERSONAL LIABILITIES

Directors or trustees who willfully and knowingly (1) vote for or assent to patently unlawful acts
of the corporation or (2) who are guilty of gross negligence or bad faith in directing the affairs of
the corporation or (3) acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.

A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been reposed in them in confidence, and upon
which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the said
director, trustee, or officer shall be liable as a trustee for the corporation and must account for the
profits which otherwise would have accrued to the corporation (Sec. 30, RCCP).

Are corporate agents such as directors, trustees, or officers of a corporation solidarily liable
with the corporation they represent?
GR: No, they are not solidarily liable with the corporation. Obligations incurred by them, acting
as such corporate agent, are not theirs, but the direct accountabilities of the corporation they
represent. The act that they approved the contract or signed the document evidencing the contract
will not make them liable.

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Personal and Solidary Liability- Solidary/ personal liabilities may be incurred in the following
cases:
1. When directors and trustees or, in appropriate cases, the officers of the corporation:
a. Vote or assent to patently unlawful acts of the corporation;
b. Act in bad faith or with gross negligence in directing the affairs of the corporation;
c. Are guilty of conflicts of interest to the prejudice of the corporation, its stockholders
or members, and other persons;
2. When a director has consented to the issuance of watered stock or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto;
3. When the director, trustee, or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; and
4. When a director, trustee, or officer is made by specific provisions of law, personally liable
for his corporate actions.

l. RESPONSIBILITY FOR CRIMES

Directors, corporate officers, or employees, through whose act, default, or omission the
corporation commits crime. There are special laws that specify the officers who are criminally
liable for corporate crimes.

Sec. 171 of the RCCP provides that if the offender is a corporation, the penalty may, at the
discretion of the court, be imposed upon such corporation and/or upon its directors, trustees,
stockholders, members, officers, or employees responsible for the violation or indispensable to its
commission.

m. SPECIAL FACT DOCTRINE

Majority Rule Doctrine in the dealings of directors with stockholders

The majority rule states that a director has a fiduciary duty with respect to the corporation as an
entity, and not to the stockholders as individuals. Consequently, he is subject to the duty to disclose
all material facts only to the corporation and not to the stockholders (American T. Co. v. California
etc. Ins. Co., 15 Cal.2d 42, 1940).

Special Fact Doctrine

The special fact doctrine is an exception to the majority rule doctrine. It states that where special
circumstances or facts are present which make it inequitable for the director to withhold
information from the stockholder, the duty to disclose arises, and concealment is fraud (Ibid).

n. INSIDE INFORMATION
Any material non-public information about the issuer of the securities (corporation) or the
security obtained by being an insider, which includes:

1. The issuer;
2. A director or officer (or any person performing similar functions) of, or a person controlling
the issuer;

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 3. A person whose relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to the
public;
4. A government employee, 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 forgoing insiders
(SRC, Sec. 3.8).

o. CONTRACTS

i. BY SELF-DEALING DIRECTORS (Sec. 31, RCCP)

This covers contracts between the corporation and (1) a director or trustee or (2) officer or (3) their
spouses or (4) relatives within the 4th civil degree of consanguinity or affinity.

GR: The contract is voidable at the option of the corporation.

When Valid: The contract with self-dealing director, trustee, officer, or their covered relatives is
valid if the following conditions are present (Sec. 31, RCCP):
1. The presence of the director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material contracts are approved by
at least 2/3 of the entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and
5. In case of an officer, the contract has been previously authorized by the board of
directors.

XPNs: Where any of the first 2 conditions set forth above is absent (presence and vote during the
meeting is not necessary), in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock
or of at least 2/3 of the members in a meeting called for the purpose. It is however required that:
1. There is full disclosure of the adverse interest of the director or trustee involved at such
meeting and
2. The contract is fair and reasonable under the circumstances.

NOTE: Although that last paragraph of Sec. 31 of the RCCP covers situations where any of
the first 3 conditions is absent (instead of the first 2), the third condition cannot be dispensed
with as reflected in the last phrase of the last paragraph of Sec. 31.

ii. BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS (Sec. 32, RCCP)

There is an interlocking director in a corporation when one (or some or all) of the directors in one
corporation is (or are) a director(s) in another corporation.

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1. Interest both substantial- if the interest of the interlocking director in the corporation are both
substantial stockholdings exceed 20% of outstanding capital stock):
GR: Valid. A contract between 2 or more corporations having interlocking directors shall
NOT be invalidated on that ground alone.

XPN: Voidable at the option of the Corporation if the contract is fraudulent or not fair and
reasonable. It is believed that the right to annul pertains to the corporation that was
prejudiced- the victim of fraud or who can claim unfairness or unreasonable.

NOTE: While Sec. 32 of the RCCP does not cover cases where the interest of the
interlocking director in the 2 corporations is both nominal, the contract would be valid as
a general rule, but it may be annulled under the grounds provided in the New Civil Code
for voidable contracts which include fraud.

2. Interest substantial in one, nominal in the other- if the interest of the interlocking director in
one of the corporations is nominal while substantial (stockholdings 20% or more of outstanding
capital) in the other:
GR: Voidable at the option of the corporation where the interlocking director has nominal
interest (Sec. 31 and 32, RCCP).

XPN: It will only be valid if the following conditions are present:

1. The presence of such director/ trustee in the board meeting in which the contract was
approved was NOT necessary to constitute a quorum for such meeting;
2. That the vote of such director/ trustee was not necessary for the approval of the contract;
and
3. That the contract is fair and reasonable under the circumstances.

Ratification- Where any of the first 2 is absent, the contract can be ratified by the vote of
the stockholder representing at least 2/3 of the outstanding capital stock or by the vote of
at least 2/3 of the members in a meeting called for the purpose so long as the following are
present:
1. Full disclosure of the adverse interest of the directors/ trustees involved is made on
such meeting;
2. The contract is fair and reasonable under the circumstances.

p. EXECUTIVE AND OTHER SPECIAL COMMITTEES (Sec. 34, RCCP)

i. CREATION
ii. LIMITATIONS ON ITS POWERS

SEC. 34. Executive, Management, and Other Special Committees. – If the bylaws so provide, the
board may create an executive committee composed of at least 3 directors. Said committee may
act, by majority vote of all its members, on such specific matters within the competence of the
board, as may be delegated to it in the bylaws or by majority vote of the board.
XPN with respect to the:
1. Approval of any action for which shareholders’ approval is also required;

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 2. Filling of vacancies in the board;
3. Amendment or repeal of bylaws or the adoption of new bylaws;
4. Amendment or repeal of any resolution of the board which by its express terms is not
amendable or repealable; and
5. Distribution of cash dividends to the shareholders.

The board of directors may create special committees of temporary or permanent nature and
determine the members’ term, composition, compensation, powers, and responsibilities.

q. MEETINGS

i. REGULAR OR SPECIAL (Sec. 52, RCCP)

(a) WHEN AND WHERE

Regular Meetings- monthly, unless otherwise specified in the By-laws (including the
annual organizational meeting after the election of directors or trustees).

Special Meetings- any time, upon the call of the President or as provided by the By-laws.

Place of Meeting- Unlike stockholders’ or members’ meeting that is required to be held in

the principal office, or if not practicable, in the city or municipality where the principal
office is located, the director’s meeting may be held anywhere in or outside the
Philippines unless the By-laws provide otherwise (Sec. 50 and 52, RCCP).

(b) NOTICE
Notice of regular or special meetings stating the date, time and place of the meeting must be sent
to every director or trustee at least 2 days prior to the scheduled meeting, unless a longer time is
provided in the bylaws. A director or trustee may waive this requirement, either expressly or
impliedly (Sec. 52, RCCP).

(c) ATTENDANCE IN MEETINGS

Directors or trustees who cannot physically attend or vote at board meetings can participate and
vote through remote communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable opportunities to participate.
Directors or trustees cannot attend or vote by proxy at board meetings. A director or trustee
who has a potential interest in any related party transaction must recuse from voting on the
approval of the related party transaction without prejudice to compliance with the requirements of
Section 31 of this Code.

ii. WHO PRESIDES

The chairman or, in his absence, the president shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws provide otherwise (Sec. 53,
RCCP).

iii. QUORUM

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Unless the articles of incorporation or the by-laws provides for a greater majority, a majority of
the directors or trustees as stated in the articles of incorporation shall constitute a quorum
to transact corporate business, and every decision reached by at least a majority of the directors or
trustees constituting a quorum, except for the election of officers which shall require the vote of
a majority of all the members of the board, shall be valid as a corporate act (Sec. 53, RCCP).

iv. RULE ON ABSTENTION

Effect of Abstention
No inference can be drawn in a vote of abstention. When a director or trustee abstains, it cannot
be said that he intended to acquiesce in the action taken by those who voted affirmatively. Neither,
for that matter, can such inference be drawn from the abstention that he was abstaining because he
was not then ready to make a decision (Lopez v. Ercita, G.R. No. L-32991, June 29, 1972).
Instances when a director is required to abstain in voting
Whenever a director believes he/she has a conflict of interest, the director should abstain from
voting on the issue and make sure his/her abstention is noted in the minutes (Robert's Rules, 10th
ed.).
The other reason a director might abstain is that he/she believes there was insufficient
information for making a decision. Otherwise, directors should cast votes on all issues put before
them. Failure to do so could be deemed a breach of their fiduciary duties.

Example where a director needs to abstain

To avoid “Insider Trading”, Insiders are obligated to abstain from trading the shares of his
corporation. This duty to abstain is based on two factors:
1. The existence of a relationship giving access, directly or indirectly, to information intended
to be available only for a corporate purpose and not for the personal benefit of anyone; and
2. The inherent unfairness involved when a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing (SEC v. Interport Resources
Corporation, G.R. No. 135808, October 6, 2008).

10. CAPITAL AFFAIRS

a. CERTIFICATE OF STOCK

i. NATURE OF THE CERTIFICATE

It is the written evidence of the shares of stock but it is not the share itself.
a. The certificate is merely a prima facie evidence of ownership and evidence can be
presented to determine the real owner of the shares.
b. Delivery is also essential for its issuance.

It is not essential to the existence of a share of stock or the creation of the relation of the shareholder
with the corporation (Tan v. SEC, G.R. No. 95696, March 3, 1992).

ii. UNCERTIFICATED SHARES

An uncertificated share is a subscription duly recorded in the corporate books but has no
corresponding certificate of stock yet issued.

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Stockholder may alienate his shares even if there is no certificate of stock issued by the
corporation
The absence of a certificate of stock does not preclude the stock holder from alienating or
transferring his shares of stock.

Transfers of fully paid subscription but the corporations has not yet issued a certificate of
stock
In case of a fully paid subscription, without the corporation having issued a certificate of stock,
the transfer may be effected by the subscriber or stockholder executing a contract of sale or deed
of assignment covering the number of shares sold and submitting said contract or deed to the
corporate secretary for recording.
Transfers of subscription not fully paid
In case of subscription not fully paid, the corporation may record such transfer, provided that the
transfer is approved by the board of directors and the transferee executes a verified assumption
of obligation to pay the unpaid balance of the subscription.

iii. NEGOTIABILITY; REQUIREMENTS FOR VALID TRANSFER OF STOCKS

Stock certificate is not negotiable

Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be
transferred by delivery, it is well-settled that the instrument is NON-NEGOTIABLE, because the
holder thereof takes it without prejudice to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppels (Republic v. Sandiganbayan,G.R. Nos.
107789 & 147214, April 30, 2003).

Certificates of stock may be issued only to registered owners of stock. The issuance of “bearer”
stock certificates is not allowed under the law (SEC Opinion No. 05-02, Jan. 31, 2005).

Requirements for valid transfer of stocks

1. If represented by a certificate, the following must be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties and to the corporation, the transfer must be recorded in
the books of the corporation (Rural Bank of Lipa v. CA, G.R. No. 124535, Sepember
28, 2001).
2. If NOT represented by a certificate (such as when the certificate has not yet been issued or
where for some reason is not in the possession of the stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the corporation. (Sundiang Sr. & Aquino,
2009).

iv. ISSUANCE

Issuance of certificate of stock

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It may only be issued until the full amount of the stockholder’s subscription together with the
interest and expenses (in case of delinquent shares) if due has been paid (Sec. 63, RCCP).

Requisites for the issuance of the certificate of stock

1. The certificate must be signed by the president or vice-president, countersigned by the
corporate secretary or assistant secretary (Bitong v. CA, G.R. No. 123553, July 13, 1998).
NOTE: Unless it complies with the foregoing, it is not deemed issued.

2. The certificate must be sealed with the seal of the corporation.

3. The certificate shall be issued in accordance with the by-laws.
4. The certificate must be delivered.
5. The par value as to par value shares, or full subscription as to no par value shares must be
fully paid, the basis of which is the doctrine of indivisibility of subscription.
6. The original certificate must be surrendered where the person requesting the issuance of a
certificate is a transferee from the stockholder (Sec. 64, RCCP).

(a) FULL PAYMENT

Rule: Sec 63 prohibits the issuance of certificate of stock to a subscriber who has not paid “the full
amount of his subscription together with interest and expenses (in case of delinquent shares), if
any is due.

NOTE: The provision enunciates the doctrine that a subscription is one, entire and indivisible
contract, and therefore, it cannot be divided into portions so that the stockholder shall not be
entitled to the certificate of stock until he has paid the full amount of his subscription together with
interest and expenses, if any is due.

(b) PAYMENT PRO-RATA

In the case of Baltazar v. Lingayen Gulf Electric Co., 14 SCRA 522 (1965), the Court ruled that,
unless prohibited by the by-laws, certificates of stock may be issued for less than the number of
shares subscribed provided the par value of each of the stocks represented by said certificate has
been fully paid.

NOTE: This provides a contrary view that a subscription is one, entire and indivisible contract.

In other words, in the absence of provisions in the by-laws to the contrary, a corporation may apply
payments made by subscribers on account of their subscriptions, either as:
1. full payment for the corresponding number of shares, the par value of which is covered by
such payment, or
2. as payment pro rata to each and all the entire number of shares subscribed for. This rule
applies to all kinds and classes of stock corporations. The two alternatives cannot be availed
of at the same time (SEC Opinion, Feb. 7, 1968).

v. STOCK AND TRANSFER BOOK

(a) CONTENTS
1. All stocks in the name of the stockholders alphabetically arranged;

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 2. Amount paid and unpaid on all stocks and the date of payment of any installment;
3. Alienation, sale, or transfer of stocks;
4. Other entries as the by-laws may prescribe (Sundiang Sr. & Aquino, 2009).

(b) WHO MAY MAKE VALID ENTRIES

The corporate secretary is the officer who is duly authorized to make entries on the stock and
transfer book. Hence, entries made by the Chairman or President are invalid (Torres, Jr. v. CA,
G.R. No. 120138, Sept. 5, 1997).

(c) STOCK TRANSFER AGENT

A stock transfer agent or one engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed to operate in the Philippines upon
securing a license from the Commission and the payment of a fee to be fixed by the Commission,
which shall be renewable annually:

Provided, That a stock corporation is not precluded from performing or making transfers of its
own stocks, in which case all the rules and regulations imposed on stock transfer agents, except
the payment of a license fee herein provided, shall be applicable:

Provided, further, That the Commission may require stock corporations which transfer and/or trade
stocks in secondary markets to have an independent transfer agent (Sec. 64, RCCP).

vi. LOST OR DESTROYED CERTIFICATES (Sec. 72, RCCP)

SEC. 72. Lost or Destroyed Certificates. – The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu of those which have been lost, stolen or
destroyed:

1. The registered owner of a certificate of stock in a corporation or such person’s legal

representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen, or destroyed, the
number of shares represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as may be deemed necessary;

2. After verifying the affidavit and other information and evidence with the books of the
corporation, the corporation shall publish a notice in a newspaper of general circulation in
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. The notice shall state the name of the corporation, the name of the
registered owner, the serial number of the certificate, the number of shares represented by
such certificate, and shall state that after the expiration of 1 year from the date of the last
publication, if no contest has been presented to the corporation regarding the certificate of
stock, the right to make such contest shall be barred and the corporation shall cancel the
lost, destroyed or stolen certificate of stock in its books. In lieu thereof, the corporation
shall issue a new certificate of stock, unless the registered owner files a bond or other

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 security as may be required, effective for a period 1 year, for such amount and in such form
and with such sureties as may be satisfactory to the board of directors, in which case a new
certificate may be issued even before the expiration of the 1 year period provided herein.

If a contest has been presented to the corporation or if an action is pending in court

regarding the ownership of the certificate of stock which has been lost, stolen, or destroyed,
the issuance of the new certificate of stock in lieu thereof shall be suspended until the court
renders a final decision regarding the ownership of the certificate of stock which has been
lost, stolen or destroyed.

3. Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen, or destroyed pursuant to the procedure
above-described.

vii. SITUS OF THE SHARES OF STOCK

GR: The situs of shares of stock is the country where the corporation is domiciled (Wells Fargo
Bank v. CIR, G.R. No. L-46720, June 28, 1940).

The residence of the corporation is the place where the principal office of the corporation is
located as stated in its AOI even though the corporation has closed its office therein and relocated
to another place (Hyatt Elevators and Escalators Corp. v. Goldstar Elevator Phils., Inc., supra.).

XPN: In property taxation –the situs of intangible property, such as shares of stocks, is at the
domicile or residence of the owner.

XPN to the XPN:

1. When a nonresident alien has shares of stock in a domestic corporation, then the situs will be
in the Philippines; and
2. For purposes of the estate tax, the gross estate of a resident decedent, whether citizen or alien,
or a citizen decedent, whether resident or nonresident, includes his intangible personal property
wherever situated (De Leon, 2010).

b. WATERED STOCKS (Sec. 64, RCCP)

i. DEFINITION
Watered stocks are those issued not in exchange for its equivalent either in cash, property, share,
stock dividends, or services; thus, the issuance of stocks is prohibited.

ii. LIABILITY OF DIRECTORS FOR WATERED STOCKS

A director or officer of a corporation shall be liable to the corporation or its creditors, solidarily
with the stockholders concerned for the difference between the value received at the time of
issuance of the stock and the par or issued value of the same, if he/she:
1. Consents to the issuance of stocks for a consideration less than its par or issued value-
including those issued without consideration (bonus share) or issued as fully paid when

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 the corporation has received a lesser sum of money than its par or issued value (discounted
share);
2. Consents to the issuance of stock for a consideration other than cash (e.g., property or
service), values in excess of its fair value; or
3. Having knowledge of the insufficient consideration, does not file a written objection with
the corporate secretary (Sec. 64, RCCP).

iii. TRUST FUND DOCTRINE FOR LIABILITY FOR WATERED STOCKS

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 latter’s
unpaid subscription.

c. PAYMENT OF BALANCE OF SUBSCRIPTION (Sec. 66, RCCP)

Subject to the provisions of the subscription contract, the board of directors may, at any time,
declare due and payable to the corporation unpaid subscriptions and may collect the same or such
percentage thereof, in either case, with accrued interest, if any, as it may deem necessary (Sec. 66,
RCCP).

i. CALL BY BOARD OF DIRECTORS

Payment of unpaid subscription or any percentage thereof, together with any interest accrued shall
be made on the date specified in the subscription contract or on the date stated in the call made
by the board. Failure to pay on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance, unless a different interest
rate is provided in the subscription contract. The interest shall be computed from the date specified,
until full payment of the subscription. If no payment is made within 30 days from the said date, all
stocks covered by the subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders otherwise (Sec. 66, RCCP).

ii. NOTICE REQUIREMENT

The notice of the call must be served on the stockholders concerned in the manner prescribed in
the call, which may either be by registered mail and/or personal delivery and publication.

Notice of call is necessary to bind the stockholders (Ibid., citing Baltazar v. Lingayen Gulf Electric
Power, G.R. No. L-16236, June 30, 1965).

The stockholders are given notice of the board resolution by the corporate secretary, either
personally or by registered mail.

d. SALE OF DELINQUENT SHARES (Sec. 67, RCCP)

i. EFFECT OF DELINQUENCY (Sec. 70, RCCP)

1. Deprives the stockholder the right to be voted for, to vote, or to representation at any
stockholder’s meeting.
2. Delinquent stockholder shall not be entitled to any of the rights of a stockholder; his rights
are suspended except that he shall still be entitled to dividends subject to the provisions of

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 Sec. 42 (any cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholders until their unpaid subscription is fully paid).
3. Delinquent stocks shall be subject to delinquency sale
NOTE: If the delinquent stockholder is a director, he shall continue to be a director but he
cannot run for re-election.

ii. CALL BY RESOLUTION OF THE BOARD OF DIRECTORS

Stocks become delinquent when the unpaid subscription and accrued interests thereon are not
paid within 30 days from their due date as specified in the subscription contract or in the call by
the board of directors.

The delinquency is automatic after said 30 day period and does not need a declaration by the board
making the stock delinquent.

iii. NOTICE OF SALE

Served on the subscribers either personally or registered mail and publication in a newspaper of
general circulation in the province or the city where principal office I located once a week for 2
consecutive weeks.

Notice of sale shall state the amount due on each subscription plus the accrued interest, and the
date, time, and place of such sale which shall not be less than 30 days nor more than 60 days from
the date the stocks became delinquent. (Sec. 67, RCCP)

iv. AUCTION SALE

Such number of shares as may be necessary to pay the amount due on subscription, plus interests,
and other amounts due, will be sold at public auction.

The winner- the highest bidder is the person offering to pay the full amount of the balance on the
subscription with accrued interest, costs of advertisements, and expenses of sale for the smallest
number of shares or fraction of a share (Sec. 66, RCCP).

e. ALINENATION OF SHARES (Sec. 62, RCCP)

SEC. 62. Certificate of Stock and Transfer of Shares. –

The capital stock of corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with
the bylaws.
Shares of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation showing
the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates, and the number of shares transferred. The Commission may
require corporations whose securities are traded in trading markets and which can

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 reasonably demonstrate their capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the rules of the Commission.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

i. ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES

Requisites for a restriction to be valid

1. Restrictions are provided in the articles of incorporation;
2. It must be printed at the back of the certificate of stock; and
3. Must not be more onerous than the right of first refusal.

ii. SALE OF PARTIALLY PAID SHARES

iv. SALE OF ALL SHARES NOT FULLY PAID

The incomplete payment of the subscription does not preclude the subscriber from alienating his
shares of stock. However, the transfer shall be valid only between the parties. The corporation has
the right to refuse from recording the sale in its books.

A transferee of the partially paid shares cannot compel the corporation to record the transfer
of shares in its books, even though he has no knowledge that they are not fully paid
Shares of stock against which the corporation holds any unpaid claim shall not be transferable in
the books of the corporation. Hence, a transferee of the partially paid shares cannot compel the
corporation to record the transfer of shares in its books, even though he has no knowledge that
they are not fully paid (Sec. 62, RCCP).

Liability of the transferee for the balance of the purchase price in case the stockholder on
record fails to pay the same
In case the stockholder on record fails to pay the pay the balance of the purchase price, he is still
liable for the balance of the purchase price. Unless the transfer of the shares is recorded, the
stockholder is still the owners of the shares as far as the corporation is concerned.

REASON: The subscriber is as much bound to pay his subscription as he would be to pay any
other debt (Nava v. Peers Marketing Corp., G.R. No. L-28120 November 25, 1976).

iii. SALE OF A PORTION OF SHARES NOT FULLY PAID

A stockholder who has not paid the full amount of his subscription cannot transfer a portion of
his subscription in view of the indivisible nature of the subscription contract.

v. SALE OF FULLY PAID SHARES

Sale of fully paid shares is allowed even without the consent of the corporation as long as the
requisites for the valid transfer of shares are complied.

vi. REQUISITE OF A VALID TRANSFER

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 1. If represented by a certificate, the following must be strictly complied with:
a. Indorsement by the owner and his agent;
b. Delivery of the certificate;
c. To be valid to third parties and to the corporation, the transfer must be recorded in
the books of the corporation (Rural Bank of Lipa v. CA, G.R. No. 124535,
September 28, 2001); and
d. No shares of stock against which the corporation holds any unpaid claim shall be
transferrable in the books of the corporation (Sec. 62, RCCP).

NOTE: Unpaid claim refers to claim arising from unpaid subscription, and not to
any indebtedness which a stockholder or subscriber may owe to the corporation
arising from any other transaction.

2. If NOT represented by a certificate (such as when the certificate has not yet been issued
or where for some reason is not in the possession of the stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the corporation.

vii. INVOLUNTARY DEALINGS

It refers to such writ, order, or process issued by a court of record affecting shares of stocks
which by law should be registered to be effective, and also to such instruments which are not the
willful acts of the registered owner and which may have been executed even without his knowledge
or against his consent.

Examples of involuntary dealings of a share

1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks

Involuntary dealings must be registered

It is the act of registration which creates a constructive notice to the whole world of such instrument
or court writ or process and is the operative act that conveys ownership (Aquino, 2007).

f. CORPORATE BOOKS AND RECORDS

i. RECORDS TO BE KEPT AT PRINCIPAL OFFICE (Sec. 73, RCCP).

A corporation is required to keep and preserve at its principal office corporate books/ documents/
information/ records such as, but not limited to, the following:
1. The Articles of Incorporation and By-laws of the corporation and all their amendments;
2. The current ownership structure and voting rights of the corporation, including lists
of stockholders or members, group structures, intra-group relations, ownership data, and
beneficial ownership;
3. The names and addresses of all the members of the board of directors or trustees and
the executive officers;
4. A record of all business transactions;

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 5. A record of the resolutions of the board of directors or trustees and of the stockholders
or members;
6. Copies of the latest reportorial requirements submitted to the Commission; and
7. The minutes of all meetings of stockholders or members, or of the board of directors or
trustees.

ii. RIGHT TO INSPECT CORPORATE RECORDS (Sec. 73, RCCP)

Corporate records, regardless of the form in which they are stored, shall be open to inspection by
any director, trustee, stockholder or member in person or by a representative and a written demand
may be made by said director/ trustee, stockholder/ member to secure copies or excerpts from the
records under the following conditions:

1. The right must be exercised at reasonable hours on business days;

2. The director, trustee, stockholder, or member has not improperly used any information he
secured through any previous examination;
3. Demand is made in good faith or for a legitimate purpose;
4. The inspecting or reproducing party must respect and is bound by confidentiality rule under
prevailing laws such as the Intellectual Property Code, Data Privacy Act, Securities
Regulation Code, and the Rules of Court.
5. The requesting party who is not a stockholder or member of record, or who is a competitor,
director, officer, controlling stockholder or otherwise represents the interest of a competitor
shall have no right to inspect or demand reproduction of corporate records.

NOTE: the right to inspect is available even if the corporation has already been dissolved
(its certificate of incorporation was revoked) and its assets are pending liquidation.

iii. EFFECT OF REFUSAL TO INSPECT CORPORATE RECORDS

1. Summary investigation- If the corporation denies or does not act on a demand for
inspection and/ or reproduction of corporate books or records, the aggrieved party may
report such denial or inaction to the SEC. Within 5 days from receipt of such report, the
SEC shall conduct a summary investigation and issue an order directing the inspection or
reproduction of the requested records;
2. Mandamus- it is a proper remedy if the stockholder is being improperly deprived of his
right to inspect;
3. Criminal action under Sec. 161 of the RCCP is also an available remedy.

NOTE: Any officer or agent of the corporation who shall refuse to allow the inspection and/or
reproduction of records in accordance with the provisions of this Code shall be liable to such
director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 161 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal:
Provided further, That it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation’s records and minutes has

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 improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or
for a legitimate purpose in making the demand to examine or reproduce corporate records,
or is a competitor, director, officer, controlling stockholder or otherwise represents the
interests of a competitor.

If the corporation denies or does not act on a demand for inspection and/or reproduction, the
aggrieved party may report such to the Commission. Within 5 days from receipt of such report,
the Commission shall conduct a summary investigation and issue an order directing the inspection
or reproduction of the requested records (Sec. 73, RCCP).

11. DISSOLUTION AND LIQUIDATION

Dissolution- Extinguishment of the franchise of a corporation and the termination of its corporate
existence.

a. MODES OF DISSOLUTION

i. VOLUNTARY DISSOLUTION

(a) WHERE NO CREDITORS ARE AFFECTED (Sec. 134, RCCP)

1. A meeting must be held on the call of directors or trustees;
2. Notice of the meeting should be given to the stockholders by personal delivery or
registered mail at least 20 days prior to the meeting;
3. The notice of meeting should also be published once in a newspaper published in the
principal office or if there is no such newspaper, in a newspaper of general circulation in
the Philippines;
4. The resolution to dissolve must be approved by the MAJORITY of the directors/ trustees
and approved by the stockholders representing at least MAJORITY of the outstanding
capital stock or MAJORITY of members;
5. A verified REQUEST for dissolution shall be filed with the SEC and the latter will issue
the certificate of dissolution within 15 days from receipt of the verified request.

(b) WHERE CREDITORS ARE AFFECTED (Sec. 135, RCCP)

1. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of members in a meeting called for that purpose;
2. It is necessary to file a verified PETITION with the SEC signed by majority of directors
or trustees or other officers having the management of its affairs, verified by the President
or Secretary or Director. Claims and demands must be stated in the petition;
3. The SEC shall issue an order fixing the deadline for filing objections, which shall be
no less than 30 days nor more than 60 days after the entry of the order;
4. A copy of the order shall be published at least once a week for 3 consecutive weeks in 3
public places in the city or municipality;
5. After the expiration of the time to file objections, a hearing shall be conducted upon prior
5-day notice to hear the objections;

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 6. Judgement shall be rendered dissolving the corporation and directing the disposition of
assets; the judgment may include appointment of a receiver;
7. The dissolution if effective upon issuance by the SEC of the certificate of dissolution.

(c) SHORTENING OF CORPORATE TERM (Sec. 136, RCCP)

A voluntary dissolution may be effected by amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Commission in accordance with this Code.

Upon the expiration of the shortened term, as stated in the approved amended articles of
incorporation, the corporation shall be deemed dissolved without any further proceedings, subject
to the provisions of this Code on liquidation.

In the case of expiration of corporate term, dissolution shall automatically take effect on the
day following the last day of the corporate term stated in the articles of incorporation, without
the need for the issuance by the Commission of a certificate of dissolution.

(d) WITHDRAWAL OF DISSOLUTION (Sec. 137, RCCP)

Withdrawal of Request and Petition for Dissolution
A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number of
incorporators, directors, trustees, shareholders, or members necessary to request for dissolution as
set forth in the foregoing sections (majority). The withdrawal shall be submitted no later than 15
days from receipt by the Commission of the request for dissolution. Upon receipt of a withdrawal
of request for dissolution, the Commission shall withhold action on the request for dissolution and
shall, after investigation:
1. make a pronouncement that the request for dissolution is deemed withdrawn;
2. direct a joint meeting of the board of directors or trustees and the stockholders or members
for the purpose of ascertaining whether to proceed with dissolution; or
3. issue such other orders as it may deem appropriate.

A withdrawal of the petition for dissolution shall be in the form of a motion and similar in
substance to a withdrawal of request for dissolution but shall be verified and filed prior to
publication of the order setting the deadline for filing objections to the petition.

ii. INVOLUNTARY DISSOLUTION (Sec. 138, RCCP)

By filing a verified COMPLAINT with the SEC based on any ground provided by law or rules,
including:
1. Non-use of corporate charter as provided under Sec. 21 of the Code;
2. Continuous inoperation of a corporation as provided under Sec. 21 of this Code;
3. Upon receipt of a lawful court order dissolving the corporation;
4. Upon finding by final judgment that the corporation procured its incorporation through
fraud;
5. Upon finding by final judgment that the corporation:

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 a. Was created for the purpose of committing, concealing or aiding the commission
of securities violations, smuggling, tax evasion, money laundering, or graft and
corrupt practices;
b. Committed or aided in the commission of securities violations, smuggling, tax
evasion, money laundering, or graft and corrupt practices, and its stockholders
knew of the same; and
c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices
or other fraudulent or illegal acts by its directors, trustees, officers, or employees.

NOTE: If the corporation is ordered dissolved by final judgment pursuant to the

grounds set forth in subparagraph (5) hereof, its assets, after payment of its
liabilities, shall, upon petition of the SEC with the appropriate court, be forfeited in
favor of the national government. Such forfeiture shall be without prejudice to the
right of innocent stockholders and employees for services rendered, and to the
application of other penalty or sanction under the RCCP or other laws.

b. METHOD OF LIQUIDATION

Liquidation- 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 (Sundiang Sr. & Aquino, 2014).

i. BY THE CORPORATION ITSELF/ By the Board of Directors

Except for banks (RA No. 7653- “New Central Bank Act”) and (Republic Act No. 3591-
“Philippine Deposit Insurance Corporation Charter”).

Every corporation (1) whose charter expires pursuant to its articles of incorporation, (2) is annulled
by forfeiture, or (3) whose corporate existence is terminated in any other manner:
1. Shall nevertheless remain as a body corporate for 3 years after the effective date of
dissolution;
2. For the purpose of
a. Prosecuting and defending suits by or against it;
b. Enabling it to settle and close its affairs;
c. Dispose of and convey its property, and;
d. Distribute its assets.
3. But not for the purpose of continuing the business for which it was established (Sec. 139
(par. 1), RCCP).

ii. COVEYANCE TO A TRUSTEE WITHIN A THREE-YEAR PERIOD

At any time during said three (3) years, the corporation is authorized and empowered to convey
all of its property to trustees for the benefit of stockholders, members, creditors and other persons
in interest. After any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which the corporation had
in the property terminates, the legal interest vests in the trustees, and the beneficial interest in
the stockholders, members, creditors or other persons in-interest.

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iii. BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER
In the case of a dissolution order where creditors are affected, the SEC may appoint a receiver to
take charge of the liquidation of the corporation (Sec. 135, RCCP).

NOTE: Thus, the appointment of receiver is addressed to the sound discretion of the court or the
SEC.

Appointment of receiver for a going corporation

The appointment of a receiver for a going corporation is a last resort remedy, and should not be
employed when another remedy is available. Relief by receivership is an extraordinary remedy
and is never exercised if there is an adequate remedy at law or if the harm can be prevented by an
injunction or a restraining order. Bad judgment by directors, or even unauthorized use and
misapplication of the company’s funds, will not justify the appointment of a receiver for the
corporation if appropriate relief can otherwise be had (Rev. Ao-As v. CA, G.R. No. 128464, June
20, 2006).

Even without dissolution, the court has authority to appoint a receiver for a corporation to protect
and preserve its properties for the use and benefit of its creditors and others who may have similar
interests in the property as where there is already a final and executory judgment against the
corporation, which is in a precarious financial condition (Central Sawmills, Inc. v Alto Surety and
Ins. Co., 27 SCRA 247 (1969)).

Where corporate directors are guilty of breach of trust, minority stockholders may ask for
receivership [Chase v. CFI, 18 SCRA 602 (1966)].

The corporation, through its president cannot condone penalties and charges after it had
been placed under receivership
The appointment of a receiver operates to suspend the authority of a corporation and of its directors
and officers over its property and effects, such authority being reposed in the receiver (Yam v. CA,
G.R. No. 104726, February 11, 1999).

Corporate Rehabilitation
It refers to the restoration of the debtor to a condition of successful operation and solvency, if it is
shown that its continuance of operation is economically feasible and its creditors can recover by
way of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated (Sec. 4(gg), FRIA).

Nature of Rehabilitation proceedings

Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in ordinary court proceedings.

The jurisdiction of the rehabilitation court is over claims against the debtor that is under
rehabilitation, not over claims by the debtor against its own debtors or against third parties. The
corporation under rehabilitation must file a separate action against its debtors/insurers to recover
whatever claim it may have against them.

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Stay order and appointment of rehabilitation receiver
Under Section 6(c) of PD 902-A, receivers may be appointed whenever:
1. Necessary in order to preserve the rights of the parties-litigants; and/or
2. Protect the interest of the investing public and creditors.

iv. LIQUIDATION AFTER THREE YEARS

1. If full liquidation can only be effected after the three-year period and there is no trustee,
the directors may be permitted to complete the liquidation by continuing as trustees by
legal implication.
2. Cases that were filed while the corporation was still in existence and remain pending when
the three-year liquidation period expired may be continued by the trustees or directors until
rendition of the final judgment, even if such judgment is rendered beyond the three-year
period allowed under Sec. 139.
3. The trustee or receiver can maintain an action for the corporation even after the three-year
period. This is supported by the 2nd paragraph of Sec. 139 of the RCCP which states that
there is transfer of interest to the trustee (which rule applies to receivers).

NOTE: Except as otherwise provided for in Sections 93 and 94 of this Code, upon the winding up
of corporate affairs, any asset distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated in favor of the national government.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities (Sec. 139 (par. 1), RCCP).

12. OTHER CORPORATIONS

a. CLOSE CORPORATION

Requirements for Close Corporations (Sec. 95, RCCP)

1. All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding 20;
2. All the issued stock of all classes shall be subject to 1 or more specified restrictions on
transfer permitted by Title XII of the RCCP, which restriction/s on transfer of shares must
be specified in the Articles of Incorporation, By-Laws, and the certificate of stock to be
binding on third persons (Sec. 97, RCCP); and
3. The corporation shall not list in any stock exchange or make any public offering of its
stocks of any class.

NOTE:
1. A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock
or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of the RCCP (Sec. 95, RCCP);
2. Restrictions on the transfer of shares must not be more onerous than granting the existing
shareholders or the corporation the option to purchase the shares of the transferring
shareholder under reasonable terms, conditions, and period stated (Sec. 97, RCCP);

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 3. The corporation is not a close corporation even if the shares belong to less than 20 if not
all the requisites are present.

i. CHARACTERISTICS OF A CLOSE CORPORATION

The stockholders themselves can directly manage the corporation and perform the functions of
directors without the need of election as may be provided in the Articles of incorporation (Sec. 96,
RCCP).
1. When they manage the business of the corporation, stockholders are liable as directors;
2. There is no need to call a meeting to elect directors;
3. The stockholders are liable for tort.

ii. VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES (Sec. 97, RCCP)

Restrictions on the right to transfer shares must appear in the articles of incorporation, in the by-
laws, as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser in good faith. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions, or period stated. If, upon the expiration of said period, the
existing stockholders or the corporation fails to exercise the option to purchase, the transferring
stockholder may sell their shares to any third person.

iii. ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING

CONDITIONS (Sec. 97, RCCP)

1. If a stock of a close corporation is issued or transferred to any person who is not

eligible to be a holder thereof under any provision of the articles of incorporation, and if
the certificate for such stock conspicuously shows the qualifications of the persons
entitled to be holders of record thereof, such person is conclusively presumed to have
notice of the fact of the ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of persons, not
exceeding 20, who are entitled to be stockholders of record, and if the certificate for such
stock conspicuously states such number, and the issuance or transfer of stock to any person
would cause the stock to be held by more than such number of persons, the person to whom
such stock is issued or transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of a close corporation conspicuously shows a restriction on transfer
of the corporation’s stock and the transferee acquires the stock in violation of such
restriction, the transferee is conclusively presumed to have notice of the fact that the stock
was acquired in violation of the restriction.
4. Whenever a person to whom stock of a close corporation has been issued or
transferred has or is conclusively presumed under this section to have notice of:
a. the person’s ineligibility to be a stockholder of the corporation; or
b. that the transfer of stock would cause the stock of the corporation to be held by
more than the number of persons permitted under its articles of incorporation; or
c. that the transfer violates a restriction on transfer of stock, and the corporation may,
at its option, refuse to register the transfer in the name of the transferee.

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 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though
contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the
close corporation, or if the close corporation has amended its articles of incorporation in
accordance with this Title.
6. The term “transfer”, as used in this section, is not limited to a transfer for value.
7. The provisions of this section shall not impair any right which the transferee may have to
either rescind the transfer or recover the stock under any express or implied warranty.

iv. WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD (Sec. 100,

RCCP)
Unless the by-laws provide otherwise, any action taken by the directors of a close corporation
without a meeting called properly and with due notice shall nevertheless be deemed valid if:
1. Before or after such action is taken, a written consent thereto is signed by all the directors;
or
2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection in writing; or
3. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of
them makes a prompt objection in writing.

An action within the corporate powers taken at a meeting held without proper call or notice, is
deemed ratified by a director who failed to attend, unless after having knowledge thereof, the
director promptly files his written objection with the secretary of the corporation.

v. PRE-EMPTIVE RIGHT
Shall extend to all stockholders to be issued, including re-issuance of treasury shares, whether for
money or property or personal services, or in payment or corporate debts, unless the Articles of
Incorporation provide otherwise (Sec. 101, RCCP).

Pre-emptive rights cover even those that are excluded in Sec. 39 of the Corporation Code:
1. Issued in compliance with laws requiring stock offering or minimum stock ownership;
2. In exchange of property needed for corporate purposes upon 2/3 vote of outstanding
capital.

vi. AMENDMENT OF ARTICLES OF INCORPORATION

Any amendment to the articles of incorporation which seeks to delete or remove any provision
required by this Title or to reduce a quorum or voting requirement stated in said articles of
incorporation shall require the affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose (Sec. 102, RCCP).

vii. DEADLOCKS
In case of irreconcilable disputes among the directors or shareholders, the SEC may be asked to
intervene and the SEC may issue any of the following orders:

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 1. Canceling or altering any provision contained in the articles of incorporation, by-laws, or
any stockholder’s agreement;
2. Canceling, altering, or enjoining any resolution or act of the corporation or its board of
directors, stockholders, or officers;
3. Directing or prohibiting any act of the corporation or its board of directors, stockholders,
officers, or other persons party to the action;
4. Requiring the purchase of their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books, or
by the other stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; or
7. Granting such other relief as the circumstances may warrant (Sec. 104, RCCP).

b. NON-STOCK CORPORATIONS

i. DEFINITION (Sec. 86, RCCP)

For purposes of this Code and subject to its provisions on dissolution, a nonstock corporation is
one where no part of its income is distributable as dividends to its members, trustees, or
officers: Provided, That any profit which a non-stock corporation may obtain incidental to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the provisions of this Title.

The provisions governing stock corporations, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title.

ii. PURPOSES (Sec. 87, RCCP)

Non-stock corporations may be formed or organized for
1. Charitable;
2. Religious;
3. Educational;
4. Professional;
5. Cultural;
6. Fraternal;
7. Literary;
8. Scientific;
9. Social;
10. Civic service; or
11. similar purposes, like trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing particular classes of non-
stock corporations.

iii. TREATMENT OF PROFITS

A non-stock corporation may not generally engage in profit making business. It may, however,
invest its corporate funds in order to earn additional income for paying its operating expenses and
meeting benefit claims. Any excess profit it obtains as an incident to its operations can only be
used, whenever necessary or proper, for the furtherance of the purpose for which it was organized,

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Non-stock corporation may earn profit
Mere intangible or pecuniary benefit to the members does not change the nature of the corporation.
The fact that a non‐stock corporation earns a profit does not make it a profit‐making corporation
where such profit or income is used for purposes set forth in its articles of incorporation and is not
distributed to its incorporators, members, or officers.

iv. PLAN AND DISTRIBUTION OF ASSETS UPON DISSOLUTION

Plan of Distribution of Assets (Sec. 94, RCCP)

A plan providing for the distribution of assets, consistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of dissolution in the following manner:
1. The board of trustees shall, by majority vote, adopt a resolution recommending a plan of
distribution and directing the submission thereof to a vote at a regular or special meeting
of members having voting rights;
2. Each member entitled to vote shall be given a written notice setting forth the proposed
plan of distribution or a summary thereof and the date, time ,and place of such meeting
within the time and in the manner provided in this Code for the giving of notice of
meetings; and
3. Such plan of distribution shall be adopted upon approval of at least 2/3 of the members
having voting rights present or represented by proxy at such meeting.

Rules of Distribution (Sec. 93, RCCP)

The assets of a nonstock corporation undergoing the process of dissolution for reasons other than
those set forth in Sec. 139 of this Code, shall be distributed as follows:
1. All its creditors shall be paid;
2. Assets held subject to return on dissolution shall be delivered back to their givers;
3. Assets held for charitable, religious, benevolent, educational or similar purposes, without
a condition for their return on dissolution, shall be conveyed to one or more organizations
engaged in similar activities as the dissolved corporation; and
4. All other assets shall be distributed to members, as provided for in the Articles of
Incorporation or By-Laws.

Non-Stock Corporation Stock Corporation

1. Components Members Shareholders
2. Board Members Trustees Directors
3. As to existence of shares There is no capital stock Dividends may be declared
divided into shares
4. Dividends No dividends are declared Dividends may be declared
5. Purpose The primary purpose is non- The purpose is primary
profit; it is limited to those business
specified under Sec. 87
6. Performance of business It can conduct business but The business purpose is the
only incidental to the primary primary purpose
purpose

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 7. Voting Rights The voting rights can be 1 share- 1 vote
modified, limited, or
broadened
8. Transferability of interest Membership is generally non- Shares are transferable
transferable (Sec. 89, RCCP)
9. Termination Membership can be
Ownership of shareholder
terminated (Sec. 90, RCCP)
cannot be terminated until the
transfer of the shares or
liquidation
10. Effect of Death Death of a member terminates Shares can be acquired
the membership. Generally, through succession
membership is not transferred
11. Dues Payment of dues can be No dues are paid
required
12. Number of Board There can be more then 15 Not more than 15 members/
Members members/ trustees directors
13. Terms of Board Members The term may be not more Term is 1 year
than 3 years.
NOTE: There is no more
staggering of term under the
RCCP
14. Voting Cumulative voting not Cumulative voting is
allowed unless provided for in expressly allowed
the Articles or By-laws;
Section 23 on cumulative
voting is limited to stock
corporations.
15. Liquidation Generally, the members will Shareholders will get their
not get a share in the assets share in the net assets known
unless provided for in the as liquidating dividends.
Articles of Incorporation and
the By-laws (Sec. 93, RCCP)

c. EDUCATIONAL CORPORATIONS
Incorporation
Educational corporations shall be governed by special laws and by the general provisions of this
Code (Sec. 105, RCCP).

Board of Trustees
Trustees of educational institutions organized as nonstock corporations shall not be less than 5 nor
more than 15: Provided, That the number of trustees shall be in multiples of 5.

Unless otherwise provided in the articles of incorporation or by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of 1/5 of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold

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office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for 5 years. A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and authority of trustees shall be defined in the bylaws.

For institutions organized as stock corporations, the number and term of directors shall be
governed by the provisions on stock corporations.

d. RELIGIUOS CORPORATIONS

i. CORPORATION SOLE; NATIONALITY

Corporation Sole
Is one that is formed for the purpose of administering and managing as trustee, the affairs,
properties, and temporalities of any religious denomination, sect, or church by a chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect or
church (Sec. 108, RCCP)

Nationality
A corporation sole does not have any nationality but for the purposes of applying or nationalization
laws, nationality is determined not by the nationality of its head, but by the nationality of the
members constituting the sect in the Philippines. Thus, the Roman Catholic Church can acquire
land in the Philippines even if it is headed by the Pope.

The opinion of the SEC is that for registered corporation sole, it can acquire land if its members
constitute at least 60% Filipinos (SEC Opinion, August 8, 1994).

ii. RELIGIUOS SOCIETIES

Non-stock corporation formed by a religious society, group, diocese, synod, or district of any
religious denomination, sect, or church after getting the approval of 2/3 of its members (Sec. 114,
RCCP).

The By-Laws of the religious corporation may provide that the member may be expelled or
removed without prior notice. This is justified under Sec. 90 of the RCCP which states that
termination of membership may be in the manner provided in the Articles or By-Laws. If no notice
is provided in the By-Laws, the members are bound because they consented thereto when they
became members. Consequently, where any member of a religious corporation is expelled from
the membership for espousing doctrines and teachings contrary to that of his church, such action
is conclusive on the Court.

e. ONE PERSON CORPORATION

A One Person Corporation (OPC) is a corporation with a single stockholder (Sec. 116, RCCP).

Only a natural person, trust, or an estate may form an OPC (Sec. 116, RCCP).

i. EXCEPTED CORPORATIONS
The following cannot be a One Person Corporation:

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 1. Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered government-owned or controlled corporations;
2. A natural person licensed to exercise a profession may not organize as an OPC for the
purpose of exercising such profession except as otherwise provided under special laws.

A foreign individual may form an OPC subject to capital requirements and constitutional and
statutory restrictions on foreign investments.

ii. CAPITAL STOCK REQUIREMENT

Minimum Capital Stock Required for One Person Corporation
A One Person Corporation shall not be required to have a minimum authorized capital stock except
as otherwise provided by special law (Sec. 117, RCCP).

iii. ARTICLES OF INCORPORATION AND BY-LAWS (Sec. 118 and 119, RCCP)
An OPC is not required to submit and file corporate By-Laws (Sec. 119, RCCP), but is required to
file Articles of Incorporation in accordance with the requirements under Sec. 14. The Articles shall
likewise substantially contain the following:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the
trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of the
trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage, and limitation of the authority (The consent of the nominee shall be attached).

NOTE: The term of an OPC shall be perpetual. If the incorporator is a trust or estate,
the OPC’s term is co-terminus with the existence of the trust/estate.

iv. CORPORATE NAME

Display of Corporate Name
A One Person Corporation shall indicate the letters “OPC” either below or at the end of its
corporate name (Sec. 120, RCCP).

v. CORPORATE STRUCTURE AND OFFICERS

Director and President

The single stockholder shall be the sole director and president of the OPC (Sec. 121, RCCP).

Other Officers
Within 15 days from the issuance of its certificate of incorporation, the OPC shall appoint a
treasurer, corporate secretary, and other officers as it may deem necessary, and notify the SEC
thereof within 5 days from appointing (Sec. 122, RCCP).
1. The single stockholder may not be appointed as the corporate secretary (Sec. 122, RCCP).
2. A single stockholder who is likewise the self-appointed treasurer shall give a bond (2-year
term) to the SEC with undertaking in writing to faithfully administer the One Person
Corporation’s funds to be received as treasurer, and to disburse and invest the same
according to the Articles of Incorporation as approved by the SEC (Sec. 122, RCCP).

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Special Functions of the Corporate Secretary (Sec. 123, RCCP)
In addition to the functions designated by the OPC, the corporate secretary shall:
1. Be responsible for maintaining the minutes book and/ or records of the corporation;
2. Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than 5 days from such occurrence;
3. Notify the SEC of the death of the single stockholder within 5 days from such occurrence
and stating in such notice the names, residence address, and contact details of all known
legal heirs; and
4. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise
the legal heirs with regard to, among others, the election of a new director, amendment of
the Articles of Incorporation, and other ancillary and/ or consequential matters.

vi. NOMINEE (and Alternate Nominee)

The person designated by the single stockholder who shall, in the event of the single stockholder’s
death or incapacity, take the place of the single stockholder as director and shall manage the
corporation’s affairs (Sec. 124, RCCP). The Nominee must consent and such consent may be
withdrawn in writing any time before the death or incapacity of the single stockholder.

1. The term of the nominee is:

a. In case of temporary incapacity, he shall sit as director/ manage the OPC’s affair
until the stockholder, by self-determination, regains the capacity to assume such
duties;
b. In case of death or permanent incapacity- the nominee shall manage the OPC’s
affairs until the legal heirs of the single stockholder have been lawfully determined,
and the heirs have designated one of them or have agreed that the estate shall be the
single stockholder of the OPC (Sec. 117, RCCP);
2. The single stockholder may, at any time without need to amend the Articles of
Incorporation, change its nominee and alternate nominee by submitting to the SEC the
names of the new nominees and their corresponding written consent (Sec. 126, RCCP).

vii. MINUTES AND RECORDS

A One Person Corporation shall maintain a Minute Book, which shall contain all actions,
decisions, and resolutions taken by the One Person Corporation (Sec. 127, RCCP).

Records in Lieu of Meetings

When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in the Minutes Book of the OPC. The date of
recording in the Minute Book shall be deemed to be the date of the meeting for all purposes under
the RCCP (Sec. 128, RCCP).

viii. LIABILITIES
A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed. Where the single stockholder cannot prove that the property
of the One Person Corporation is independent of the stockholder’s personal property, the

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stockholder shall be jointly and severally liable for the debts and other liabilities of the One Person
Corporation. The principles of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations (Sec. 130, RCCP).

ix. CONVERSION OF CORPORATION TO ONE PERSON CORPORATION AND VICE-

VERSA

Conversion from an Ordinary Corporation to an OPC

When a single stockholder acquires all the stocks of an ordinary corporation, the latter may apply
for conversion into an OPC. The One Person Corporation converted from an ordinary stock
corporation shall succeed the latter and be legally responsible for all the latter’s outstanding
liabilities as of the date of conversion (Sec. 131, RCCP).

Conversion from an OPC to an Ordinary Stock Corporation

An OPC may be converted into an ordinary stock corporation after due notice to the SEC of such
fact and of the circumstances leading to the conversion, and after compliance with all other
requirements for stock corporations under the RCCP and applicable rules. Such notice shall be
filed with the SEC (Sec. 132, RCCP).

f. FOREIGN CORPORATION
Corporation formed, organized, or existing under any law other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or State. It
shall have the right to transact business in the Philippines after obtaining a license for that purpose
in accordance with this Code and a certificate of authority from the appropriate government agency
(Sec. 140, RCCP).
1. A foreign corporation is required to appoint a resident agent; failure to appoint a resident
agent if the original resident agent resigned is a ground for revocation of license (Sec. 145,
RCCP).
2. A foreign corporation can register a branch, a representative office, or regional
headquarters.

i. BASES OF AUTHORITY OVER FOREIGN CORPORATIONS

(a) CONSENT
Through compliance with the Philippines’ legal requirements to lawfully engage in business within
the country’s territory, the foreign corporation gives its actual consent to be subjected to the
jurisdiction of the Philippines.

By securing a license, which is a legal requirement to lawfully engage in business in the

Philippines, the foreign entity would be giving assurance that it will abide by the decisions of our
courts, even if adverse to it.

It shall have the right to transact business in the Philippines after obtaining a license for that
purpose in accordance with this Code and a certificate of authority from the appropriate
government agency (Sec. 140, RCCP).

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(b) DOCTRINE OF “DOING BUSINESS”

What constitutes “doing business” in the Philippines for foreign corporations?

Twin Characterization Tests
Under the Continuity Test, doing business implies a continuity of commercial dealings and
arrangements, and contemplates to some extent the performance of acts or works or the exercise
of some functions normally incident to and in progressive prosecution of, the purpose and object
of its organization.

Under the Substance Test, a foreign corporation is doing business in the country if it is continuing
the body or substance of the enterprise of business for which it was organized.

Does an “isolates transaction” by a foreign corporation qualify as “doing business” in the

Philippines?
It depends. If a single or isolated transaction is incidental and casual transaction, it cannot
qualify as “doing business” since it lacks the element of CONTINUITY. However, where a single
or isolated transaction is not merely incidental or casual but indicates the foreign corporation’s
intention to do other business in the Philippines, said single act or transaction constitutes “doing
business” in the Philippines.

Contract Test of “doing business” in the Philippines

1. An essential condition to be considered as “doing business” in the Philippines is the actual
performance of specific commercial acts within the territory of the Philippines for the
plain reason that the Philippines has no jurisdiction over commercial acts performed in
foreign territories. Example: Selling airline tickets by air carrier.
2. Activities within the Philippine jurisdiction that do not create earnings or profits to the
foreign corporation do not constitute doing business in the Philippines.
3. A foreign company that merely imports goods from a Philippine exporter without
opening an office or appointing an agent in the Philippines is not doing business in the
Philippines.
4. A foreign country that exports products to the Philippines, without doing any specific
commercial act, is not doing business in this country.
5. The appointment of a distributor in the Philippines is not sufficient to constitute “doing
business” unless it is under the full control of the foreign corporation. On the other hand,
if the distributor is an independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own account, the latter cannot be
considered to be doing business in the Philippines.

“Doing Business” Under the Foreign Investment Act of 1991 (Sec. 3(d))
1. Soliciting orders, service contracts, opening offices (whether branch or liaison officer);
2. Appointing representatives, distributors domiciled in the Philippines or who stay for a
period of periods totaling 180 days or more;
3. Participating in the management, supervision or control of any domestic business, form,
entity, or corporation in the Philippines; and
4. Any act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to some extent the performance of acts or works or the exercise of some

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 functions normally incident to and in progressive prosecution of, the purpose and object of
its organization.

Not doing business (Sec. 3(d)

1. Mere investment as shareholder and exercise of rights as investor;
2. Having a nominee director or officer to represent its interest in the corporation; and
3. Appointing a representative or distributor which transact business in its own name and for
its own account.

ii. NECESSITY OF A LICENSE TO DO BUSINESS

(a) REQUISUTES FOR ISSUANCE OF A LICENSE

1. In addition to a copy of its Articles of Incorporation and By-Laws, the foreign

corporation should also submit/ file with the SEC an application under oath specifying
such information, not in the Articles and By-Laws, as may be necessary to enable SEC to
determine if the corporation is entitled to a license, and to determine the fees payable (Sec.
142, RCCP). The foreign corporation shall also submit the following:
a. Name and address of the designated resident agent (who will receive summons and
notices for the corporation); a special power of attorney should also be submitted
for such purpose;
b. An agreement that if it ceases to transact business or if there is no more resident
agent, summons shall then be served through the SEC;
c. Oath of the president or any authorized officer that the corporation is solvent and
in sound financial condition; and
d. Oath of Reciprocity. Certificate under oath of the authorized official of the foreign
corporation’s country of incorporation that the laws of the said country allow
Filipino citizens and corporations to do business in said country and that the
applicant is an existing corporation in good standing therein.
2. Within 60 days from issuance of license, the corporation should deposit at least P500,000
(bonds, evidence of indebtedness, listed shares, financial instruments or a combination
thereof) for the benefit of present and future creditors subject to further deposit of
additional securities/ financial instruments every 6 months after each fiscal year of the
license (Sec. 143, RCCP).

(b) RESIDENT AGENT

Who May be a Resident Agent

A resident agent may be either (1) an individual residing in the Philippines or (2) a domestic
corporation lawfully transacting business in the Philippines: Provided, That an individual resident
agent must be of (1) good moral character and of (2) sound financial standing: Provided, further,
That in case of a domestic corporation who will act as a resident agent, it must likewise be of (1)
sound financial standing and must (2) show proof that it is in good standing as certified by the
Commission (Sec. 144, RCCP).

Resident Agent; Service of Process

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As a condition to the issuance of the license for a foreign corporation to transact business in the
Philippines, such corporation shall file with the Commission a written power of attorney
designating a person who must be a resident of the Philippines, on whom (1) summons and
other legal processes may be served in all actions or other legal proceedings against such
corporation, and (2) consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at its home office.
Such foreign corporation shall likewise execute and file with the Commission an agreement or
stipulation, executed by the proper authorities of said corporation, in form and substance as
follows:

“The (name of foreign corporation) hereby stipulates and agrees, in consideration of being granted
a license to transact business in the Philippines, that if the corporation shall cease to transact
business in the Philippines, or shall be without any resident agent in the Philippines on whom any
summons or other legal processes may be served, then service of any summons or other legal
process may be made upon the Commission in any action or proceeding arising out of any
business or transaction which occurred in the Philippines and such service shall have the same
force and effect as if made upon the duly authorized officers of the corporation at its home office.”

Whenever such service of summons or other process is made upon the Commission, the
Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or
other legal process to the corporation at its home or principal office. The sending of such copy by
the Commission shall be a necessary part of and shall complete such service. All expenses incurred
by the Commission for such service shall be paid in advance by the party at whose instance the
service is made.

It shall be the duty of the resident agent to immediately notify the Commission in writing of any
change in the resident agent’s address (Sec. 145, RCCP).

(c) AMENDMENT OF LICENSE

A foreign corporation authorized to transact business in the Philippines shall obtain an amended
license in the event it
1. changes its corporate name, or
2. desires to pursue other or additional purposes in the Philippines,

by submitting an application with the Commission, favorably endorsed by the appropriate

government agency in the proper cases (Sec. 148, RCCP).

iii. PERSONALITY TO SUE

GR: Only foreign corporations that have been issued a license to operate a business in the
Philippines have the personality to sue.

No foreign corporation transacting business in the Philippines without a license, or its

successors or assigns, shall be permitted to maintain or intervene in any action, suit, or
proceeding in any court or administrative agency of the Philippines; but such corporation may be
sued or proceeded against before Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws (Sec. 150, RCCP).

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XPN: Under the rule on estoppel, a party is estopped to challenge the personality of a foreign
corporation to sue, even if it has no license, after having acknowledged the same by entering to
a contract with it.
One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence.

iv. SUABILITY OF FOREIGN CORPORATION

A foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules,
and regulations applicable to domestic corporations of the same class, except those which provide
for the creation, formation, organization or dissolution of corporations or those which fix the
relations, liabilities, responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation (Sec. 146, RCCP).

Suit Against a Foreign Corporation

Any foreign corporation transacting business in the Philippines whether or not with a license, may
be sued or proceeded against before Philippine court or administrative tribunals on any valid cause
of action recognized under Philippine laws (Sec. 150, RCCP).

v. INSTANCES WHEN UNLICENSED FOREIGN CORPORTIONS MAY BE ALLOWED

TO SUE (ISOLATED TRANSACTIONS)

1. Isolated transactions.
2. A license subsequently granted enables the foreign corporation to sue on contracts executed
before the grant of the license.
3. In an action for infringement of patent or other intellectual property rights, provided that
the country of the foreign corporation is a party to the Paris Convention.
4. If the foreign corporation is co-plaintiff with a domestic corporation and the domestic
corporation is the one who instituted the suit in the Philippines; or
5. By reason of the doctrine of estoppel.

Isolated transaction
The Court has not construed the term “isolated transaction” to literally mean “one” or a mere single
act. The phrase “isolated transaction” has a definite and fixed meaning, i.e., a transaction or series
of transaction set apart from the common business of a foreign enterprise in the sense that
there is no intention to engage in progressive pursuit of the purpose and object of the business
organization (Lorenzo Shipping Corp., v. Chubb and Sons, G.R. No. 147724, June 8, 2004).

A foreign corporation which is not licensed to do business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is “transacting” or “doing business” in the country will a
license be necessary before it can institute suits. It may, however, bring suits on isolated business
transactions, which is not prohibited under Philippine law.

The obtainment of a license prescribed by the Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine courts by a foreign corporation. However, no

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foreign corporation shall be permitted to transact business in the Philippines, as this phrase is
understood under the Corporation Code, unless it shall have the license required by law, and until
it complies with the law in transacting business here, it shall not be permitted to maintain any suit
in local courts. As thus interpreted, any foreign corporation not doing business in the Philippines
may maintain an action in our courts upon any cause of action, provided that the subject matter
and the defendant are within the jurisdiction of the court. It is not the absence of the prescribed
license but "doing business" in the Philippines without such license which debars the foreign
corporation from access to our courts. In other words, although a foreign corporation is without
license to transact business in the Philippines, it does not follow that it has no capacity to bring an
action. Such license is not necessary if it is not engaged in business in the Philippines.

vi. GROUNDS FOR REVOCATION OF LICENSE

Without prejudice to other grounds provided under special laws, the license of a foreign
corporation to transact business in the Philippines may be revoked or suspended by the
Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or address, to submit to the Commission a
statement of such change as required by this Title;
4. Failure to submit to the Commission an authenticated copy of any amendment to its articles
of incorporation or bylaws or of any articles of merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in any application, report, affidavit or other
document submitted by such corporation pursuant to this Title;
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 subdivisions;
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 on 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. 151,
RCCP).

13. MERGER AND CONSOLIDATION

a. DEFINITION AND CONCEPT

Merger
When one corporation (surviving corporation) absorbs another one or more corporation/s into a
single corporation. One of the constituent corporations survives and remains in existence, while
the other corporations are dissolved (Sec. 75 and 79, RCCP).

Consolidation
One where a new corporation- consolidated corporation- is created, and the existence of all the
constituent corporations shall cease.

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1. Merger or consolidation does not become effective by mere agreement of the constituent
corporations. The approval of the SEC is required through the issuance of a certificate approving
the articles and plan of merger or consolidation. Upon issuance of the certificate, the merger or
consolidation becomes effective (Sec. 78, RCCP).

2. De facto Merger- this is not a merger contemplated under the Corporation Code. “A de facto
merger can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of stock of the acquiring corporation. The acquiring
corporation would end up with the business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets being the shares of stock of the
acquiring corporation.”

b. DISTINGUISH: CONSTITUENT AND CONSOLIDATED

CORPORATION

Constituent Corporation- One of the parties to a merger or consolidation.

Consolidated Corporation- A completely new corporation formed when two or more

corporations combined.

c. PLAN OF MERGER OR CONSOLIDATION (Sec. 75, RCCP)

(1) 2 or more corporations may merge into a single corporation which shall be one of the
constituent corporations or may (2) consolidate into a new single corporation which shall be
the consolidated corporation.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter referred to
as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, in case of consolidation, all the statements required to
be set forth in the articles of incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.

d. ARTICLES OF MERGER OR CONSOLIDATION (Sec. 77, RCCP)

After the approval by the stockholders or members, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be signed by the president or vice
president and certified by the secretary or assistant secretary of each corporation setting forth:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members;

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 3. As to each corporation, the number of shares or members voting for or against such plan,
respectively;
4. The carrying amounts and fair values of the assets and liabilities of the respective
companies as of the agreed cut-off date;
5. The method to be used in the merger or consolidation of accounts of the companies;
6. The provisional or pro forma values, as merged or consolidated, using the accounting
method; and
7. Such other information as may be prescribed by the Commission.

e. PROCEDURE
1. The Board of each corporation shall draw up a plan of merger or consolidation setting
forth:
1. names of the corporations involved;
2. terms and mode of carrying the same into effect;
3. statement of changes, if any, in the present Articles of Incorporation of the
surviving corporation and for consolidation, all statements to be in the Articles
of the new corporation to be formed; and
4. other provisions deemed necessary (Sec. 75, RCCP).

2. The plan for merger or consolidation shall be approved by majority vote of each of the
Board of the constituent corporations at separate meetings, and approved by 2/3 of the
outstanding capital stock or members for non-stock corporations (Sec. 76, RCCP).

3. Any amendment to the plan must be approved by the majority vote of the Board of the
constituent corporations and affirmative vote of 2/3 of the outstanding capital stock or
members (Sec. 76, RCCP).

4. Articles of Merger or Articles of 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 setting forth:
1. The plan of merger or consolidation;
2. For stock corporations, the number of shares outstanding; for non-stock, the
number of members;
3. As to each corporation, number of share or members voting for or against such
plan respectively;
4. The carrying amounts and fair values of the assets and liabilities of the
respective companies as of the agreed cut-off date;
5. The method to be used in the merger or consolidation of accounts of the
companies;
6. The provisional or pro forma values, as merged or consolidated, using the
accounting method; and
7. Such other information as may be prescribed by the SEC (Sec. 77, RCCP).

5. Copies of the Articles of Merger or Consolidation and Plan of Merger shall be submitted
to the SEC for approval. The merger or consolidation is effective upon approval by the
SEC (Sec. 78, RCCP). Merger or consolidation of banks, insurance companies, building

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 and loan associations, trust companies, public utilities, educational institutions and other
special corporations requires favorable recommendation of the government agency
concerned.

If the SEC has reason to believe that Articles of Merger or Consolidation and the plan are
inconsistent with the RCCP and other laws, the SEC shall set a hearing so that the
corporations can have opportunity to be heard. It is only after the hearing that the SEC can
proceed (Sec. 78, RCCP).

f. EFFECTIVITY (Sec. 78, RCCP)

Effectivity of Merger or Consolidation
The articles of merger or of consolidation, signed and certified as required by this Code, shall
be submitted to the Commission for its approval: Provided, That in the case of merger or
consolidation of banks or banking institutions, loan associations, trust companies, insurance
companies, public utilities, educational institutions, and other special corporations governed by
special laws, the favorable recommendation of the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger or consolidation of the corporations
concerned is consistent with the provisions of this Code and existing laws, it shall issue a certificate
approving the articles and plan of merger or of consolidation, at which time the merger or
consolidation shall be effective.

If, upon investigation, the Commission 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. Written notice
of the date, time, and place of hearing shall be given to each constituent corporation at least 2
weeks before said hearing. The Commission shall thereafter proceed as provided in this Code.

g. LIMITATIONS
h. EFFECTS
Effects of Merger or Consolidation
The merger or consolidation shall have the following effects:

1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of each constituent corporation; and all real or personal property,
all receivables due on whatever account, including subscriptions to shares and other choses
in action, and every other interest of, belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and

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 5. The surviving or consolidated corporation shall be responsible for all the liabilities and
obligations of each constituent corporation as though such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent corporation may be prosecuted by or
against the surviving or consolidated corporation. The rights of creditors or liens upon the
property of such constituent corporations shall not be impaired by the merger or
consolidation (Sec. 79, RCCP).
6. By reason of the dictates of social justice and the State policy of according full protection
to labor, employment contracts are automatically assumed by the surviving corporation in
a merger, even in the absence of an express stipulation in the articles of merger or the
merger plan (BPI vs. BPI employees Union, GR No. 164301, October 19, 2011). However,
the rule on automatic assumption or absorption does not impair the right of an employer to
terminate the employment of the absorbed employees for a lawful or authorized cause or
the right of such an employee to resign, retire, or otherwise sever his employment, whether
before or after the merger, subject to existing contractual obligation.

14. INVESTIGATIONS, OFFENSES, AND PENALTIES

a. AUTHORITY OF COMMISSIONER

i. INVESTIGATION AND PROSECUTION OF OFFENSES (Sec. 154, RCCP)

The Commission may investigate an alleged violation of this Code, or of rule, regulation, or order
of the Commission.

The Commission may publish its findings, orders, opinions, advisories, or information concerning
any such violation, as may be relevant to the general public or to the parties concerned, subject to
the provisions of Republic Act No. 10173 (Data Privacy Act of 2012), and other pertinent laws.

The Commission shall give reasonable notice to and coordinate with the appropriate regulatory
agency prior to any such publication involving companies under their special regulatory
jurisdiction.

ii. ADMINISTRATION OF OATH AND ISSUANCE OF SUBPOENA (Sec. 155, RCCP)

The Commission, through its designated officer, may (1) administer oaths and affirmations, (2)
issue subpoena and subpoena duces tecum, (3) take testimony in any inquiry or investigation, and
(4) may perform other acts necessary to the proceedings or to the investigation.

iii. CEASE AND DESIST POWER (Sec. 156, RCCP)

Whenever the Commission has reasonable basis to believe that a person has violated, or is about
to violate, this Code, a rule, regulation, or order of the Commission, it may direct such person to
desist from committing the act constituting the violation.

The Commission may issue a cease and desist order ex parte to enjoin an act or practice which
is fraudulent or can be reasonably expected to cause significant, imminent, and irreparable danger
or injury to public safety or welfare. The ex parte order shall be valid for a maximum period of 20
days, without prejudice to the order being made permanent after due notice and hearing.

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Thereafter, the Commission may proceed administratively against such person in accordance
with Section 158 of this Code, and/or transmit evidence to the Department of Justice for
preliminary investigation or criminal prosecution and/or initiate criminal prosecution for any
violation of this Code, rule, or regulation.

iv. CONTEMPT (Sec. 157, RCCP)

Any person who, without justifiable cause, fails or refuses to comply with any lawful order,
decision, or subpoena issued by the Commission shall, after due notice and hearing, be held in
contempt and fined in an amount not exceeding P30,000.00. When the refusal amounts to clear
and open defiance of the Commission’s order, decision, or subpoena, the Commission may impose
a daily fine of P1,000.00 until the order, decision, or subpoena is complied with.

b. SANCTIONS FOR VIOLATIONS

i. ADMINISTRATIVE SANCTIONS (Sec. 158, RCCP)

If, after due notice and hearing, the Commission finds that any provision of this Code, rules or
regulations, or any of the Commission’s orders has been violated, the Commission may impose
any or all of the following sanctions, taking into consideration the extent of participation, nature,
effects, frequency and seriousness of the violation:
1. Imposition of a fine ranging from P5,000.00 to P2M, and not more than P1,000.00 for each
day of continuing violation but in no case to exceed P2M;
2. Issuance of a permanent cease and desist order;
3. Suspension or revocation of the certificate of incorporation; and
4. Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV
of this Code.

ii. PROHIBITED ACTS

iii. PEANALTIES

1. Unauthorized use of corporate name- punished with a (1) fine ranging from P10,000-
P200,000 (Sec. 159, RCCP).

2. Violation of disqualification provision- When, despite the knowledge of the existence of

a ground for disqualification, a director, trustee, or officer willfully holds office, or willfully
conceals such disqualification, such punished with a (1) fine ranging from P10,000-
P200,000 at the discretion of the court, and shall be (2) permanently disqualified from
being a director, trustee or officer of any corporation. When the violation of this
provision is (3) injurious or detrimental to the public, the penalty shall be a fine ranging
from P20,000- P400,000 (Sec. 160, RCCP).

3. Violation of duty to maintain records, to allow their inspection or reproduction-

punished with a (1) fine ranging from P10,000- P200,000, at the discretion of the court.
When the violation (2) is injurious or detrimental to the public, the penalty is a fine
ranging from P20,000- P400,000 The penalties shall be without prejudice to the
Commission’s exercise of its contempt powers (Sec. 161, RCCP).

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4. Willful certification of incomplete, inaccurate, false, or misleading statements or
reports- Punished with a (1) fine ranging from P20,000- P200,000. When it is (2)
injurious or detrimental to the public, the (3) auditor or the responsible person may also
be punished with a fine ranging from P40,000- P400,000 (Sec. 162, RCCP).

5. Independent auditor collusion- An independent auditor who, in collusion with the

corporation’s directors or representatives, certifies the corporation’s financial statements
despite its incompleteness or inaccuracy, shall be punished with a (1) fine ranging from
P80,000- P500,000. When the statement or report certified is (2) fraudulent, or has the
effect of causing injury to the general public, the auditor or responsible officer may be
punished with a fine ranging from P100,000- P600,000 (Sec. 163, RCCP).

6. Obtaining corporate registration through fraud- Those responsible or who assisted

directly or indirectly therein, shall be punished with a (1) fine ranging from P200,000-
P2M. When the violation of this provision is (2) injurious or detrimental to the public,
the penalty is a fine ranging from P400,000- P5M (Sec. 164, RCCP).

7. Fraudulent conduct of business- Punished with a (1) fine ranging from P200,000- P2M.
When the violation is (2) injurious or detrimental to the public, the penalty is a fine
ranging from P400,000- P5M (Sec. 165, RCCP).

8. Acting as intermediaries for graft and corrupt practices- Liable for a (1) fine ranging
from P100,000.00- P5M. (2) When its directors, officers, employees, agents, or
representatives are engaged in graft and corrupt practices, the corporation’s failure to
install:
a. safeguards for the transparent and lawful delivery of services; and
b. policies, code of ethics, and procedures against graft and corruption
shall be prima facie evidence of corporate liability under this section (Sec. 166, RCCP).

9. Engaging intermediaries for graft and corrupt practices- (1) fine ranging from
P100,000.00- P1M (Sec. 167, RCCP).

10. Tolerating graft and corrupt practices- A director, trustee, or officer who knowingly
allows or tolerates the graft and corrupt practices or fraudulent acts committed by a
corporation’s directors, trustees, officers, or employees shall be punished with a (1) fine
ranging from P500,000- P1M (Sec. 168, RCCP).

11. Retaliation against whistleblowers- – A whistleblower refers to any person who

provides truthful information relating to the commission or possible commission of any
offense or violation under this Code. Any person who, knowingly and with intent to
retaliate, commits acts detrimental to a whistleblower shall, at the discretion of the court,
be punished with a (1) fine ranging from P100,000.00- P1M (Sec. 169, RCCP).

12. Other violations of the code- (1) fine of not less than P10,000 but not more than P1M. (2)
If the violation is committed by a corporation, the same may, after notice and hearing,

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 be dissolved in appropriate proceedings before the Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director,
trustee, or officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. Liability for any of the foregoing offenses shall be
separate from any other administrative, civil, or criminal liability under this Code and other
laws (Sec. 170, RCCP).

iv. WHO ARE LIABLE

Liability of Directors, Trustees, Officers, or Other Employees
If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon
such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees
responsible for the violation or indispensable to its commission (Sec. 171, RCCP).

Liability of Aiders and Abettors and Other Secondary Liability

Anyone who shall aid, abet, counsel, command, induce, or cause any violation of this Code, or any
rule, regulation, or order of the Commission shall be punished with a fine not exceeding that
imposed on the principal offenders, at the discretion of the court, after taking into account their
participation in the offense.

c. AUTHORITY OF THE SECURITIES AND EXCHANGE COMMISSION

Express Powers under the RCCP

1. Exercise supervision and jurisdiction over all corporations and persons acting on their
behalf, except as otherwise provided under this Code;
2. Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases involving
intracorporate disputes submitted for final resolution. The Commission shall retain
jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June
2000 until finally disposed;
3. Impose sanctions for the violation of this Code, its implementing rules and orders of the
Commission;
4. Promote corporate governance and the protection of minority investors, through, among
others, the issuance of rules and regulations consistent with international best practices;
5. Issue opinions to clarify the application of laws, rules, and regulations;
6. ssue cease and desist orders ex parte to prevent imminent fraud or injury to the public;
7. Hold corporations in direct and indirect contempt;
8. Issue subpoena duces tecum and summon witnesses to appear in proceedings before the
Commission;
9. In appropriate cases, order the examination, search and seizure of documents, papers, files
and records, and books of accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases, subject to the provisions of existing laws;
10. Suspend or revoke the certificate of incorporation after proper notice and hearing;

In imposing penalties and additional monitoring and supervision requirements, the

Commission shall take into consideration the size, nature of the business, and capacity of the
corporation (Sec. 179, RCCP).

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No Injunction
No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary
injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly
or indirectly interferes with the exercise of the powers, duties, and responsibilities of the
Commission that falls exclusively within its jurisdiction.

Other Powers
1. Visitorial Powers- The SEC shall exercise visitorial powers over all corporations, which
powers shall include the examination and inspection of records, regulations, and
supervision of activities, enforcement of compliance, and imposition of sanctions in
accordance with this Code (Sec. 179, RCCP).
2. Investigation- the SEC can investigate alleged violation of the RCCP and impose
administrative sanctions. It can also transmit evidence to the Department of Justice for
preliminary investigation or criminal prosecution (Sec. 154 and 158, RCCP).

V. SECURITIES
(The Securities Regulation Code, R.A. No. 8799)

A. STATE POLICY
Nature of the Securities Regulation Code (SRC)
The SRC is the law that (1) regulates securities (its issuance, distribution, and sale) and (2) the
person who deals with such securities. It is enacted to protect the public from unscrupulous
promoters, who stake business or venture claims which have really no basis, and sell shares or
interests therein to investors. It also serves to protect investors, promote investor confidence, and
stabilize the financial markets.

The law does not guarantee that a person who invests in securities will make money. The law only
ensures that there will be a fair and full disclosure of information regarding securities so that the
investor could make an informed judgment.

State policy with regard to the SRC (S W D D P F M)

1. Establish a socially-conscious free market that regulates itself.
2. Encourage widest participation of ownership in enterprises.
3. Enhance democratization of wealth.
4. Promote development of the capital market.
5. Protect investors.
6. Ensure full and fair disclosure about securities.
7. Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative
devices and practices which creates distortion in the free market.

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The Securities Regulation Code is called a “ truth in securities law “ because it requires the issuer
to make full and fair disclosure of information about securities being sold or offered to be sold
within the Philippines and penalizes manipulative and fraudulent acts, devices and schemes.

B. DEFINITION OF SECURITIES
“Securities” are shares, participation, or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character.

The term includes:

1. Shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed
securities;
2. Investment contract, 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 option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments; and
6. Propriety or non-propriety membership certificates in corporations; and other instruments
as may in the future be determined by the Commission.

C. KINDS OF SECURITIES
1. EXEMPT SECURITIES (Sec. 9.1, SRC)
The requirement of registration shall not, as a general rule, apply to any of the following
classes of securities:

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 or supervised 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 thereof on the basis of reciprocity. Provided, that the SEC may require
compliance with the form and content of disclosures the Commission may prescribe.
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 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 (which serves to promote
the sale of securities issued by heavily regulated banks).
6. Other securities as determined by the SEC by rule or regulation, after public hearing
(Sec. 9.1, SRC).

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Being an issuer of an exempt security does NOT exempt such issuer from the requirement of
reports under the regime of full and fair disclosure.

RATIONALE: The listed securities are exempted because they are either guaranteed by the
Government or they are already regulated by another government agency or body other than the
SEC.

2. EXEMPT TRANSACTIONS (Sec. 10.1, SRC)

1. Any judicial sale, or sale by an executor, administrator, guardian, receiver, or trustee in
insolvency or bankruptcy.
2. Those sold by a pledge holder, mortgagee, or any other similar lien holder, to liquidate
a bona fide debt a security pledged in good faith as security for such debt.
3. Those sold or offered for sale in an isolated transaction for the owner’s account and the
owner not being an underwriter.
4. Distribution by the corporation of securities to its stock holders or other security holders
as stock dividends or distribution out of surplus.
5. Sale of capital stock of a corporation to its own stockholders exclusively wherein no
commission or remuneration is paid or given directly or indirectly in connection with the
sale of such capital stock.

NOTE: Also, this sale must not involve an underwriter or financial advisor.
6. Bonds or notes secured by a mortgage upon real estate or tangible personal property,
where the entire mortgage together with all the bonds or notes secured thereby are sold to
a single purchaser at a single sale.
7. Issue and delivery of any security in exchange for any other security of the same issuer
pursuant to the right of conversion entitling the holder of the security surrendered in
exchange to make such conversion.
8. Broker’s transactions executed upon customer’s Orders, on any registered Exchange or
other Trading market.
9. Share Subscriptions in capital stock prior to incorporation or in pursuance of an
increase in its authorized capital stock under the Corporation Code when no expense is
incurred, or no commission, compensation or remuneration is paid or given in connection
with the sale or disposition of such securities, and only when the purpose for soliciting,
giving or taking of such subscriptions is to comply with the requirements of such law as to
the percentage of the capital stock of a corporation which should be subscribed before it
can be registered and duly incorporated, or its authorized capital increased.
10. Exchange of securities by the issuer with its existing security holders exclusively, when
no commission or other remuneration is paid or given directly or indirectly for soliciting
such exchange.
11. Sale by issuer to fewer than 20 persons in the Philippines during any 12 month period,
otherwise known as Private Placement Transactions (19 Lender Rule).

Requisites:
1. Sale to not more than 19 non- institutional retail investors;
2. The security is made payable to a specific person;
3. Security is non-negotiable and non- assignable; and

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 4. It is in an amount not exceeding 50 Million pesos.

12. Sale of securities to any number of the following Qualified Buyers:

1. Banks;
2. Registered investment houses;
3. Insurance companies;
4. Pension funds or retirement plans maintained by the Government of the
Philippines or any political subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage in trust functions,
investment companies;
5. Investment companies; and
6. Other persons or entities ruled qualified by the SEC on the basis of such factors
such as financial sophistication, net worth, knowledge, and experience in
financial and business matters, or amount of assets under management.

RATIONALE: Although the securities themselves must still be registered, the sale or issue need
not be registered because the investors involved herein are considered as highly sophisticated
investors or specialized investors and as such, have a greater risk tolerance or do not need strict
protection from the Commission.

List of exempt transactions under the SRC is NOT exclusive

The list is not exclusive. The commission may exempt other transactions, if it finds that the
requirements of registration under the Code is not necessary in the public interest or for the
protection of the investors such as by reason of the small amount involved or the limited character
of the public offering (Sec. 10.02, SRC).

3. NON-EXEMPT TRANSACTIONS
All securities, unless specifically exempted by law, shall not be sold or offered for sale or
distribution within the Philippines, without a registration statement duly filed with and approved
by the Commission (Sec. 8.1, SRC).

D. POWERS AND FUNCTIONS OF THE SECURITIES

AND EXCHANGE COMMISSION (SEC)
The Securities and Exchange Commission (SEC) shall act with transparency and shall have the
powers and functions provided by the Securities Regulation Code, Presidential Decree No. 902-
A, the Revised Corporation Code, the Investment Houses Law, the Financing Company Act and
other existing laws. The SEC’s powers are expanded under the Revised Corporation Code.
Additional powers of the SEC relating to securities under Sec. 5 of the SRC include:

1. Have jurisdiction and supervision over all corporations, partnerships, or associations who
are the grantees of primary franchises and/or a license or permit issued by the Government;
2. Formulate policies and recommendations on issues concerning the securities market,
advise Congress and other government agencies on all aspects of the securities market and
propose legislation and amendments thereto;

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 3. Approve, reject, suspend, revoke, or require amendments to registration statements, and
registration and licensing applications;
4. Regulate, investigate, or supervise the activities of persons to ensure compliance;
5. Supervise, monitor, suspend, or take over the activities of exchanges, clearing agencies and
other Self-Regulatory Organizations (SRO);
6. Impose sanctions for the violation of laws and the rules, regulations and orders issued
pursuant thereto;
7. Prepare, approve, amend, or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations, and orders;
8. Enlist the aid and support of and/ or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm
association, or person in the implementation of its powers and functions under the SRC;
9. Issue cease and desist orders to prevent fraud or injury to the investigating public;
10. Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
11. Suspend, or revoke, after proper notice and hearing the franchise or certificate of
registration of corporations, partnerships, or associations, upon any of the grounds
provided by law.

Transferred Jurisdiction
Under Sec. 5.2 of the SRC, the Commission’s jurisdiction over all cases enumerated under Sec. 5
of PD No. 902-A has been transferred to the courts of general jurisdiction or the appropriate
Regional Trial Court. Thus, the following are within the jurisdiction of the RTC:
1. Fraudulent devices and schemes employed by directors detrimental to the public interest
and to other firms;
2. Intra-corporate dispute and with the state in relation to their franchise and right to exist as
such;
3. Controversies in election, appointment of directors or trustees;
4. Petition to be declared in state of suspension of payments; and
5. Appointment of Rehabilitation Receiver or Management Committee.

Intra-corporate Controversy
An intra-corporate controversy is one which arises between a stockholder and the corporation or
among the stockholders involving internal affairs of the corporation.

The Relationship Test

Under the relationship test, there is an intra-corporate controversy when the conflict is:
1. between the corporation, partnership, or association and the public;
2. between the corporation, partnership, or association and the State insofar as its
franchise, permit, or license to operate is concerned;
3. between the corporation, partnership, or association and its stockholders,
partners, members, or officers; and
4. among the stockholders, partners, or associates themselves.

The Nature of Controversy Test

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 On the other hand, in accordance with the nature of controversy test, an intra-corporate
controversy arises when the dispute is not only rooted in the existence of an intra-corporate
relationship, but also in the enforcement of the parties’ correlative rights and obligations
under the corporation code and the internal and intra-corporate regulatory rules of the
corporation.

E. PROCEDURE FOR REGISTRATION OF SECURITIES

Purpose for registration of securities
Registration of securities allows the subsequent release of these securities to the investing public
and serves to protect investors.

Procedure for registration of securities

1. Application – All securities required to be registered shall be registered through the filing
by issuer with SEC, of a sworn registration statement with respect to such securities in such
form and containing such information or documents as the Commission shall prescribe.

2. Prospectus – The registration statement shall include any prospectus required or permitted
to be delivered.

3. Other information– The information required for the registration of any kind and all
securities shall include, among others, the effect of the securities’ issue on ownership, on
the mix of ownership, especially foreign and local ownership.

4. Signatories to registration statement– The registration statement shall be signed by the

issuer’s:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary or persons performing similar functions

NOTE: It shall be accompanied by a duly verified resolution of the Board of Directors of

the issuer corporation.

5. Written consent of Expert – The written consent of the expert named as having certified
any part of the registration statement or any document used in connection therewith shall
also be filed.

6. Certification by Selling stockholders- Where the registration statement includes shares

to be sold by the selling shareholders, a written certification by such selling shareholders
as to the accuracy of any part of the registration statement contributed by such selling
shareholders shall also be filed.

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 7. Fees - Upon filing of the registration statement, the issuer shall pay to the SEC a fee of not
more than one tenth of one percent (1/10 of 1%) of the maximum aggregate price at which
such securities are proposed to be offered; the SEC shall prescribe by rule, diminishing the
fees in inverse proportion, the value of the aggregate price of the offering.

NOTE: This fee paid to the SEC is called a diminishing fee.

8. Notice and Publication - Notice of the filing of the registration statement shall be
immediately published by the issuer, at its own expense, in 2 newspapers of general
circulation in the Philippines; once a week for two consecutive weeks, or in such other
manner as the Commission by rule shall prescribe, reciting that:
a. A registration statement for the sale of such security has been filed;
b. The aforesaid registration statement as well as the papers attached thereto is
open to inspection at the Commission during business hours; and
c. Copies thereof, photo static or otherwise, shall be furnished to interested parties
at such reasonable charges as the Commission may prescribe.

9. Ruling - Within 45 days after the date of the filing of the registration statement, or by such
later date to which the issuer has consented, the SEC shall declare the registration statement
effective or rejected, unless the applicant is allowed to amend the registration statement.
The Commission shall enter an order declaring the registration statement to be effective if
it finds that the registration statement together with all the other papers and documents
attached thereto is on its face complete and that the requirements have been complied with.
The Commission may also impose such terms and conditions as may be necessary or
appropriate for the protection of the investors.

10. Effectivity - Upon effectivity of the registration statement, the issuer shall state under oath
in every prospectus that all registration requirements have been met and that all information
are true and correct as represented by the issuer or the one making the statement (Sec. 12,
SRC).

NOTE: Any untrue statement or fact of omission to state a material fact required to be
stated therein or necessary to make the statement therein not misleading shall constitute
fraud.

F. PROHIBITION ON FRAUD, MANIPULATION AND

INSIDER TRADING
1. MANIPULATION OF SECURITY PRICES
Acts which are considered as manipulation of security prices
The price of securities should be dictated by market forces. It cannot be pegged or stabilized. The
following acts are considered as manipulation of security prices and are therefore prohibited:

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1. Transactions intended to create a false or misleading appearance of active trading in
any listed security traded in an Exchange or any other trading market:
a. Wash Sale – is a transaction in which there is no genuine change in the beneficial
(or actual) ownership of a security;
b. Matched Sale – is a change of ownership in the securities by entering an order for
the purchase or sale of a security with the knowledge that a simultaneous order of
substantially the same size, time, and price, for the sale or purchase of any such
security, has or will be entered by or for the same or different parties; or
c. Market rigging or jiggling- By performing similar acts where there is no change in
beneficial ownership.

2. Effecting a series of transactions that will raise or depress the price of securities to
induce the purchase or sale of securities respectively, or creating active trading to induce
transactions through manipulative devices:
a. Marking the close - buying and selling of securities at the close of the market in an
effort to alter the closing price of these securities;
b. Painting the tape - engaging in a series of transactions effected by brokers in
securities that are reported publicly to give the impression or illusion of activity or
price movement in a security, which may trick investors into trading in these
securities because of the alleged trading volume or indications of interest;
c. Squeezing the float - refers to 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 to create artificial prices. This prevents the actual market
from determining the price of these securities;
d. Hype and dump - engaging in buying activity at increasingly higher prices and then
selling securities in the market at the higher prices;
e. Boiler room operations - refers to activities that involve the use of high pressure
sale tactics such as direct mail offers or telephone follow-ups to investors to
promote purchase and sale of securities wherein there is misrepresentation in these
securities. This is a fraudulent transaction that tricks investors into trading in a fake
market;
f. Daisy chain - refers to a series of purchase and sales of the same issue at
successively higher prices by the same group of people with the purpose of
manipulating prices are drawing unsuspecting investors into the market leaving
them defrauded of their money and securities;
g. Front-Running - is the prohibited practice of a broker-dealer executing its
proprietary order before the customer's order for the same security. This violates
the fiduciary responsibility by the broker-dealer to its customer accounts as well as
placing the customer's order first; or
h. Churning - involves the excessive trading of securities by a broker-dealer in a
customer's discretionary account in order to generate commissions, without regard
to the customer’s investment objective.

3. Circulating or disseminating information that the price of any security listed in an Exchange
will or is likely to rise or fall because of manipulative market operations of any one or more

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 persons conducted for the purpose of raising or depressing the price of that security for the
purpose of inducing the purchase or sale of such security.

4. To make false or misleading statement with respect to any material fact, which he knew or
had reasonable ground to believe was so false or misleading, for the purpose of inducing
the purchase or sale of any security listed or traded in an Exchange.

5. To effect, either alone or with others, any series of transactions for the purchase and/or sale
of any security traded in an exchange for the purpose of pegging, fixing, or stabilizing the
price of such security, unless otherwise allowed by the Code or by rules of the Commission
(Sec. 24, SRC).

2. SHORT SALES
1. Any sale of a security which the seller does not own;
2. Any sale which is consummated by the delivery of a security borrowed by or for the account
of the seller with the commitment of the seller or securities borrower to return or deliver
said securities or their equivalent to the lender on a determined or determinable future time
(Sec. 24, 2-2.1, 2015 SRC-IRR).

Prohibition
There is NO ABSOLUTE PROHIBITION on short sale except in the following instances:
1. Directors, officers, or principal shareholder of a corporation cannot make a short sale in
securities of the corporation in which he is a director, officer, or principal shareholder;
2. Whenever the SEC, motu proprio or upon recommendation of the Exchange, prohibits
short sale indefinitely or for such period as it may deem proper for the protection of the
investors or as an emergency measure or whenever such short selling is necessary or
appropriate in the public interest (Sec. 24, 2-2.10, 2015 SRC-IRR).

3. OPTION TRADING
“Options”
Are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying
security at a predetermined price, called the exercise or strike price, on or before a predetermined
date, called the expiry date.

Call Options- are rights to buy

Put Options- are rights to sell

Stock option granted to employees or officials who are not members of the board is allowed
or may be approved by the SEC subject to a review of the scheme by the board and approval
by the stockholders in order to widen the corporate base and distribute corporate profits
more equitable (Sec. 12.1.3.2.4.2, 2015, SRC-IRR).

Stock options may be granted to non-stockholders if the board has been authorized to grant
that benefit by the (i) corporation’s Articles of Incorporation, (ii) By-Laws, or (iii) by a

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 resolution of the stockholders representing at least 2/3 of the outstanding voting and non-
voting capital stock (Sec. 12.1.3.2.4.2, 2015, SRC-IRR).

Stock options granted to directors and officers must be approved in a meeting of the
stockholders representing at least 2/3 of the outstanding voting and non-voting capital stock
(Sec. 12.1.3.2.4.2, 2015, SRC-IRR).

“Put” is a transferrable option or offer to deliver a given number of shares of stock at a stated price
at any given time during a state period. “Call” is a transferrable option to buy a specified number
of shares at a stated price. “Straddle” is a combination of put and call.

The SRC prohibits members of an Exchange from directly or indirectly indorsing or guaranteeing
the performance of a put, call, or straddle (Sec. 25, SRC).

4. FRAUDULENT TRANSACTIONS
1. Employment of any device, scheme, or artifice to defraud investors;
2. Obtaining money or property by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statement made not
misleading; and
3. Engaging in any act, transaction, practice, or course of business, which operates as a fraud
or deceit upon any person.
NOTE: Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of fraud or
mistake, the circumstances constituting fraud or mistake must be stated with particularity.

5. INSIDER TRADING
Insider
A person who is in possession of corporate material information not generally available to the
public.

Who may be an insider:

1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling
the issuer;
3. A person whose relationship or former relationship to the issuer gives or gave 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. Constructive Insider – A person who learns such information by a communication from
any of the foregoing insiders (Sec. 3.8, SRC).

Other prohibited acts in an insider trading

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 1. For an insider to communicate material non- public information about the issuer or the
security to any person who by virtue of the communication thereby becomes an insider,
where the original insider communicating the information knows or has reason to believe
that such person will likely buy or sell a security of the issuer while in possession of such
information (Sec. 27.3, SRC).
2. When a tender offer has commenced or is about to commence, it is unlawful for any
person, other than the tender offeror, who is in possession of material non-public
information relating to such tender offer to buy or sell the securities of the issuer that are
sought or to be sought by such tender offer, if such person knows or has reason to believe
that the information is non-public and has been acquired directly or indirectly from the
tender offer, or those acting on its behalf, the issuer of the securities sought or to be sought
by such tender offer, or any insider of such issuer (Sec. 27.4 (a) (i), SRC).
3. When a tender offer has commenced or is about to commence, it is also unlawful for (1)
any tender offeror, or (2) those acting on its behalf, (3) the issuer of securities covered by
such tender offer, and (4) any insider, to communicate material non- public information to
any person relating to the tender offer which would likely result in violation of prohibition
of the insider from trading (Sec. 27.4 (a) (ii), SRC).

Material non-public information

1. Information about the issuer or the security 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. Would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell, or hold a security (Sec. 27.2 , SRC).

G. PROTECTION OF SHAREHOLDERS INTERESTS

1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule

1. TENDER OFFER RULE

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

1. A tender offer is an offer by the acquiring person to stockholders of a public company for
them to tender their shares therein on the terms specified in the offer. Tender offer is in
place to protect minority shareholders against any scheme that dilutes the share value of
their investments. It gives the minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares at the same price as those
of the majority shareholders.
2. Public Company- Means any corporation with a class of equity securities listed on an
Exchange or with assets in excess of P50M and having 200 or more holders, and 200 of
which are holding at least 100 shares of a class of its equity securities.

When tender offer is mandatory

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 1. Filing of a declaration with the SEC is necessary- If any person or group of persons
acting in concert, intends to acquire 15% of equity securities in a public company within a
period of 12 months.

2. Required to (1) Disclose the intention and (2) To make tender offer FOR THE
PERCENTAGE SOUGHT to all holders of such securities- When any person or group
of persons acting in concert, who intends to acquire 35% or more of the OUTSTANDING
voting shares or such outstanding voting shares that are sufficient to GAIN CONTROL of
the board in a public company in one or more transactions within a period of 12 months
(Sec. 19.2.2, 2015 SRC-IRR).

NOTE: If the tender offer is over subscribed, the aggregate amount of securities to be
acquired at the close of the tender offer shall be proportionately distributed.

3. Required to make tender offer for OUTSTANDING VOTING shares- Any person or
group of persons in concert who intends to acquire 35% or more of the outstanding voting
shares or such outstanding voting shares that are sufficient to gain control of the board in
a public company DIRECTLY from one or more shareholders shall be required to make a
tender offer for ALL THE OUTSTANDING VOTING SHARES. The sale of shares
pursuant to the private transaction or block sale shall not be completed prior to the closing
and completion of the tender offer (Sec. 19.2.4, 2015 SRC-IRR).

4. Required to make tender offer for all outstanding equity shares- If any acquisition of
even less than 35% would result in ownership of over 51% of the total outstanding equity
securities of a public company, the acquirer shall be required to make a tender offer for all
the Outstanding Equity Securities to all remaining stockholders of the said company at
a price supported by a fairness opinion provided by an independent financial advisor or
equivalent third party. The acquirer in such a tender offer shall be required to accept any
and all securities thus tendered (Sec. 19.2.5, 2015 SRC-IRR).

5. When NOT REQUIRED to make tender offer- When any person or group of persons
acting in concert, who intends to acquire 35% or more of the outstanding voting shares or
such outstanding voting shares that are sufficient to gain control of the board in a public
company through the Exchange trading system if such person or group of persons acting
in concert acquires the remainder through a block sale if, after acquisition through the
exchange trading system, they fail to acquire their target of 35% of the outstanding
VOTING shares that is sufficient to gain control of the board.

Exempt from Mandatory Tender Offer Requirement

The mandatory tender offer requirement shall not apply to the following:
1. Any purchase of shares from the unissued capital stock provided that the acquisition will
not result to a 50% or more ownership of shares by the purchaser;
2. Any purchase of shares form 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 a debtor or creditor;

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 4. Purchases in connection with privatization undertaken by the government of the
Philippines;
5. Purchase in connection with corporate rehabilitation under court supervision;
6. Purchases through an open market at the prevailing market price; and
7. Merger or consolidation.

Obligations of person making a tender offer

1. Make an announcement of his intention in a newspaper of general circulation, prior to the
commencement of the offer;
2. At least 2 business days prior to the date of the commencement of the tender offer:
a. File with the SEC a required form for tender offer including all exhibits thereto,
with prescribed filing fees; and
b. Hand deliver a copy of such form including all exhibits (and amendments thereto)
to the target company at its principal executive office and to each Exchange where
such class of the target company’s securities are listed for trading.
3. Report the results of the tender offer by filing with the Commission, not later than 10
calendar days after the termination of the tender offer, copies to the final amendments to
the form.

2. PROXY SOLICITATION
Requisites for valid proxy solicitation
1. It must be in writing.
2. It must be signed by the stockholder or his duly authorized representative.
3. It must be filed before the scheduled meeting with the corporate secretary (Sec. 20.2, SRC).

NOTE: For public companies, the period to submit proxy solicitation should not be later than
5 days before the meeting unless the by-laws provides for a longer period.

Unless otherwise provided in the proxy, the proxy 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.

Rules on proxy solicitation with regard to broker or dealer

1. 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.
2. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as
the Commission may prescribe of the outstanding share of the issuer, shall submit a report
identifying the beneficial owner within 10 days after 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 Commission (Sec. 20.4, 20.5, SRC).

3. DISCLOSURE RULE
Beginning of disclosure requirement
It begins at registration and continues periodically through the regular filing of periodic report.

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Suspension of disclosure
It may be suspended for any fiscal year after the year such registration became effective if such
issuer as of the first day of any such fiscal year, has less than 100 shareholders of such class of
securities and it notifies the Commission of such (Rule 17.1, SRC- IRR).

End of disclosure requirement

GR: Disclosure does not end because once an issuer becomes a reporting company, it remains as
such even when the registration of securities has been revoked (Rule 13, SRC- IRR).

XPN: If the primary license is revoked.

XPN to the XPN: In the case of hospitals and educational institutions if the primary license is
revoked, the disclosure requirement still continues because of public interest.

Reportorial requirements

1. Issuers:
a. Shall file with the Commission within 135 days, after the end of the issuer’s fiscal
year, or such other time as the Commission may prescribe, an annual report which
shall include among others, a balance sheet, profit and loss statement and statement
of cash flows, for such last fiscal year, certified by an independent certified public
accountant, and a management discussion and analysis of results of operations; and
b. Such other periodical reports for interim fiscal periods and current reports on
significant developments of the issuer as the Commission may prescribe as
necessary to keep current information on the operation of the business and financial
condition of the issuer (Sec. 17, SRC).

2. Types of issuers required to file reports:

a. An issuer which has sold a class of its securities pursuant to a registration statement
under Section 12 of the SRC;
b. An issuer with a class of securities listed for trading in an Exchange;
c. An issuer with assets of at least PHP 50M and having 200 or more holders each
holding at least 100 shares.

3. Persons acquiring securities - If the issuer is one that has to make a report, any person
who acquires directly or indirectly the beneficial ownership of more than 5% of such class,
or in excess of such lesser per centum as the Commission by rule may prescribe, shall,
within 10 days after such acquisition or such reasonable time as fixed by the Commission,
submit to the issuer of the security, to the Exchange where the security is traded, and to the
Commission a sworn statement containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of the business, any plans the recipient may
have affecting a major change in the business
d. The number of shares beneficially owned, and the number of shares for which there
is a right to acquire granted to such person or his associates

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 e. Information as to any agreement with a third person regarding the securities (Sec.
18, SRC).

4. Persons that has beneficial ownership of 10% or more - Every person who is directly
or indirectly the beneficial owner of more than 10% of any class of any equity security, or
who is director or an officer of the issuer of such security, shall file:
a. Statement with the SEC and, if such security is listed for trading on an Exchange,
also with the Exchange, of the amount of all equity securities of such issuer of
which he is the beneficial owner;
b. Within 10 days after the close of each calendar month, if there is a change in
ownership during such month, a statement indicating his ownership at the close of
the calendar month and such changes in his ownership as have occurred during such
calendar month (Sec. 23, SRC).

VI. BANKING
A. THE NEW CENTRAL BANK ACT (NCBA, R.A. 7653, as amended
by R.A. 11211)

a. STATE POLICIES
Policy of the state with respect to the creation of the Bangko Sentral ng Pilipinas
The State shall maintain a central monetary authority that shall function and operate as an
independent and accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking, and credit (Sec 2, NCBA).

While it is a government owned corporation it enjoys fiscal and administrative autonomy.

Fiscal – relating to treasury as in the monetary board.
Administrative – being the regulatory agency in accordance with its policy directions.

Salient considerations on the creation of Bangko Sentral ng Pilipinas

1. It is established as an independent central monetary authority.
2. Its capital shall be P50,000,000,000, P200,000,000,000 to be fully subscribed by the
Philippine Government.
3. The increase in capitalization shall be funded solely from the declared dividends of the
Bangko Sentral in favor of the National Government.

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 4. Any declared dividends of the Bangko Sentral in favor of the National Government shall
be deposited in a special account in the General Fund, and earmarked for the payment of
Bangko Sentral’s increase in capitalization. Such payment shall be released and disbursed
immediately and shall continue until the increase in capitalization is fully paid.

b. CREATION OF THE BANGKO SENTRAL NG PILIPINAS

Bangko Sentral ng Pilipinas (BSP)
It is the State’s central monetary authority. It is the government agency 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,
G.R. No. L-48955, June 30, 1987).

Bangko Sentral ng Pilipinas as an institution

The BSP is a government-owned corporation which enjoys fiscal and administrative autonomy.

c. RESPONSIBILITY AND PRIMARY OBJECTIVE

Responsibilities of BSP
1. To provide policy directions in the areas of money, banking, and credit.
2. To supervise bank operations.
3. To exercise regulatory and examination powers over quasi-banking operations of non-bank
financial institutions, money service businesses, credit granting businesses, and payment
system operators.

Primary objectives of BSP

1. To maintain price stability conducive to a balanced and sustainable growth of the economy;
and
2. To promote and maintain monetary stability and the convertibility of the peso (Sec. 3,
NCBA).

d. CORPORATE POWERS
The BSP is a government-owned and controlled corporation that is invested by law with corporate
powers (Sec. 3, NCBA). The corporate powers specified in Sec. 5 of the New Central Banking Act
are as follows:
1. The power to adopt, alter, and use a corporate seal which shall be judicially noticed;
2. To enter into contracts;
3. To lease or own real and personal property;
4. To sell or otherwise dispose of its real and personal property;
5. To sue and be sued;
6. To perform any and all things that may be necessary or proper to carry out the purposes of
the New Central Bank Act; and
7. To compromise, condone, or release, in whole or in part, any claim of or settled liability.

e. OPERATIONS OF THE BANGKO SENTRAL NG PILIPINAS

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a. AUTHORITY TO OBTAIN DATA AND INFORMATION
1. The Bangko Sentral shall have the authority to require from any person or entity, including
government offices and instrumentalities, or government-owned or -controlled
corporations, any data, for statistical and policy development purposes in relation to the
proper discharge of its functions and responsibilities: Provided, That disaggregated data
gathered are subject to prevailing confidentiality laws.
2. The Bangko Sentral through the Governor or in his absence, a duly authorized
representative shall have the power to issue a subpoena for the production of the books and
records for the aforesaid purpose. Those who refuse the subpoena without justifiable cause,
or who refuse to supply the Bangko Sentral with data required, shall be subject to
punishment for contempt in accordance with the provisions of the Rules of Court.
3. The authority of the Bangko Sentral to require data from banks shall continue to be
exercised pursuant to its supervisory powers set forth in this Act and other applicable laws.
(Sec. 23, NCBA).

b. SUPERVISION AND EXAMINATION

1. The Bangko Sentral shall have supervision over, and conduct regular or special
examinations of banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.
2. The Bangko Sentral shall have regulatory authority over, and conduct regular or special
examinations of, entities which under this Act or by special laws are subject to its
jurisdiction.
3. The Bangko Sentral shall establish a mechanism for issues arising from bank examinations.
It shall be independent and reports directly to the Monetary Board, without prejudice to the
authority of the Bangko Sentral and its Monetary Board to take enforcement and
supervisory actions against supervised entities.
4. The department heads and the examiners of the supervising and/or examining departments
are hereby authorized to administer oaths to any director, officer, or employee of any
institution under their respective supervision or subject to their examination, and to compel
the presentation of all books, documents, papers or records necessary in their judgment to
ascertain the facts relative to the true condition of any institution;

No restraining order or injunction shall be issued by the court enjoining the Bangko Sentral
from examining any institution subject to supervision or examination by the Bangko Sentral,
unless there is convincing proof that the action of the Bangko Sentral is plainly arbitrary and made
in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the
action is pending a bond executed in favor of the Bangko Sentral, in an amount to be fixed by the
court (Sec. 25, NCBA).

c. BANK DEPOSITS AND INVESTMENTS

Any director, officer or stockholder who, together with his related interest, contracts a loan or any
form of financial accommodation from:
1. his bank; or
2. from a bank
a. which is a subsidiary of a bank holding company of which both his bank and the
lending bank are subsidiaries or

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 b. 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, in excess of 5% of the
capital and surplus of the bank, or in the maximum amount permitted by law,
whichever is lower, shall be required by the lending bank to waive the secrecy of
his deposits of whatever nature in all banks in the Philippines.

Any information obtained from an examination of his deposits shall be held (1) strictly confidential
and may be (2) used by the examiners only in connection with their supervisory and examination
responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the
deposit account (Sec. 26, NCBA).

d. PROHIBITIONS
Personnel of the Bangko Sentral are hereby prohibited from:

1. being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or

indirectly, of any institution subject to supervision or examination by the Bangko Sentral,
except non-stock savings and loan associations and provident funds organized exclusively
for employees of the Bangko Sentral, and except as otherwise provided in this Act;
2. directly or indirectly requesting or receiving any gift, present or pecuniary or material
benefit for himself or another, from any institution subject to supervision or examination
by the Bangko Sentral;
3. revealing in any manner, except under orders of the court, the Congress or any government
office or agency authorized by law, or under such conditions as may be prescribed by the
Monetary Board, information relating to the condition or business of any institution. This
prohibition shall not be held to apply to the giving of information to the Monetary Board
or the Governor of the Bangko Sentral, or to any person authorized by either of them, in
writing, to receive such information; and
4. borrowing from any institution subject to supervision or examination by the Bangko
Sentral unless said borrowing is transacted on an arm’s length basis, fully disclosed to the
Monetary Board, and shall be subject to such rules and regulations as the Monetary Board
may prescribe (Sec. 27, NCBA).

e. EXAMINATION AND FEES

The supervising and examining department head, personally or by deputy, shall examine the
operations of every bank and quasi-bank, including their subsidiaries and affiliates engaged in
allied activities, and other entities which under this Act or special laws are subject to Bangko
Sentral supervision, in accordance with the guidelines set by the Monetary Board taking into
consideration sound and prudent practices: Provided, That there shall be an interval of at least 12
months between regular examinations: Provided, further, That the Monetary Board, by an
affirmative vote of at least 5 members, may authorize a special examination if the circumstances
warrant.

The institution concerned shall afford to the head of the appropriate supervising and examining
departments and to his authorized deputies (1) full opportunity to examine its books and records,
(2) cash and assets and (3) general condition and review its systems and procedures at any time
during business hours when requested to do so by the Bangko Sentral: Provided, however, That

234
none of the reports and other papers relative to such examinations shall be open to inspection by
the public except insofar as such publicity is incidental to the proceedings hereinafter authorized
or is necessary for the prosecution of violations in connection with the business of such institutions.

Supervised institutions shall pay to the Bangko Sentral, no later than May 31 of each year, an
annual supervision fee as may be prescribed by the Monetary Board. In determining the amount
of the annual supervision fee, the Monetary Board shall consider the costs of supervision (Sec. 28,
NCBA).

f. MONETARY BOARD; POWERS AND FUNCTIONS

Monetary Board
It is the body through which the powers and functions of the BSP are exercised (Sec 6, NCBA).

Powers and functions of the Monetary Board

1. Issue rules and regulations it considers necessary for the effective discharge of the
responsibilities and exercise of its powers.
2. Direct the management, operations, and administration of the BSP, reorganize its
personnel, and issue such rules and regulations as it may deem necessary or convenient for
this purpose.
3. Establish a human resource management system.
4. Adopt an annual budget for and authorize such expenditures by the BSP as are in the
interest of the effective administration and operations of the BSP in accordance with
applicable laws and regulations.
5. Indemnify its members and other officials of the BSP, including personnel of the
departments performing supervision and examination functions against all costs and
expenses reasonably incurred by such persons in connection with any civil or criminal
action (Sec 15, NCBA).

NOTE: In the event of a settlement or compromise, indemnification shall be provided only in

connection with such matters covered by the settlement as to which the BSP is advised by
external counsel that the person to be indemnified did not commit any negligence or
misconduct. The costs and expenses incurred in defending the aforementioned action, suit or
proceeding may be paid by the BSP in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the member, officer, or employee
to repay the amount advanced should it ultimately be determined by the Monetary Board that
he is not entitled to be indemnified as provided in this subsection (Sec 15, NCBA).

Composition of the Monetary Board

The MB shall be composed of 7 members appointed by the President with a 6-year term. No
member of the MB may be reappointed more than once (Sec. 6, NCBA).

Members
1. The BSP Governor or his designated alternate (a deputy governor);
2. A Cabinet member to be designated by the President or his designated alternate (an
undersecretary in his department);

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 3. 5 members from the private sector.

Qualifications
1. Citizenship- natural-born citizens of the Philippines
2. Age
GR: at least 35 years old
XPN: Governor must be at least 40 years old;
3. Of good moral character
4. Of unquestionable integrity
5. Of known probity and patriotism;
6. With recognized competence in social and economic disciplines (Sec. 8, NCBA).

Powers of the Governor (Sec. 17, NCBA)

The Governor shall be the Chief Executive Officer of the Bangko Sentral. His powers and duties
shall be to:

1. Prepare the agenda for the meetings of the Monetary Board and to submit for the
consideration of the Board the policies and measures which he believes to be necessary to
carry out the purposes and provisions of this Act;
2. Execute and administer the policies and measures approved by the Monetary Board;
3. Direct and supervise the operations and internal administration of the Bangko Sentral. The
Governor may delegate certain of his administrative responsibilities to other officers
subject to such rules and regulations as the Monetary Board may prescribe;
4. Appoint and fix the remunerations and other emoluments of personnel below the rank of a
department head, as well as to impose disciplinary measures upon personnel of the Bangko
Sentral.
5. Render opinions, decisions, or rulings, which shall be final and executory until reversed or
modified by the Monetary Board, on matters regarding application or enforcement of
pertinent banking laws.
6. Exercise such other powers as may be vested in him by the Monetary Board.

Liabilities of the members of the Monetary Board

Members of the Monetary Board, officials, examiners, and employees of the BSP who:
1. Willfully violate RA 7653;
2. Are guilty of negligence, abuses or acts of malfeasance or misfeasance; or
3. Fail to exercise extraordinary diligence in the performance of his duties

Shall be held liable for any loss or injury suffered by the BSP or other banking institutions as a
result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise
extraordinary diligence (Sec 16, NCBA).

g. HOW THE BANGKO SENTRAL IN PILIPINAS HANDLES

BANKS IN DISTRESS
In case of a distressed bank, the BSP appoints a conservator or receiver for closure of the bank.

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Illiquidity- This occurs when the bank is not liquid. It means that the bank cannot meet its current
liabilities. It is handled by conservatorship.
Liquidity-It is the ability of an asset to be converted into cash. An entity is liquid when it is able
to pay its liabilities when they fall due.
Insolvency
This occurs 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. An entity is
insolvent when it is unable to meet current and long-term obligations. It is handled by receivership
or closure.

The duration of conservatorship shall not exceed 1 year (Sec. 29, NCBA).

a. CONSERVATORSHIP

Conservator
One appointed if the bank is in the state of illiquidity or the bank fails or refuses to maintain a state
of liquidity adequate to protect its depositors and creditors. The bank still has more assets than its
liabilities but its assets are not liquid or not in cash thus it cannot pay its obligation when it falls
due. The bank, not the BSP, pays for fees.

Powers of a conservator
1. Collect all monies and debts due to the said bank
2. To take charge of the assets, liabilities, and the management thereof
3. Reorganize, the management thereof
4. And such other powers as the Monetary Board deems necessary
5. 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
6. To bring court actions to assail or repudiate contracts entered into by the bank (First
Philippine International Bank v. CA, G.R. No. 115849, Jan. 24, 1996).

Powers of a conservator do not extend to the revocation of valid and perfected contracts
The powers of a conservator cannot extend to post facto repudiation of valid and perfected
transactions. Thus, the law merely gives the conservator power to revoke contracts that are deemed
to be defective- void, voidable, unenforceable or rescissible. Hence, the conservator merely takes
the place of the bank’s board (First Philippine International Bank v. CA, supra.).

Termination of conservatorship
1. Conservatorship is terminated when the Monetary Board is satisfied that the bank can
operate on its own and the conservatorship is no longer necessary; or
2. When the Monetary Board, on the basis of the report of the conservator or of its own
findings, determine that the continuance in business of the institution would involve
probable losses to its depositors or creditors (EFFECT: the bank or quasi- bank would
then be place under receivership)

b. CLOSURE
Grounds for closure of a bank or a quasi-bank

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 1. Cash Flow Test - Inability to pay liabilities as they become due in the ordinary course of
business (Sec. 30 (a), NCBA).
2. Balance Sheet Test – Insufficiency of realizable assets to meet its liabilities (Sec 30 (b),
NCBA).
3. Inability to continue business without involving probable losses to its depositors and
creditors (Sec 30 (c), NCBA).
4. Willful violation of a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets (Sec 30
(d), NCBA).
5. Notification to the BSP or public announcement of a bank holiday (Sec 53, GBL).
6. Suspension of payment of its deposit liabilities continuously for more than 30 days (Sec
53, GBL).
7. Persisting in conducting its business in an unsafe or unsound manner (Sec 56, GBL).

Close now-hear later doctrine

The doctrine is founded on practical and legal considerations to obviate unwarranted dissipation
of the bank’s assets and as a valid exercise of police power to protect the depositors, creditors,
stockholders, and the general public. The law does not contemplate prior notice and hearing before
the bank may be directed to stop operations and placed under receivership (Central Bank of the
Philippines v. CA, G.R. No. 76118 Mar. 30, 1993).

Assailing the order of closure (receivership or conservatorship)

1. The order may be assailed by the stockholders representing at least majority of the
outstanding capital stock;
2. within ten days from receipt by the board of directors of the order; and
3. Thru a petition for certiorari on the ground that the action taken by the BSP was in excess
of jurisdiction or with grave abuse of discretion as to amount to lack of jurisdiction.

No prior hearing is necessary in appointing a receiver and in closing the bank. It is enough that
subsequent judicial review is provided for. Indeed, to require such previous hearings would not
only be impractical but would tend to defeat the very purpose of the law

c. RECEIVERSHIP
Receiver
One appointed if the bank is already insolvent which means that its liabilities are greater than its
assets. The Court has no authority to appoint a receiver for a bank if the latter will function as such
under BSP law. The power to appoint belongs to BSP.

NOTE: For banks, the receiver would be the Philippine Deposit Insurance Corporation (PDIC);
for quasi-banks, it could be any person of recognized competence in banking or finance (Sec. 30,
NCBA).

Duties of a receiver
1. Immediately gather and take charge of all the assets and liabilities of the institution;

238
 2. Administer (only acts of administration and not acts of dominion) the same for the benefit
of the creditors, and exercise the general powers of a receiver under the Revised Rules of
Court;
3. Not, with the exception of administrative expenditures, pay or commit any act that will
involve the transfer or disposition of any asset of the institution: Provided that the receiver
may deposit or place the funds of the institution in non-speculative investments;
4. Within 90 days from the take-over, the receiver shall determine whether the institution may
be rehabilitated or otherwise placed in such a condition that it may be permitted to resume
business with safety to its depositors and creditors and the general public; and
5. If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business, then the Monetary Board shall notify in writing the board of directors of the
institution of its findings and direct the receiver to proceed with liquidation of the
institution (Sec 30, NCBA).

d. LIQUIDATION
Acts of liquidation are those which constitute the conversion of the assets of the banking institution
to money or the sale, assignment or disposition of the same to creditors and other parties for the
purpose of paying debts of such institution (Banco Filipino v. Central Bank, G.R. No. 70054,
December 11, 1991).

Commencement of liquidation proceedings bar the filing of a separate action or petition to

assail the order of closure
Once liquidation proceedings have been initiated, the majority stockholders of the bank can no
longer file a separate action or petition to assail the order of closure. Instead, issues on validity of
closure should be raised as affirmative defenses in the liquidation proceeding. This is necessary to
prevent multiplicity of suits or conflicting resolutions.

Filing of the claims against the insolvent bank

GR: All claims against the insolvent bank should be filed in the liquidation proceeding. It is not
necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation
court (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).

XPN: Where it is the bank that files a claim against another person or legal entity, the claim should
be filed in the regular courts.

Reason: The judicial liquidation is intended to provide an orderly mode for payment of all claims.
In addition, such petition is not in the nature of a disputed claim against the bank.

Bank deposits as a rule are not preferred credits

The exception is when the deposits are covered by a cashier's check purchased from the bank when
the bank officers knew or ought to have known that the bank is insolvent (Miranda v. PDIC, G.R.
No. 169334, September 8, 2006).

Conservatorship vs Receivership vs Liquidation

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 Conservatorship Receivership Liquidation
Grounds 1. Continuing inability 1. Inability to pay liabilities 1. Insolvency
2. Unwillingness to as they fall due 2. Continuance would
maintain condition of 2. Assets are less than its involve probable loss
liquidity liabilities to its creditors
3. Cannot continue 3. Bank cannot be
business without causing rehabilitated
damage
4. Violation of a cease and
desist order
5. “Bank holiday” for more
than 30 days (Sec 30,
NCBA).
Effects 1. Judicial personality is 1. Judicial personality is Same with
retained retained conservatorship
2. Perfected transactions 2. Suspension of operation/
cannot be repudiated stoppage of business
3. Assets deemed in
custodia legis

When After 1 year Within 90 days if When debts have been

terminated liquidation is decided paid in accordance
upon; with the liquidation
Until the bank is viable plan
again, if rehabilitation is
decided upon

h. ADMINISTRATIVE SANCTIONS ON SUPERVISED ENTITIES

(Sec 37, NCBA)
The imposition of administrative sanctions shall be fair, consistent, and reasonable. Without
prejudice to the criminal sanctions, the Monetary Board may, at its discretion, impose upon any
(1) bank, (2) quasi-bank, including their (3) subsidiaries and (4) affiliates engaged in allied
activities, or (5) other entity which under this Act or special laws are subject to the Bangko Sentral
supervision, and/or their (6) directors, (7) officers or (8) employees, for any:

1. willful violation of its charter or bylaws,

2. willful delay in the submission of reports or publications thereof;
3. any refusal to permit examination into the affairs of the institution;
4. any willful making of a false or misleading statement to the Board, or supervising and
examining department, or its examiners;
5. any willful failure, refusal to comply with, or violation of, any banking law, Monetary
Board, or the Governor; or
6. any commission of irregularities, and/or
7. conducting business in an unsafe or unsound manner.

The following are administrative sanctions:

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 1. fines in amounts as may be determined by the Monetary Board to be appropriate, but in no
case to exceed ₱1M for each transactional violation or ₱100,000 per calendar day for
violations of a continuing nature, taking into consideration the attendant circumstances,
such as the nature and gravity of the violation or irregularity and the size of the
institution: Provided, That in case profit is gained or loss is avoided as a result of the
violation, a fine no more than 3 times the profit gained or loss avoided may also be
imposed;
2. suspension of rediscounting privileges or access to Bangko Sentral credit facilities;
3. suspension of lending or foreign exchange operations or authority to accept new deposits
or make new investments;
4. suspension of interbank clearing privileges; and/or
5. suspension or revocation of quasi-banking or other special licenses.

Resignation or termination from office shall not exempt such director, officer or employee from
administrative or criminal sanctions.

The Monetary Board may, whenever warranted by circumstances, preventively suspend any
director, officer or employee of the institution pending an investigation: Provided, That should the
case be not finally decided by the Bangko Sentral within a period of 120 days after the date of
suspension, said director, officer or employee shall be reinstated in his position: Provided,
further, That when the delay in the disposition of the case is due to the fault, negligence, or petition
of the director or officer, the period of delay shall not be counted in computing the period of
suspension herein provided.

Whether or not there is an administrative proceeding, if the institution and/or the directors, officers
or employees concerned continue with or otherwise persist in the commission of the indicated
practice or violation, the Monetary Board may issue an order requiring the institution and/or the
directors, officers or employees concerned to cease and desist from the indicated practice or
violation, and may further order that immediate action be taken to correct the conditions resulting
from such practice or violation. The cease and desist order shall be immediately effective upon
service on the respondents.

The respondents shall be afforded an opportunity to defend their action in a hearing before the
Monetary Board or any committee chaired by any Monetary Board member created for the
purpose, upon request made by the respondents within 5 days from their receipt of the order. If no
such hearing is requested within said period, the order shall be final. If a hearing is conducted, all
issues shall be determined on the basis of records, after which the Monetary Board may either
reconsider or make final its order.

The Governor is hereby authorized, at his discretion, to impose upon banks and quasi-banks,
including their subsidiaries and affiliates engaged in allied activities, and other entities which
under this Act or special laws are subject to Bangko Sentral supervision for any failure to comply
with the requirements of law, Monetary Board regulations and policies, and/or instructions issued
by the Monetary Board or by the Governor, fines not in excess of ₱100,000 for each transactional
violation or ₱30,000 per calendar day for violations of a continuing nature, the imposition of which
shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal.

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i. RULES ON BANK DEPOSITS AND INVESTMENTS BY
DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR
RELATED INTERESTS (Sec 26, NCBA)
Any director, officer or stockholder who, together with his related interest, contracts a loan or any
form of financial accommodation from: (1) his bank; or (2) from a bank (a) which is a subsidiary
of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) 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, in excess of five percent (5%) of the capital and surplus of
the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by
the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the
Philippines. Any information obtained from an examination of his deposits shall be held strictly
confidential and may be used by the examiners only (1) in connection with their supervisory and
examination responsibility or (2) by the Bangko Sentral in an appropriate legal action it has
initiated involving the deposit account.

j. SUPERVISION AND REGULATION OF BANK OPERATIONS

a. LOANS AND OTHER CREDIT ACCOMMODATIONS
Credit Policy
Guiding Principles- The rediscounts, discounts, loans and advances which the Bangko Sentral is
authorized to extend to banking institutions, under the provisions of the present article of this Act
shall be used to influence the volume of credit consistent with the objective of price stability and
maintenance of financial stability. (Sec 81, NCBA).

NORMAL CREDIT OPERATIONS

Authorized Types of Operations.

1. Commercial credits- The Bangko Sentral may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments with maturities of not more
than 180 days from the date of their rediscount, discount or acquisition by the Bangko
Sentral and resulting from transactions related to:
a. the importation, exportation, purchase or sale of readily saleable goods and
products, or their transportation within the Philippines; or
b. the storing of non-perishable goods and products which are duly insured and
deposited, under conditions assuring their preservation, in authorized bonded
warehouses or in other places approved by the Monetary Board.

2. Production credits - The Bangko Sentral may rediscount, discount, buy and sell bills,
acceptances, promissory notes and other credit instruments having maturities of not more
than 360 days from the date of their rediscount, discount or acquisition by the Bangko
Sentral and resulting from transactions related to the production or processing of
agricultural, animal, mineral, or industrial products.

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 3. Other credits - Special credit instruments not otherwise rediscountable under the
immediately preceding subsections.

4. Advances - The Bangko Sentral may grant advances against the following kinds of
collaterals for fixed periods which, with the exception of advances against collateral named
in clause (d) of the present subsection, shall not exceed 180 days:
a. gold coins or bullion;
b. securities representing obligations of the Bangko Sentral or of other domestic
institutions of recognized solvency;
c. the credit instruments to which reference is made in subsection (1) of this section;
d. the credit instruments to which reference is made in subsection (2) of this section,
for periods which shall not exceed 360 days;
e. utilized portions of advances in current amount covered by regular overdraft
agreements related to operations included under subsections (1) and (2) of this
section, and certified as to amount and liquidity by the institution soliciting the
advance;
f. negotiable treasury bills, certificates of indebtedness, notes and other negotiable
obligations of the Government maturing within 3 years from the date of the
advance; and
g. negotiable bonds issued by the Government of the Philippines, by Philippine
provincial, city or municipal governments, or by any Philippine Government
instrumentality, and having maturities of not more than ten (10) years from the date
of advance.
The rediscounts, discounts, loans and advances made in accordance with the provisions of this
section may not be renewed or extended unless extraordinary circumstances fully justify such
renewal or extension.

Advances made against the collateral named in clauses (f) and (g) of subsection (4) of this section
may not exceed 80% of the current market value of the collateral (Sec 82, NCBA).

SPECIAL CREDIT OPERATION

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

EMERGENCY CREDIT OPERATION

Emergency Loans and Advances - In periods of national and/or local emergency or of imminent
financial panic which directly threaten monetary and banking stability, the Monetary Board may,
by a vote of at least 5 of its members, authorize the Bangko Sentral to grant extraordinary loans or
advances to banking institutions secured by assets: Provided, That while such loans or advances
are outstanding, the debtor institution shall not, except upon prior authorization by the Monetary
Board, expand the total volume of its loans or investments.

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The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grant
emergency loans or advances to banking institutions, even during normal periods, for the purpose
of assisting a bank in a precarious financial condition or under serious financial pressures brought
by unforeseen events, or events which, though foreseeable, could not be prevented by the bank
concerned: Provided, however, That the Monetary Board has ascertained that the bank is not
insolvent and has the assets defined hereunder to secure the advances: Provided, further, That a
concurrent vote of at least 5 members of the Monetary Board is obtained.

The amount of any emergency loan or advance shall not exceed the sum of 50% of total deposits
and deposit substitutes of the banking institution and shall be disbursed in 2 or more tranches (Sec
84, NCBA).

b. SELECTIVE REGULATION
The Monetary Board shall use the powers granted to it under this Act to ensure that the supply,
availability and cost of money are in accord with the needs of the Philippine economy and that
bank credit is not granted for speculative purposes prejudicial to the national interests. Regulations
on bank operations shall be applied to all banks of the same category uniformly and without
discrimination (Sec 104, NCBA).

i. MARGIN REQUIREMENTS AGAINST LETTERS OF CREDIT

The Monetary Board may at any time prescribe minimum cash margins for the opening of letters
of credit, and may relate the size of the required margin to the nature of the transaction to be
financed (Sec 105, NCBA).

ii. REQUIRED SECURITY AGAINST BANK LOANS

In order to promote liquidity and solvency of the banking system, the Monetary Board may issue
such regulations as it may deem necessary with respect to the maximum permissible maturities of
the loans and investments which the banks may make, and the kind and amount of security to be
required against the various types of credit operations of the banks (Sec 106, NCBA).

iii. PORTFOLIO CEILINGS

Whenever the Monetary Board considers it advisable to prevent or check an expansion of bank
credit, the Board may place an upper limit on the amount of loans and investments which the banks
may hold, or may place a limit on the rate of increase of such assets within specified periods of
time. The Monetary Board may apply such limits to the loans and investments of each bank or to
specific categories thereof.

In no case shall the Monetary Board establish limits which are below the value of the loans or
investments of the banks on the date on which they are notified of such restrictions. The restrictions
shall be applied to all banks uniformly and without discrimination (Sec 107, NCBA).

iv. MINIMUM CAPITAL RATIOS

The Monetary Board may prescribe minimum ratios which the capital and surplus of the banks
must bear to the volume of their assets, or to specific categories thereof, and may alter said ratios
whenever it deems necessary (Sec 107, NCBA).

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

B. LAW ON SECRECY OF BANK DEPOSITS (RA 1405, AS

AMENDED)

1. PURPOSE
The purposes of RA 1405 are:
1. Encourage people to deposit their money in banking institutions; and
2. Discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country (Sec. 1, RA 1405).

2. PROHIBITED ACTS
The following are the prohibited acts in RA 1405:
1. Examination/inquiry/looking into all deposits of whatever nature with banks or banking
institutions in the Philippines (including investment in bonds issued by the government)
by any person, government official, or office (Sec. 2, RA 1405).
2. Disclosure by any official or employee of any banking institution to any unauthorized
person of any information concerning said deposit (Sec. 3, RA 1405).

Acts not covered by the prohibition

Non-bank official or employee is not covered by the prohibition. Neither is disclosure by a bank
official or employee of information about bank deposit in favor of a co-employee in the course of
the performance of his duties covered by the prohibition.

3. DEPOSITS COVERED
1. All deposits of whatever nature with banks or banking institutions found in the Philippines.
2. Investments in bonds issued by the Philippine Government, its branches, and institutions
(Sec. 2, RA 1405).
3. Trust accounts

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 Sec.2, RA 1405. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in
bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered
as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent
court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the
subject matter of the litigation.

NOTE: Despite such pronouncement that trust funds are considered deposits, trust funds remain
not covered by PDIC.

NOTE: Confidentiality granted by RA 1405 does NOT extend to Letters of Credit and Trust
Receipts

The confidentiality granted by the law does NOT extend to other documents and records like L/C’s,
TR’s, bank drafts and promissory notes (Opinion of the Secretary of Justice No. 5, Series of 1982;
Opinion of the Secretary of Justice No. 126, Series of 1989).

4. EXCEPTIONS
Instances where examination or disclosure of information about deposits can be allowed
1. Upon written consent of the depositor;
2. In cases of impeachment;
3. Upon order of competent court in cases of bribery or dereliction of duty of public officials; or
4. In cases where the money deposited or invested is the subject matter of the litigation (Sec. 2, RA
1405).

Other Instances:
1. Upon order of the CIR in respect of the bank deposits of a decedent for the purpose of
determining such decedent’s gross estate;
2. Upon the order of the CIR in respect of bank deposits of a taxpayer who has filed an
application for compromise of his tax liability by reason of financial incapacity to pay his
tax liability;
3. The CIR is authorized to inquire into bank deposits of a specific taxpayer upon request for
tax information from a foreign tax authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a party;
4. In case of dormant accounts/deposits for at least 10 years under the Unclaimed Balances
Act;
5. The prohibition against examination of bank deposit does not preclude its garnishment to
satisfy a judgment against the depositor;
6. Presidential Commission on Good Government (PCGG) may require the production of
bank records material to its investigation;
7. The Anti-Money Laundering Council (AMLC) may inquire into any deposit with any bank
in case of violation of the RA 9160 or the AMLA if there is probable cause that it is related
to an unlawful activity;
8. The PDIC and the BSP may examine deposit accounts and all information related to them
in case of a finding of unsafe or unsound banking practices;
9. With court order:
1. In cases of unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt Practices
Act.

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 2. In cases filed by the Ombudsman and upon the latter’s authority to examine and
have access to bank accounts and records.
10. Without court order: If the AMLC determines that a particular deposit or investment with
any banking institution is related to the following:
1. Hijacking,
2. Kidnapping,
3. Murder,
4. Destructive Arson, and
5. Violation of the Dangerous Drugs Act
6. Acts of Terrorism or in violation of Human Security Act.
11. In case the law is repealed, superseded or modified by any law to the contrary.

5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN

DEPOSITS
Garnishment of a bank deposit does not violate the law
The prohibition against examination or inquiry does not preclude its being garnished for
satisfaction of judgment. The disclosure is purely incidental to the execution process and it was
not the intention of the legislature to place bank deposits beyond the reach of judgment creditor
(PCIB v. CA, G.R. No. 84526, January 28, 1991).

Garnishment of foreign currency deposits

GR: Foreign currency deposits shall be exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government agency or any administrative body
whatsoever (Sec 8, RA 6426).

XPN: The application of Sec. 8 of RA 6426 depends on the extent of its justice. The garnishment
of a foreign currency deposit should be allowed to prevent injustice and for equitable grounds,
otherwise, it would negate Article 10 of the New Civil Code which provides that “in case of doubt
in the interpretation or application of laws, it is presumed that the lawmaking body intended right
and justice to prevail (Salvacion v. Central Bank of the Philippines, G.R. 94723, August 21, 1997).

6. PENALTIES FOR VIOLATION

Penalties for violation of R.A. 1405
1. Imprisonment of not more than five (5) years; or
2. Fine of not more than P20,000.00; or
3. Both, in the discretion of the court (Sec. 5, 1405).

C. GENERAL BANKING ACT (RA 8791)

1. DEFINITION AND CLASSIFICATION OF BANKS
Banks- A bank is an entity engaged in the lending of funds obtained from the public in the form
of deposits from the public (Sec. 3.1, GBL).

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Elements for an entity to be considered doing business as a bank
1. The entity is engaged in the lending of funds;
2. Funds obtained from the public with at least 20 depositors;
3. Funds are in the form of deposits.

NOTE: A transaction involving not a loan but purchase of receivables at a discount within the
purview of investing, reinvesting, or trading in securities which an investment company may
perform is not banking.

Classifications of banks
1. Universal banks- Primarily governed by the GBL. They can exercise the powers of an
investment house and invest in non-allied enterprises and have the highest capitalization.
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 (Can only engage in allied
undertakings- Allied undertakings are those activities or entities which enhance or
complement banking).
3. Thrift banks – These are:
a. Savings and mortgage banks;
b. Stock savings and loan associations; and
c. Private development banks, which are primarily governed by the Thrift Banks Act
(RA 7906).
4. Rural banks – These are 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 – Banks whose majority shares are owned and controlled by
cooperatives primarily to provide financial and credit services to cooperatives. It shall
include cooperative rural banks. They are 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 Shari’ a, 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 BSP.

2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST

ENTITIES
Quasi-bank
These are entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or
purchasing of receivables and other obligations (Sec 4, GBL). The source of funds are borrowings
rather than bank deposits. Unlike banks, quasi-banks do not accept deposits. Neither are funds
obtained insured with the PDIC.

Trust entities

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These are entities engaged in trust business that 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, GBL). A bank does
not act as a trustee.

3. BANK POWERS AND LIABILITIES

a. CORPORATE POWERS
1. All powers provided by the corporation code, like issuance of stocks and entering into
merger or consolidation with other corporation or banks.
2. It can only acquire real property when it is needed for business, in settlement of debt
incurred in the course of the business, property as may be mortgaged to it to secure a debt
in good faith and, property it may acquire during execution sale to satisfy judgment. Banks
cannot acquire real property in settlement of a civil liability arising from crime.
3. A universal and commercial bank can both invest in equity but only universal bank is
allowed to invest in equity of non-allied enterprises.

b. BANKING AND INCIDENTAL POWERS

General powers and functions of a bank
1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes, drafts, bills of exchange and other
instrument evidencing debt
3. Accepting or creating demand deposits, receiving other types of deposit and deposit
substitutes
4. Buying and selling FOREX and gold or silver bullion
5. Acquiring marketable bonds and other debt securities
6. Extending credit
7. Determination of bonds and other debt securities eligible for investment including
maturities and aggregate amount of such investment, subject to such rules as the Monetary
Board may promulgate.
8. And all other powers as may be necessary to carry on the business of a bank (Sec. 29, GBL).

Rules regarding the issuance of stocks by a bank

1. The Monetary Board may prescribe rules and regulations on the types of stock a bank may
issue.
2. Banks shall issue par value stocks only (Sec. 9, GBL).
3. GR: No bank shall purchase or acquire shares of its own capital stock or accept its own
shares as a security for a loan.

XPN: When authorized by the Monetary Board.

NOTE: That in every case the stock so purchased or acquired shall, within 6 months from
the time of its purchase or acquisition, be sold or disposed of at a public or private sale
(Sec. 10, GBL).

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 4. Foreign individuals and non-bank corporations may own or control up to 40% of the
voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank
corporations.

NOTE: The percentage of foreign-owned voting stocks in a bank shall be determined by

the citizenship of the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the citizenship of the controlling
stockholders of the corporation, irrespective of the place of incorporation (Sec 11, GBL).

5. Stockholdings of individuals related to each other within the fourth degree of consanguinity
or affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such corporations or related
groups of persons with the bank (Sec 12, GBL).
6. Two or more corporations owned or controlled by the same family group or same group of
persons (Corporate Stockholdings) shall be considered related interests and must be fully
disclosed in all transactions by such corporations or related group of persons with the bank
(Sec 13, GBL).

Instances when a bank is prohibited from declaring dividends

1. Its clearing account with the Bangko Sentral is overdrawn;

2. It is deficient in the required liquidity floor for government deposits for 5 or more
consecutive days;
3. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for
purposes of determining funds available for dividend declaration;
4. It has committed a major violation as may be determined by the Bangko Sentral (Sec. 57,
GBL).

Independent directors in banks

Independent director – a person other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests.

NOTE: Irrespective of the number of members of the board, 2 of them shall be independent
directors.

Effect of merger or consolidation of banks to the number of directors allowed

In case of a merged bank, number of directors may be more than 15 but should not exceed 21 (Sec.
17, GBL).

Limitation on the grant of compensation to the directors by the Monetary Board

The Monetary Board may limit the grant of compensation to the directors of a bank only in
exceptional cases and when the circumstances warrant, such as but not limited to the following:
1. When a bank is under comptrollership or conservatorship
2. When a bank is found by the Monetary Board to be conducting business in an unsafe or
unsound manner

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 3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition
(Sec. 18, GBL).

4. DILIGENCE REQUIRED OF BANKS IN VIEW OF FIDUCIARY

NATURE OF BANKING
The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligations to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.

Degree of diligence required of banks in handling deposits

Banks are expected to exercise extraordinary diligence in its dealings with depositors.
Consequently, the diligence required of banks is more than that of a Roman pater familias or a
good father of a family (PCI Bank v Balcameda G.R. No. 158143, September 21, 2011).

Degree of diligence required of banks with its other dealings

The diligence more than that of a Roman pater familias only applies only to cases where banks
act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. The
same degree of diligence is not expected to be exerted by banks in commercial transactions (Reyes
v CA G.R. No. 118492. August 15, 2001).

5. NATURE OF BANK FUNDS AND BANK DEPOSITS

Deposit function of banks
The function of the bank to receive a thing, primarily money, from depositors with the obligation
of safely keeping it and returning the same.

Kinds of deposits between a bank and its depositors

1. As debtor-creditor
2. Special Kinds of Deposits
a. Demand deposits – all those liabilities of banks which are denominated in the
Philippine currency and are subject to payment in legal tender upon demand by
representation of checks.
b. Savings deposits – the most common type of deposit and is usually evidenced by a
passbook.

NOTE: The requirement of presentation of passbooks is required by the Manual of

Regulations for Banks. A bank is negligent if it allows the withdrawal without requiring
the presentation of passbook (BPI v. CA, GR No. 112392, February 29, 2000).

3. As trustee-trustor:
Trust account – a savings account, established under a trust agreement containing funds
administered by the bank for the benefit of the trustor or another person or persons.

4. As agent-principal:
a. Deposit of checks for collection

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 b. Deposit for specific purpose
c. Deposit for safekeeping

Types of deposit accounts

1. Savings
2. Current
3. Time

Deposit accounts may also be classified as:

1. Individual; or
2. Joint:
a. “And” account – the signature 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.

Joint accounts may be subject of a survivorship agreement 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 v. CA,
G.R. No. 82027, March 29, 1990).

Nature of a bank deposit

All kinds of bank deposits are loan. The bank can make use as its own the money deposited. Said
amount is (1) not being held in trust for the depositor (2) nor is it being kept for safekeeping (Tang
Tiong Tick v. American Apothecaries, G.R. No. 43682, March 31, 1938).

Mandamus will not lie in the enforcement of obligations concerning deposit

All kinds of deposit are loans. Thus, the relationship being contractual in nature, mandamus cannot
be availed of because mandamus will not lie to enforce the performance of contractual obligations
(Lucman v. Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).

Contract between banks and depositors is not a trust agreement

The fiduciary nature of the bank-depositor relationship does not convert the contract between
banks and depositors to a trust agreement. Thus, failure by the bank to pay the depositor is failure
to pay simple loan, and not a breach of trust (Consolidated Bank and Trust Corp. v. CA, G.R.
No. 138569, September 11, 2003).

Nature of safety deposit box

The contract for the use of a safety deposit box should be governed by the law on lease.

6. GRANT OF LOAN S AND SECURITY REQUIREMENTS

a. RATIO OF NET WORTH TO TOTAL RISK ASSETS
Net Worth
The total of the unimpaired paid-in surplus, retained earnings, and undivided profit, net of
valuation reserves and other adjustments as may be required by the BSP (Sec. 24.2, GBL).

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Risked based 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.

NOTE: The Monetary Board may require or suspend compliance with such ratio whenever
necessary for a maximum period of 1 year and that such ratio shall be applied uniformly to banks
of the same category (Sec. 34, GBL).

Effect of non-compliance with the ratio

1. Distribution of net profits may be limited or prohibited and MB may require that part or all
of the net profits be used to increase the capital accounts of the bank until the minimum
requirement has been met; or
2. GR: Acquisition of major assets and making of new investments may be restricted.

XPN: Purchases of evidence of indebtedness guaranteed by the Government can be

exempted from restrictions (Sec. 34, GBL).

b. SINGLE BORROWER’S LIMIT

Limitations imposed upon banks with respect to its loan function
1. GR: Single borrower’s limit – The total amount of loans, credit accommodations, and
guarantees that the bank could grant should at no time exceed 25% of the bank’s net
worth (GBL, Sec 35.1, amended by BSP Circular 779 s. 2013).

XPN:
a. As the Monetary Board may otherwise prescribe for reasons of national interest
b. Deposits of rural banks with GOCC financial institutions like LBP, DBP, and PNB.

2. The total amount of loans, credit accommodations, and guarantees prescribed in (a) may
be increased by an additional 10% of the net worth of such bank provided that additional
liabilities are adequately secured by trust receipt, shipping documents, warehouse receipts
and other similar documents which must be fully covered by an insurance (Sec. 35.2, GBL).

3. Loans and other credit accommodations secured by Real Estate Mortgage (REM) shall not
exceed 75% of the appraised value of the real estate security plus 60% of the appraised
value of the insured improvements (Sec. 37, GBL) Chattel Mortgage (CM)/intangible
property such as patents, trademarks, etc. shall not exceed 75% of the appraised value of
the security (Sec. 38, GBL).

4. Loans being contractual, the period of payment may be subject to stipulation by the parties.
In the case of amortization, the amortization schedule has no fixed period as it depends on
the project to be financed such that if it was capable of raising revenues, it should be at
least once a year with a grace period of 3 years if the project to be financed is not that
profitable which could be deferred up to 5 years if the project was not capable of raising
revenues (Sec. 44, GBL).

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 5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over the bank
d. Related Interests, such as DOS's spouses, their relatives within the first degree
whether by consanguinity or affinity, partnership whereby DOS is a partner or a
corporation where DOS owns at least 20%.

c. RESTRICTIONS ON BANK EXPOSURE TO DIRECTORS, OFFICERS,

STOCKHOLDERS, AND THEIR RELATE DINTERESTS (DOSRI)

Three (3) restrictions imposed by law on DOSRI transactions

GR: No director or officer of any bank shall, directly or indirectly, for himself or as the
representative or agent of others:

1. borrow from such bank;

2. become a guarantor, endorser, or surety for loans from such banks to others; or
3. in any manner be an obligor or incur any contractual liability to the bank (Sec.

36, GBL).

XPN: There is a written approval of the majority of all the directors of the bank, excluding the
director concerned.

Requirements that must be complied with in case of DOSRI accounts

1. Procedural requirement - Loan must be with written approved by the majority of all the
directors not including the director concerned. (Sec. 36. GBL).

2. Substantive requirement - Loan must not exceed the paid in contribution and unencumbered
deposits. (Not to exceed 15% of the portfolio or 100% of the net worth, whichever is lower) (Sec.
36 (4), GBL).

In the case of Go v. Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23, 2009, it was held
that the requirements are:
1. Approval requirement - which means that the DOSRI transaction must be approved by at
least majority of the directors excluding the director concerned;
2. Reportorial requirement - means that the transaction must be recorder in the books of the
bank and reported to the BSP; and
3. Ceiling requirement - which means that the amount of the loan shall not exceed the book
valued of the paid-in contribution and the amount of the unencumbered deposits.

d. PROHIBITED ACTS OF BORROWERS

No borrower shall:
1. Fraudulently overvalue property offered as security for a loan or other credit
accommodation from the bank;

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 2. Furnish false or make misrepresentation or suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other credit accommodation or extending the
period thereof;
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 approving a loan or
other credit accommodation application.

e. FLOATING INTEREST RATES AND ESCALATION CLAUSES

Rules on stipulation of interest

Through Circular No. 799, the Monetary Board declared that effective July 1, 2013 the rate of
interest for the loan or forbearance of any money, goods, or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be 6% per annum
(Section 1, Circular 799, Series of 2013 amending Section 2 of Circular No. 905, Series of 1982).

This means that if the parties fail to state in writing the interest payable on any of the transactions
mentioned, or on account of a court judgment involving a related money claim, the imposable
interest is 6% every year.

Escalation Clauses
Stipulations in the loan which contains agreement of the parties to increases or decreases the loan
interest. It shall be valid if there is a written consent of the depositor, thus, not violating the
principle of mutuality of contracts.

An escalation clause with a de-escalation clause is valid provided that the client’s consent is still
secured prior to any increase in interest rate; otherwise, the escalation clause is void.

7. PENALTIES FOR VIOLATIONS

Unless otherwise herein provided, the violation of any of the provisions of this Act shall be subject
to Sections 34, 35, 36 and 37 of the New Central Bank Act (RA 7653/ 11211). If the offender is
a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or
remove such director or officer. If the violation is committed by a corporation, such corporation
may be dissolved by quo warranto proceedings instituted by the Solicitor General (Sec. 66, GBL).

a. FINE, IMPRISONMENT (Secs. 34, 35, 36, 37, NCBA)

1. Refusal to make reports or permit examination- Fine of ₱50,000- ₱2M or by
imprisonment of 1- 5 years, or both, at the discretion of the court (Sec. 34. NCBA).
2. False statement- fine of ₱100,000- ₱2M, or by imprisonment of not more than 5 years, or
both, at the discretion of the court (Sec. 35. NCBA).
3. Proceedings Upon Violation of NCBA and Other Banking Laws, Rules, Regulations,
Orders or Instructions- The person or persons responsible for such violation shall be
punished by a fine of ₱50,000- ₱2M or by imprisonment of 2-10 years, or both, at the
discretion of the court (Sec. 36. NCBA).

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 4. Administrative Sanctions on Supervised Entities by the Bangko Sentral- Fines in
amounts as may be determined by the Monetary Board to be appropriate, but in no case to
exceed ₱1M for each transactional violation or ₱100,000 per calendar day for violations of
a continuing nature, taking into consideration the attendant circumstances, such as the
nature and gravity of the violation or irregularity and the size of the institution: Provided,
That in case profit is gained or loss is avoided as a result of the violation, a fine no more
than 3 times the profit gained or loss avoided may also be imposed (Sec. 37. NCBA).

b. SUSPENSION OR REMOVAL OF DIRECTOR OR OFFICER

If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board
may also suspend or remove such director or officer (Sec. 66, GBL).

c. DISSOLUTION OF BANK
If the violation is committed by a corporation, such corporation may be dissolved by quo warranto
proceedings instituted by the Solicitor General (Sec. 66, GBL).

D. PHILIPPINE DEPOSIT INSURNCE CORPORATION

ACT (RA 3591, AS AMENDED)
1. BASIC POLICY
There is hereby created a Philippine Deposit Insurance Corporation hereinafter referred to as the
‘Corporation’ which shall insure as herein provided, the deposits of all banks which are entitled to
the benefits of insurance under this Act, and which shall have the powers hereinafter granted.

The Corporation shall, as a basic policy, (1) promote and safeguard the interests of the depositing
public by providing insurance coverage on all insured deposits and (2) helping maintain a sound
and stable banking system (Sec. 1, PDIC as amended by RA 10846).

2. POWERS AND FUNCTIONS OF THE PHILIPPINE DEPOSIT

INSURANCE CORPORATION; PROHIBITIONS
Primary Functions:
1. Deposit insurer;
2. Co-regulator of banks; and
3. Receiver and liquidator of closed banks.

Board of Directors
The powers and functions of PDIC shall be vested in, and exercised by, a Board of Directors
which shall be composed of 7 members as follows:
1. The Secretary of Finance shall be the ex officio chairman of the Board without
compensation

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 2. The Governor of the Bangko Sentral ng Pilipinas (BSP) who shall be ex officio member
of the Board without compensation (PDIC Charter, as amended by R.A. No. 9302).
3. The President of PDIC
a. The President of PDIC shall be appointed by the President of the Philippines from
a shortlist prepared by the Governance Commission for Government Owned or
Controlled Corporations (GOCCs), pursuant to R.A. 10149
b. The President of PDIC shall serve on a full-time basis for a term of 6 years.
c. The President of PDIC shall also serve as the Vice Chairman of the Board (PDIC
Charter, as amended by R.A. No. 10846).
4. 4 members from the private sector
The members are to be appointed by the President of the Philippines from a shortlist
prepared by the Governance Commission for GOCCs pursuant to R.A. 10149.

The appointive directors shall serve for a term of 6 years unless sooner removed for cause
and shall be subject to only 1 reappointment: Provided, That –
a. Of those first appointed, the first 2 appointees shall serve for a period of 3 years
b. The appointive director shall continue to hold office until the successor is
appointed.

An appointive director may be nominated by the Governance Commission for GOCCs for
reappointment by the President
a. Only if one obtains a performance score of above average or its equivalent or higher in
the immediately preceding year of tenure as appointive director
b. Based on the performance criteria for appointive directors of PDIC (Sec. 3, PDIC
Charter, as amended by R.A. No. 10846).

Appointment to any vacancy shall be only for the unexpired term of the predecessor
pursuant to R.A. 10149 (PDIC Charter, as amended by R.A. No. 10846).

POWERS AND FUNCTIONS OF PDIC

1. PDIC shall be entitled to the free use of Philippine mail in the same manner as theother
offices of the national government.

2. The Board of Directors shall appoint examiners who shall have power, on behalf of PDIC,
to examine any insured bank or any bank making application to become an insured bank
a. Each such examiner shall have power to make a thorough examination of allthe
affairs of the bank
b. In doing so the examiner shall have power:
i. To administer oaths;
ii. To examine and take and preserve the testimony of any of the officers and
agents thereof; and
iii. To compel the presentation of books, documents, papers, or records
necessary in his judgment to ascertain the facts relative to the condition of
the bank
1. The examiner shall make a full and detailed report of the condition
of the bank to PDIC.

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 3. The Board of Directors shall appoint claim agents who shall have power to investigate
and examine all claims for insured deposits and transferred deposits. Each claim agent
shall have power –
a. To administer oaths; and
b. To examine under oath and take and preserve the testimony of any person relating
to such claims.

4. PDIC may appoint or hire persons or entities of recognized competence in forensic and
fraud investigations as its agents to conduct investigations on frauds, irregularities, and
anomalies committed in banks, based on:
a. Reports of examination conducted by PDIC and BSP; or
b. Complaints from depositors or from other government agency.

5. PDIC shall have access to reports of examination made by, and reports of condition
made to the BSP or its appropriate supervising departments, Provided That –
a. PDIC shall use the reports and findings under similar terms and conditions
prescribed by applicable laws on the BSP (Sec. 10, PDIC Charter, as amended by
R.A. 7400, R.A. 9302, and R.A. 10846).

PROHIBITIONS
Personnel of PDIC are hereby prohibited from:
1. Being an officer, director, consultant, employee, or stockholder, directly or indirectly, of
any bank or banking institution except as otherwise provided in the PDIC Charter;

XPN: Members of the Board of Directors and other personnel of PDIC may become
directors and officers of any bank and banking institution and of any entity related to such
institution –
a. In connection with financial assistance extended by PDIC to such institution; and
b. When in the opinion of the Board, it is appropriate to make such a designation to
protect the interest of PDIC

2. Receiving any gift or thing of value from any officer, director or employee thereof:

3. Revealing in any manner, except under order of the court or authorized herein in such
condition or business of any such institution.

The prohibition shall not be held to apply to the giving of information to the Board of
Directors or to any person authorized by neither of them in writing to receive such
information (Sec. 10, PDIC Charter, as amended by R.A. 7400 and R.A. 10846).

PROHIBITION ON BORROWING
From Institutions under Examination
Borrowing from the particular bank or banking institution in which they are assigned, or are
conducting an examination by the ff. is prohibited:
1. Examiners; and

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 2. Other personnel of the examination departments of PDIC

From Institutions Undergoing any Action

GR: All personnel of other departments, offices or units of PDIC shall likewise be prohibited from
borrowing from any bank or banking institution during the period of time that a transaction of such
institution with the corporation is being:
1. Evaluated;
2. Processed; or
3. Acted upon by such personnel

XPN: Certain personnel may be exempted from the prohibition, as the Board may, at its discretion,
indicate the position levels or functional groups to which the prohibition is applicable.

From Any Institution

Borrowing by all full-time personnel of PDIC from any bank or banking institution shall be:
1. Secured and disclosed to the Board; and
2. Subject to such further rules and regulations as the Board may prescribe (Sec. 10, PDIC
Charter, as amended by R.A. 7400 and R.A. 10846).

3. CONCEPT OF INSURED DEPOSITS

Insured Deposit
The term “insured deposit” means the amount due to any bona fide depositor for legitimate
deposits in an insured bank as of the date of closure but not to exceed P500,000.00 (Sec. 5(j), RA
3591, as amended).

Adjusting the Maximum Deposit Insurance Cover

The maximum deposit insurance coverage is P500,000.00.

However, in case of a condition that threatens the monetary and financial stability of the banking
system that may have systemic consequences, as defined in Section 22 of the PDIC Charter, as
determined by the Monetary Board, the maximum deposit insurance cover may be adjusted –
1. In such amount,
2. For such a period, and/or
3. For such deposit products,
-As may be determined by a unanimous vote of the Board of Directors in a meeting called
for the purpose, chaired by the Secretary of Finance
-Subject to the approval of the President of the Philippines (Sec. 5(j), RA 3591, as
amended).

4. LIABILITY TO DEPOSITORS
a. DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH THE PDIC

GR: The deposit liabilities of any bank shall be insured with PDIC (Sec. 6, PDIC Charter, as
amended by R.A. 10846).

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Foreign currency deposits are also insured by PDIC pursuant to R.A. 6426 (An act instituting a
foreign currency deposit system in the Philippines, and for other purposes).

Depositors may receive payment in the same currency in which the insured deposit is denominated
(Sec. 9, R.A. 6426).

XPN: Deposits in overseas branches of local banks are NOT insured with PDIC, as PDIC
insurance only covers deposits in banks located in the Philippines.

However, any insured bank with a branch outside the Philippines, subject to the approval of
the Board of Directors, may elect to include for insurance its deposit obligations payable at such
branch (Sec. 5 (g), PDIC Charter, as amended by R.A. 9576 and R.A. 10846).

b. COMMENCEMENT OF LIABILITY
PDIC shall commence the determination of insured deposits due the depositors of a closed bank
upon its actual takeover of the closed bank.

PDIC shall give notice to the depositors of the closed bank of the insured deposits due them by
whatever means deemed appropriate by the Board of Directors: Provided, That –
1. PDIC shall publish the notice once a week for at least 3 consecutive weeks in a newspaper
of general circulation; or
2. When appropriate, it shall be published in a newspaper circulated in the community or
communities where the closed bank or its branches are located (Sec. 18, R.A. 9302).

c. DEPOSIT ACCOUNTS NOT ENTITLED TO PAYMENT

PDIC shall not pay deposit insurance for the following accounts or transactions:
1. Investment products such as bonds and securities, trust accounts, and other similar
instruments;
2. Deposit accounts or transactions which are fictitious or fraudulent, as determined by
PDIC;
3. Deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound
banking practice/s;
4. As determined by PDIC, in consultation with the BSP;
5. After due notice and hearing, and publication of a cease and desist order issued by PDIC
against such deposit accounts or transactions; and
6. Deposits that are determined to be the proceeds of an unlawful activity as defined under
the Anti-Money Laundering Act (Republic Act 9160, as amended). (Sec. 5(g), PDIC
Charter, as amended by R.A. 9576 and R.A. 10846)

d. EXTENT OF LIABILITY
PDIC covers only the risk of a bank closure ordered by the Monetary Board. Thus, bank losses
due to theft, fire, closure by reason of strike or existence of public disorder, revolution or civil war,
are not covered by PDIC.

e. DETERMINATION OF INSURED DEPOSITS

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The amount of the insured deposit shall be determined according to such regulations as the Board
of Directors may prescribe.

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 or her benefit either in his or her own name
or in the name of others (Sec. 5(j), PDIC).

In PDIC v. Gidwani, 867 SCRA 581 (2018), Gidwani used his helpers and rank-and-file employees
to create several deposit accounts ostensibly held by them but actually beneficially owned by him,
for the purpose of increasing his deposit insurance cover. The Supreme Court held that “the
entitlement to a deposit insurance is based not on the number of bank accounts held, but on
the number of beneficial owners.” In this case, there was only one beneficial owner of the several
bank accounts (namely, Gidwani); hence, he was only entitled to P250,000 (then the maximum
deposit insurance cover under the PDIC Charter) for all the deposit accounts.

NOTE: No owner/holder of any passbook, certificate of deposit, or other evidence of deposit shall
be recognized as a depositor entitled to the rights provided in the PDIC Charter unless the same is
determined by PDIC to be an authentic document or record of the issuing bank (Sec. 5(j), PDIC).

f. CALCULATION OF LIABILITY

i. PER DEPOSITOR, PER CAPACITY RULE

In determining such amount due to any depositor, there shall be added together all deposits in the
bank maintained (1) in the same right and capacity (2) for his or her benefit (3) either in his or her
own name or in the name of others (Sec. 3, R.A. 9576]

ii. JOINT ACCOUNTS

A joint account regardless of whether the conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be insured
separately from any individually- owned deposit account: Provided, That-

Holder of Account Division of Maximum Insured Deposit

If the account is held jointly by 2 or more GR: The maximum insured deposit shall be
natural persons, or by 2 or more juridical divided into as many equal shares as there are
persons or entities individuals, juridical persons or entities.

XPN: Unless a different sharing is stipulated

in the document of deposit.
If the account is held by a juridical person or The maximum insured deposit shall be
entity jointly with one or more natural persons presumed to belong entirely to such juridical
person or entity.

The aggregate of the interest 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 P500,000.00 (Sec. 5(j), PDIC).

iii. MODE OF PAYMENT

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Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30
of R.A. 7653, payment of the insured deposits on such closed bank shall be made by PDIC as soon
as possible either:
1. by cash; or
2. by making available to each depositor a transferred deposit in another insured bank in an
amount equal to insured deposit of such depositor.

Provided, however, That PDIC, in its discretion, may:

1. Require proof of claims to be filed before paying the insured deposits; and
2. Require final determination of a court of competent jurisdiction before paying such claim,
in any case where PDIC is not satisfied as to the viability of a claim for an insured deposit
(Sec. 19, PDIC Charter, as amended by R.A. 10846).

iv. EFFECT OF PAYMENT OF INSURED DEPOSITS

PDIC, upon payment of any depositor, shall be subrogated to all rights of the depositor against
the closed bank to the extent of such payment.

Such subrogation shall include the right on the part of PDIC to receive the same dividends and
payments from the –
1. Proceeds of the assets of such closed bank; and
2. Recoveries on account of stockholders’ liability, as would have been payable to the
depositor on a claim for the insured deposits.

NOTE: However, such depositor shall retain his claim for any uninsured portion of his deposit
(Sec. 20, PDIC Charter, as amended by R.A. 10846).

v. PAYMENT OF INSURED DEPOSITS AS PREFERRED CREDIT

All payments by PDIC of insured deposits in closed banks –
1. Partake of the nature of public funds; and
2. As such, must be considered a preferred credit similar to taxes due to the National
Government in the order of preference under Article 2244 of the New Civil Code
a. This preference shall be likewise effective upon liquidation proceedings already
commenced and pending as of the approval of the PDIC Charter, where no
distribution of assets has been made (Sec. 20, PDIC Charter, as amended by R.A.
10846).
b. NOTE: Taxes due to the National Government are ranked 9th out of the 14
enumerated ordinary preferred credits under Art. 2244

Implications of Status as Ordinary Preferred Credit

1. Ordinary preferred credits enjoy a preference, excluding the credits that are later in order,
but only as against the value of the property not otherwise subjected to any special preferred
credit;
2. Does not create a lien on specific property;
3. Creates rights in favor of certain creditors to have the free property of the debtor applied
in accordance with an order of preference (Art. 2244, NCC; Somera).

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vi. FAILURE TO SETTLE CLAIM OF INSURED DEPOSITOR
GR: The failure to settle the claim, within 6 months from the date of filing of claim for insured
deposit, shall, upon conviction, subject the directors, officers or employees of PDIC responsible
for the delay, to imprisonment from 6 months- 1 year, where such failure was due to –
1. Grave abuse of discretion,
2. Gross negligence,
3. Bad faith, or
4. Malice

XPN: The 6-month period shall NOT apply if the validity of the claim requires the resolution of
issues of facts and or law –
1. By another office, body or agency; or
2. By PDIC together with such other office, body, or agency (Sec. 19, PDIC Charter, as
amended by R.A. 10846).

vii. FAILURE OF DEPOSITOR TO CLAIM INSURED DEPOSITS

If the depositor in the closed bank shall fail to claim his insured deposits with PDIC within 2 years
from actual takeover of the closed bank by the receiver, or does not enforce his claim filed with
the corporation within 2 years after the two-year period to file a claim:
1. All rights of the depositor against PDIC with respect to the insured deposit shall be barred;
2. However, all rights of the depositor against the closed bank and its shareholders or the
receivership estate to which PDIC may have become subrogated, shall thereupon revert to
the depositor.
3. Thereafter, PDIC shall be discharged from any liability on the insured deposit (Sec. 18,
R.A. 9302).

NOTE: PDIC may waive the abovementioned 2-year period.

(a) EXAMINATION OF BANKS AND DEPOSIT ACCOUNTS

Power to Conduct Examination of Banks (BY PDIC)

PDIC, as a corporate body, shall have the power to conduct examination of banks with prior
approval of the Monetary Board, Provided, That –

1. No examination can be conducted within 12 months from the last examination date;
2. However, PDIC may conduct a special examination, in coordination with the BSP , as the
Board of Directors:
a. By an affirmative vote of a majority of all of its members; and
b. If there is a threatened or impending closure of a bank (Sec. 9(8), PDIC Charter,
as amended by R.A. 9576 and R.A. 10846).

Power to Inquire into Deposit Accounts

PDIC and/or the BSP, may inquire into or examine deposit accounts and all information related
thereto
1. In case there is a finding of unsafe or unsound banking practice
2. Notwithstanding the provisions of:

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 a. Republic Act No. 1405, as amended
b. Republic Act No. 6426, as amended,
c. Republic Act No. 8791, and
d. Other laws

To avoid overlapping of efforts, the examination of banks and deposit accounts shall maximize
the efficient use of the relevant reports, information, and findings of the BSP, which it shall make
available to PDIC (Sec. 9(8), PDIC Charter, as amended by R.A. 9576 and R.A. 10846).

Refusal to Permit Examination

Any unjustified refusal to permit examination and audit of the deposit records or the affairs of the
institution shall, at the discretion of the court, be punished by imposing upon any director, officer,
employee or agent of a bank:
1. The penalty of imprisonment of not less than 6 years but not more than 12 years; or
2. A fine of not less than P50,000 but not more than P2M; or
3. Both imprisonment and the fine (Sec.26(f)(1)(b), PDIC Charter, as amended by R.A.
10846).

(b) PROHIBITION AGAINST SPLITTING OF DEPOSITS

Occurs whenever a deposit account with an outstanding balance of more than the statutory
maximum amount of insured deposit, maintained under the name of natural or juridical persons,
is broken down and transferred into two or more accounts –

In the name/s of natural or juridical persons or entities who have no beneficial ownership on
transferred deposits in their names;
Either:
1. Within 120 days immediately preceding a bank holiday; or
2. During a bank-declared bank holiday, or
3. Within 120 days immediately preceding a closure order issued by the Monetary Board of
the BSP for the purpose of availing of the maximum deposit insurance coverage (Sec.
26(f)(1)(e), PDIC Charter, as amended by R.A. 10846).

Penalty for Splitting of Deposits

The splitting of deposits or creation of fictitious or fraudulent loans or deposit accounts shall, at
the discretion of the court, be punished by imposing upon any director, officer, employee or
agent of a bank:
1. The penalty of imprisonment of not less than 6 years but not more than 12 years; or
2. A fine of not less than P50,000 but not more than P2M; or
3. Both imprisonment and the fine (Sec.26(f)(1)(e), PDIC Charter, as amended by R.A.
10846).

(c) PROHIBITION AGAINST ISSUANCE OF TEMPORARY RESTRAINING ORDERS

The actions of the Board of Directors of PDIC, namely, determining and prescribing, by
regulations, what are considered as deposit liabilities of the bank under Section 5(g) shall be final
and executory (Sec.5(g), PDIC Charter, as amended by R.A. No. 10846).

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Such actions may only be restrained or set aside by the Court of Appeals, upon appropriate
petition for certiorari on the ground that –
1. The action was taken in excess of jurisdiction; or
2. The action was taken with such grave abuse of discretion as to amount to a lack or excess
of jurisdiction.

The petition for certiorari may only be filed within 30 days from notice of denial of claim for
deposit insurance (Sec.5(g), PDIC Charter, as amended by R.A. No. 10846).

5. CONCEPT OF BANK RESOLUTION

Definition
The term resolution refers to the actions undertaken by PDIC under Section 11 of the PDIC
Charter to:
1. Protect depositors, creditors and the Deposit Insurance Fund (DIF);
2. Safeguard the continuity of essential banking services or maintain financial stability; and
3. Prevent deterioration or dissipation of bank assets (Sec.5(s), PDIC Charter, as amended by
R.A. No. 10846).

Grounds for the Resolution of a Bank

PDIC, in coordination with the BSP may commence the resolution of a bank under the PDIC
Charter upon:
1. Failure of prompt corrective action as declared by the Monetary Board; or
2. Request by a bank to be placed under resolution (Sec. 11(a), PDIC Charter, as amended
by R.A. 10846).

The Role of the PDIC in Bank Resolution

PDIC shall:
1. Inform the bank of its eligibility for entry into resolution (Sec. 11(a), PDIC Charter, as
amended by R.A. 10846).
2. Have the authority to inquire and monitor the status of banks under prompt corrective
action (Sec. 11(b), PDIC Charter, as amended by R.A. 10846).
3. Determine whether the bank may be resolved through the (1) purchase of all its assets and
(2) assumption of all its liabilities, or (3) merger or consolidation with, or its (4)
acquisition, by a qualified investor
a. Within a period of 180 days from a bank's entry into resolution
b. Through the affirmative vote of at least 5 members of the PDIC Board (Sec. 11(e),
PDIC Charter, as amended by R.A. 10846).

Note: If PDIC determines that the bank may not be resolved, the Monetary Board may act
in accordance with Section 30 of Republic Act No. 7653 or (4) the New Central Bank Act
(Sec. 11(i), PDIC Charter, as amended by R.A. 10846).

The Role of the BSP in Bank Resolution

The BSP shall:
1. Inform PDIC of the initiation of prompt corrective action on any bank; and

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 2. Be authorized to share with PDIC all information, agreements or documents, including any
order of the Monetary Board, in relation to the prompt corrective action.

Failure of Prompt Corrective Action

PDIC, its duly authorized officers or employees, may examine, inquire or look into the deposit
records of a bank when there is a failure of prompt corrective action as declared by the Monetary
Board due to capital deficiency.

However, such authority may NOT be exercised when such failure is due to grounds other than
capital deficiency.

For this purpose, banks, their officers and employees are hereby mandated to disclose and report
deposit account information in said bank to PDIC or its duly authorized officers and employees.
(Sec. 11(c), PDIC Charter, as amended by R.A. 10846).

Obligations of the Bank Undergoing Resolution

The stockholders, directors, officers, or employees of the bank shall have the following
obligations:
1. Ensure bank compliance with the terms and conditions prescribed by PDIC for the
resolution of the bank;
2. Cause the engagement, with the consent of PDIC, of an independent appraiser or auditor
for the purpose of determining the valuation of the bank consistent with generally accepted
valuation standards;
3. Ensure prudent management and administration of the bank's assets, liabilities and records;
and
4. Cooperate with PDIC in the conduct or exercise of any or all of its authorities under the
PDIC Charter and honor in good faith its commitment or undertaking with PDIC on the
resolution of the bank (Sec. 11(d), PDIC Charter, as amended by R.A. 10846).

6. ROLE OF PHILIPPINE DEPOSIT INSURANCE

CORPORATION IN RELATION TO BANKS IN DISTRESS
a. CLOSURE AND TAKEOVER
Whenever a bank is ordered closed by the Monetary Board, the Corporation shall:
1. Be designated as receiver; and
2. Proceed with the takeover and liquidation of the closed bank in accordance with the PDIC
Charter.

For this purpose, banks closed by the Monetary Board shall no longer be rehabilitated.
(Sec. 12, PDIC Charter, as amended by R.A. No. 10846).

Designation of PDIC as Receiver

Upon the designation of PDIC as receiver of a closed bank, it shall:
1. Serve a notice of closure to the highest-ranking officer of the bank present in the bank
premises; or

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 2. Post the notice of closure in the bank premises or on its main entrance, in the absence of
such officer.

Closure and Takeover of Bank

The closure of the bank shall be deemed effective upon the service of the notice of closure.

Thereafter, the receiver shall takeover the bank and exercise the powers of the receiver as provided
in the PDIC Charter (Sec.14(a), PDIC Charter, as amended by R.A. No. 10846).

b. CONSERVATORSHIP
Grounds for Appointment of a Conservator
Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or quasi-bank is:
1. In a state of continuing inability; or
2. Unwilling to maintain a condition of liquidity deemed adequate to protect the interest of
depositors and creditors (Sec. 29, R.A. 7653, as amended).

The designation of a conservator shall be vested exclusively in the Monetary Board (Sec. 30,
R.A. 7653, as amended).

Qualifications of a Conservator
1. Competent and knowledgeable in bank operations and management;
2. A natural person to be appointed by the generally the PDIC (Sec. 29, R.A. 7653, as
amended).

NOTE: The designation of a conservator is not a precondition to the designation of a

receiver (Sec. 30, R.A. 7653, as amended).

c. RECEIVER

Grounds
The Monetary Board may summarily, and without need for prior hearing, forbid the institution
from doing business in the Philippines and designate the PDIC as receiver of the banking
institution whenever –

Upon report of the head of the supervising or examining department, the Monetary Board finds
that a bank or quasi-bank:
1. Is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
2. Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or
3. Cannot continue in business without involving probable losses to its depositors or creditors;
or
4. Has willfully violated a cease and desist order under Section 37 of the New Central Bank
Act that has become final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution;

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NOTE: For a quasi-bank, any person of recognized competence in banking or finance may be
designated as receiver (Sec. 30, R.A. 7653, as amended).

Specific Powers of the PDIC as Receiver

In addition to the powers of a receiver provided under existing laws (see Sec. 30, R.A. 7653), PDIC,
as receiver of a closed bank, is empowered to:
1. Represent and act for and on behalf of the closed bank;
2. Gather and take charge of all the assets, records and affairs of the closed bank, and
administer the same for the benefit of its creditors;
3. Convert the assets of the closed bank to cash or other forms of liquid assets, as far as
practicable;
4. Bring suits to enforce liabilities of the directors, officers, employees, agents of the closed
bank and other entities related or connected to the closed bank or to collect, recover, and
preserve all assets, including assets over which the bank has equitable interest;
5. Appoint or hire persons or entities of recognized competence in banking, finance, asset
management or remedial management, as its deputies, assistants or agents, to perform such
powers and functions of PDIC as receiver of the closed bank, or assist in the performance
thereof;
6. Appoint or hire persons or entities of recognized competence in forensic and fraud
investigations;
7. Pay accrued utilities, rentals and salaries of personnel of the closed bank for a period not
exceeding 3 months, from available funds of the closed bank;
8. Collect loans and other claims of the closed bank and for this purpose, modify, compromise
or restructure the terms and conditions of such loans or claims as may be deemed
advantageous to the interests of the creditors of the closed bank;
9. Hire or retain private counsel as may be necessary;
10. Borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed bank,
when necessary to preserve or prevent dissipation of the assets, or to redeem foreclosed
assets of the closed bank, or to minimize losses to its depositors and creditors;
11. If the stipulated interest rate on deposits is unusually high compared with prevailing
applicable interest rates, PDIC as receiver, may exercise such powers which may include
a reduction of the interest rate to a reasonable rate: Provided, That any modifications or
reductions shall apply only to earned and unpaid interest;
12. Utilize available funds of the bank, including funds generated by the receiver from the
conversion of assets to pay for reasonable costs and expenses incurred for the preservation
of the assets, and liquidation of, the closed bank, without need for approval of the
liquidation court; For banks with insufficient funds, PDIC is authorized to advance the
foregoing costs and expenses, and collect payment, as and when funds become available.
13. Charge reasonable fees for the liquidation of the bank from the assets of the bank: Provided,
That payment of these fees, including any unpaid advances under the immediately
preceding paragraph, shall be subject to approval by the liquidation court;
14. Distribute the available assets of the closed bank, in cash or in kind, to its creditors in
accordance with the Rules on Concurrence and Preference of Credits under the Civil Code
or other laws;

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 15. Dispose records of the closed bank that are no longer needed in the liquidation in
accordance with guidelines set by the PDIC Board of Directors, notwithstanding the laws
on archival period and disposal of records; and
16. Exercise such other powers as are inherent and necessary for the effective discharge of the
duties of PDIC as receiver (Sec.13(b), PDIC Charter, as added by R.A. No. 10846).

d. LIQUIDATION
The receiver is authorized to adopt and implement, without need of consent of the stockholders,
board of directors, creditors or depositors of the closed bank, any or a combination of the following
modes of liquidation:
1. Conventional liquidation; and
2. Purchase of assets and/or assumption of liabilities (Sec.13(a), PDIC Charter, as amended
by R.A. No. 10846).

The placement of a bank under liquidation shall have the following effects:
1. On the corporate franchise or existence:
Upon placement by the Monetary Board of a bank under liquidation, it shall continue as a
body corporate until the termination of the winding-up period under Section 16 of the PDIC
Charter.
a. The receiver shall represent the closed bank in all cases by or against the closed bank
and prosecute and defend suits by or against it.
b. In no case shall the bank be reopened and permitted to resume banking business after
being placed under liquidation.

2. On the powers and functions of its directors, officers and stockholders:

The powers, voting rights, functions and duties, as well as the allowances, remuneration
and perquisites of the directors, officers, and stockholders of such bank are terminated upon
its closure.
a. Accordingly, the directors, officers, and stockholders shall be barred from interfering
in any way with the assets, records, and affairs of the bank.
b. The receiver shall exercise all authorities as may be required to facilitate the liquidation
of the closed bank for the benefit of all its creditors.

3. On the assets:
Upon service of notice of closure as provided in Section 14 of the PDIC Charter, all the
assets of the closed bank shall he deemed in custodia legis in the hands of the receiver, and
as such, these assets may not be subject to attachment, garnishment, execution, levy or any
other court processes.
a. A judge, officer of the court or any person who shall issue, order, process - or cause the
issuance or implementation of the garnishment order, levy, attachment or execution,
shall be liable under Section 27 of the PDIC Charter.
b. Collaterals securing the loans and advances granted by the BSP shall not be included
in the assets of the closed bank for distribution to other creditors.
a. The proceeds in excess of the amount secured shall be returned by the BSP to
the receiver.

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 c. Any preliminary attachment or garnishment on any of the assets of the closed bank
existing at the time of closure shall not give any preference to the attaching or
garnishing party.
d. Upon motion of the receiver, the preliminary attachment or garnishment shall be lifted
and/or discharged.

4. On labor relations:
Notwithstanding the provisions of the Labor Code, the employer-employee relationship
between the closed bank and its employees shall be deemed terminated upon service of the
notice of closure of the bank in accordance with the PDIC Charter.
a. Payment of separation pay or benefits provided for by law shall be made from
available assets of the bank in accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other laws.

5. On contractual obligations:
The receiver may cancel, terminate, rescind or repudiate any contract of the closed bank
a. If the contract is not necessary for the orderly liquidation of the bank; or
b. If the contract is grossly disadvantageous to the closed bank; or
c. For any ground provided by law.

6. On interest payments:
The liability of a bank to pay interest on deposits and all other obligations as of closure
shall cease upon its closure by the Monetary Board without prejudice to the first paragraph
of Section 85 of Republic Act No. 7653, NCBA.
a. The receiver shall have the authority, without need for approval of the liquidation
court, to assign, as payment to secured creditors, the bank assets serving as
collaterals to their respective loans up to the extent of the outstanding obligations,
including interest as of date of closure of the hank, as validated by the receiver.
b. The valuation of the asset shall be based on the prevailing market value of the
collaterals as appraised by an independent appraiser on an ‘as is
where is’ basis.

7. On liability for penalties and surcharges for late payment and nonpayment of taxes:
From the time of closure, the closed bank shall not be liable for the payment of penalties
and surcharges arising from the late payment or nonpayment of real property tax, capital
gains tax, transfer tax and similar charges.

8. On bank charges and fees:

The receiver may impose, on behalf of the closed bank, charges and fees for services
rendered after bank closure, such as, but not limited to, the execution of pertinent deeds
and certifications.

9. Actions pending for or against the closed bank:

Except for actions pending before the Supreme Court, actions pending for or against the
closed bank in any court or quasi-judicial body shall, upon motion of the receiver:
a. Be suspended for a period not exceeding 180 days;

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 b. Referred to mandatory mediation; and
c. Referred back to the court or quasi- judicial body for further proceedings upon
termination of the mediation.

10. Final decisions against the closed bank:

The execution and enforcement of a final decision of a court other than the liquidation court
against the assets of a closed bank shall be stayed. The prevailing party shall file the final
decision as a claim with the liquidation court and settled in accordance with the Rules on
Concurrence and Preference of Credits under the Civil Code or other laws.

11. Docket and other court fees:

Payment of docket and other court fees relating to all cases or actions filed by the receiver
with any judicial or quasi-judicial bodies shall be deferred until the action is terminated
with finality.
a. Any such fees shall constitute as a first lien on any judgment in favor of the closed
bank or in case of unfavorable judgment, such fees shall be paid as liquidation costs
and expenses during the distribution of the assets of the closed bank.

12. All assets, records, and documents in the possession of the closed bank at the time of its
closure are presumed held by the bank in the concept of an owner.

13. The exercise of authority, functions, and duties by the receiver under this Act shall be
presumed to have been performed in the regular course of business.

14. Assets and documents of the closed bank shall retain their private nature even if
administered by the receiver. Matters relating to the exercise by the receiver of the
functions under this Act shall be subject to visitorial audit only by the Commission on
Audit (Sec. 13(e), PDIC Charter, as amended by RA 10846).

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 VII. INTELLECTUAL PROPERTY
Intellectual Property Code of the Philippines
RA No. 8293, as amended by RA No. 9150, RA No. 9502, RA No. 10372

A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL

1. INTELLECTUAL PROPERTY RIGHTS
Definition
Intangible property rights granted by law to owners of intellectual creations such as inventions,
designs, signs and names used in commerce, and literary and artistic works.

Art. 14, Sec. 13, 1987 Constitution

The State shall protect and secure the exclusive rights of scientists, inventors, artists, and other
gifted citizens to their intellectual property and creations, particularly when beneficial to the people
(social justice), for such period as may be provided by law.
• Exclusive Rights
• Limited in time, scope, and space
o Exceptions and limitations
o Territory

Intellectual Property Rights

• Exclusive rights to do or prohibit
• May be assigned or licensed to others
• May be infringed

Intellectual Property Rights under the Intellectual Property Code (RA 8293) (C T G I P U L
P)

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 1. Copyright and Related Rights;
2. Trademarks and Service Marks;
3. Geographic Indications;
4. Industrial Designs (P);
5. Patents;
6. Utility Models (P) (Chapter XII);
7. Layout-Designs (Topographies) of Integrated Circuits (P);
8. Protection of Undisclosed Information (Sec. 4.1, RA 8293).

2. DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS,

AND PATENTS
The difference between copyright, trademarks, and patent lies in the scope of protection.

A trademark is any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise from that of another 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.

Meanwhile, the scope of a copyright is confined to literary and artistic works which are original
intellectual creations in the literary and artistic domain protected from the moment of their
creation.

Patentable inventions, on the other hand, refer to any technical solution (invention) of a problem
in any field of human activity which is new, involves an inventive step and is industrially
applicable (Kho v. Court of Appeals, 379 SCRA 410 (2002)).

Trademark Copyright Patent

Subject matter Any visible sign Literary or artistic work Invention: Technical
of protection capable of which is an original Solution of a problem
distinguishing the intellectual creation;which is new, involves
goods or services of an Expression. an inventive step and is
enterprise. industrially applicable.
Office where Bureau of Trademarks, Not required; Optional at Bureau of Patents,
right is Intellectual Property The National Library or Intellectual Property
registered Office IPO Office
Duration of 10 years, renewable Generally, 50 years after 20 years from filing or
right indefinitely the death of author priority date

3. TECHNOLOGY TRANSFER ARRANGEMENT

Definition
Contracts/Agreements involving:
1. The transfer of systematic knowledge for:
a. The manufacture of a product,

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 b. The application of a process,
c. Rendering of a service including management contracts; and
2. The transfer, assignment, or licensing of all forms of intellectual property rights, including
the licensing of computer software except computer software developed for mass market.
(Sec. 4.2, RA 8293).

Functions of the Intellectual Property Office (IPOPHL)

1. Examine applications for grant of letters patent for inventions and register utility models
and industrial designs;
2. Examine applications for the registration of marks, geographic indication, integrated
circuits;
3. Register technology transfer arrangements and settle disputes involving technology
transfer payments covered by the provisions of Part II, Chapter IX on Voluntary Licensing
and develop and implement strategies to promote and facilitate technology transfer;
4. Promote the use of patent information as a tool for technology development;
5. Publish regularly in its own publication the patents, marks, utility models and industrial
designs, issued and approved, and the technology transfer arrangements registered;
6. Administratively adjudicate contested proceedings affecting intellectual property rights;
7. Coordinate with other government agencies and the private sector efforts to formulate and
implement plans and policies to strengthen the protection of intellectual property rights in
the country (Sec. 5, RA 8293);
8. Undertake enforcement functions supported by concerned agencies such as the Philippine
National Police, National Bureau of Investigation, Bureau of Customs, Optical Media
Board, Local Government Units, among others (Sec. 7. (c) RA 8293, as amended by R.A.
10372);
9. Conduct visits during reasonable hours to establishments and business engaging in
activities violating intellectual property rights and provisions of this act based on report,
information or complaint received by the office (Sec. 7.(d) RA 8293, as amended by R.A.
10372).

IPOPHL JURISDICTIONAL THRESHOLD in administrative complaints for violations of

laws involving intellectual property rights
Two hundred thousand pesos (P200,000) or more in total damages claimed.

Role of the IPO with Respect to Technology Transfer Arrangements

The IPO shall:
1. Register technology transfer arrangements and settle disputes involving technology
transfer payments
2. Develop and implement strategies to promote and facilitate technology transfer;
3. Promote the use of patent information as a tool for technology development;
4. Publish regularly in its own publication the technology transfer arrangements registered
(Sec. 4.4, RA 8293).

B. PATENTS
1. PATENTABLE INVENTIONS

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 1. Inventions;
2. Utility Model;
3. Industrial Designs; and
4. Lay-Out Designs (Topographies of Integrated Circuits)

Invention Patent
A patentable invention is any technical solution of a problem in any field of human activity which
is new, involves an inventive step and is industrially applicable. It may be, or may relate to, a
product, or process, or an improvement of any of the foregoing (Sec. 21, RA 8293).

Standards or requirements for registrability of Invention Patent (Sec. 21)

1. Novelty;
An invention shall NOT be considered new/novel if it forms part of a PRIOR ART (Sec.
23, RA 8293).

Prior Art
This shall consist of:
1. Everything which has been made available to the public anywhere in the world,
before the filing date or the priority date of the application claiming the invention
(Sec. 24.1, RA 8293);
2. (First to file) The whole contents of an application for a patent, utility model, or
industrial design registration, published in accordance with this Act, filed or
effective in the Philippines, with a filing or priority date that is earlier than the
filing or priority date of the application: Provided, That –
a. The application which has validly claimed the filing date of an earlier
application under Section 31 of this Act, shall be prior art with effect as of
the filing date of such earlier application
b. The applicant or the inventor identified in both applications are NOT one
and the same (Sec. 24.2, RA 8293).

Non-prejudicial disclosures
This is an exception to the General Rule on Prior Art under Sec. 24. It provides that the
disclosure of the information contained in the application during the 12 months preceding
the filing date or the priority date of the application shall not prejudice the applicant on the
ground of lack of novelty if such disclosure was made by:
1. The inventor
2. A 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
3. A third party which obtained the information directly or indirectly from the inventor
(Sec. 25, RA 8293).

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 2. Involves an inventive step;
An invention involves an inventive step if, having regard to prior art, it is NOT OBVIOUS
TO A PERSON SKILLED in the art at the time of the filing date or priority date of the
application claiming the invention (Sec. 26.1, RA 8293, as amended by RA 9502).

*Cheaper Medicines Act: In case of drugs and medicines, there is no inventive step if the
invention results from:
a. The mere discovery of a new form or new property of a known substance
which does not result in enhancement of the known efficacy of that
substance;
b. The mere discovery of any new property or new use for a known substance;
or
c. The mere use of a known process unless such known process results in a
new product that employs at least one new reactant (Sec. 26.2, RA 8293 as
amended by RA 9502)

NOTE: R.A. No. 9520, “Universally Accessible Cheaper and Quality Medicines Act
of 2008”
• Compulsory Licensing on the manufacture of patented medicines
• Compulsory Licensing on the importation of medicines protected by patent or
trademark
• Non-patentability of second use of known substance unless there is enhanced
efficacy.

3. Industrially applicable
An invention that can be produced and used in any industry shall be industrially applicable
(Sec. 27, RA 8293).

Additional Requirements
1. Patentable subject matter (Sec. 22)
2. Sufficient disclosure (Sec. 35)

2. NON-PATENTABLE INVENTIONS (Sec. 22)

The following shall be excluded from patent protection:
1. Discoveries, scientific theories, and mathematical methods, and in the case of drugs and
medicines, (1) the mere discovery of a new form or new property of a known substance
which does not result in the enhancement of the known efficacy of that substance, or (2)
the mere discovery of any new property or new use for a known substance, or (3) the mere
use of a known process unless such known process results in a new product that employs
at least one new reactant. Salts, esters, ethers, polymorphs, metabolites, pure form, particle
size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of a
known substance shall be considered to be the same substance, unless they differ
significantly in properties with regard to efficacy (Sec. 22.1, RA 8293 as amended by RA
9502);

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 2. Schemes, rules, and methods of performing mental acts, playing games, or doing business,
and programs for computers (programs may be copyrighted but not patented) (Sec. 22.2,
RA 8293);
3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic
methods practiced on the human or animal body. This provision shall not apply to products
and composition for use in any of these methods (Sec. 22.3, RA 8293);
4. Plant varieties or animal breeds or essentially biological process for the production of
plants or animals. This provision shall not apply to micro-organisms and non-biological
and microbiological processes (Sec. 22.4, RA 8293);
5. Aesthetic creations (Sec. 22.5, RA 8293);
6. Anything which is contrary to public order or morality (Sec. 22.6, RA 8293);

3. OWNERSHIP OF A PATENT
a. RIGHT TO A PATENT
GR: The right to a patent belongs to the inventor, his heirs, or assigns. When two or more persons
have jointly made an invention, the right to a patent shall belong to them jointly (Sec. 28, RA 8293).

XPNS: Inventions created pursuant to employment or a commissioned work

1. The person who commissions the work shall own the patent (Sec. 30.1, RA 8293).
2. The employer has the right to the patent if the invention is the result of the performance of
the employee’s regularly assigned duties (Sec. 30.2, RA 8293).

b. FIRST-TO-FILE-RULE
RA 8293 changed the basis of ownership of a patent from First-to-Invent under RA 165 to First-
to-File.

If two or more persons have made the invention separately and independently of each other, the
right to the patent shall belong to the person who filed an application for such invention, or where
two or more applications are filed for the same invention, to the applicant who has the earliest
filing date or, the earliest priority date (Sec. 29, RA 8293).

Filing Date
The filing date of a patent application shall be the date of receipt by the Office of at least the
following elements:
1. An express or implicit indication that a Philippine patent is sought;
2. Information identifying the applicant; and
3. Description of the invention and one (1) or more claims in Filipino or English (Sec. 40.1,
RA 8293).

c. INVENTION CREATED PURSUANT TO A COMMISSION/ IN THE

COURSE OF EMPLOYMENT
The person who commissions the work shall own the patent, unless otherwise provided in the
contract (Sec. 30.1, RA 8293).

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In case the employee made the invention in the course of his employment contract, the patent shall
belong to:
1. The employee, if the inventive activity is NOT part of his regular duties even if the
employee uses the time, facilities, and materials of the employer.
2. The employer, if the invention is the result of the performance of his regularly- assigned
duties, unless there is an agreement, express or implied, to the contrary (Sec. 30.2, RA
8293).

d. RIGHT OF PRIORITY
An application for patent filed by any person who has previously applied for the same invention
in another country which by treaty, convention, or law affords similar privileges to Filipino
citizens, shall be considered filed as of the date of filing the foreign application: Provided, That:
1. The local application expressly claims priority;
2. It is filed within 12 months from the date the earliest foreign application was filed; and
3. A certified copy of the foreign application together with an English translation is filed
within 6 months from the date of filing in the Philippines (Sec. 31, RA 8293).

4. GROUNDS FOR CANCELLATION OF A PATENT

Any interested person may petition to cancel the patent or any claim thereof, or parts of the
claim, on any of the following grounds:
1. That what is claimed as the invention is not new or patentable;
2. That the 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; or
3. That the patent is contrary to public order or morality (Sec. 61.1, RA 8293).

Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation
may be effected to such extent only (Sec. 61.2, RA 8293).

Effect of Cancellation of Patent or Claim

The rights conferred by the patent or any specified claim or claims cancelled shall terminate.
Notice of the cancellation shall be published in the IPO Gazette. Unless restrained by the Director
General, the decision or order to cancel by Director of Legal Affairs shall be immediately
executory even pending appeal (Sec. 66, RA 8293).

Remedies of a Person with a Right to a Patent

Patent Application by Persons Not Having the Right to a Patent. — If a person referred to in
Section 29 (First-to-File) other than the applicant, is declared by final court order or decision as
having the right to the patent, such person may, within 3 months after the decision has become
final:
1. Prosecute the application as his own application in place of the applicant;
2. File a new patent application in respect of the same invention;
3. Request that the application be refused; or
4. Seek cancellation of the patent, if one has already been issued (Sec. 67, RA 8293).

5. REMEDY OF THE TRUE AND ACTUAL INVENTOR

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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:
1. Order for his substitution as patentee, or
2. At the option of the true inventor, cancel the patent, and
3. Award actual and other damages in his favor, if warranted by the circumstances (Sec. 68,
RA 8293).

The action shall be filed within 1 year from the date of publication made in accordance with
Sections 44 and 51, respectively (Sec. 70, RA 8293).

6. RIGHTS CONFERRED BY A PATENT

Where the subject To restrain, prohibit, and prevent any unauthorized person or entity
matter of a patent is afrom making, using, offering for sale, selling or importing that product
product (Sec. 71.1(a), RA 8293).
Where the subject To restrain, prevent, or prohibit any unauthorized person or entity
matter of a patent is afrom using the process, and from manufacturing, dealing in, using,
process selling or offering for sale, or importing any product obtained directly
or indirectly from such process (Sec. 71.1(b), RA 8293).
Other rights of Patent Patent owners shall also have the right to assign, or transfer by
Owners succession the patent, and to conclude licensing contracts for the same
(Sec. 71.2, RA 8293).

7. LIMITATIONS OF PATENT RIGHTS

a. PRIOR USE
Any prior user, who, in good faith was using the invention or has undertaken serious preparations
to use the invention in his enterprise or business, before the filing date or priority date of the
application on which a patent is granted, shall have the right to continue the use thereof as
envisaged in such preparations within the territory where the patent produces its effect (Sec. 73.1,
RA 8293).

The right of the prior user may only be transferred or assigned together with his enterprise or
business, or with that part of his enterprise or business in which the use or preparations for use
have been made (Sec. 73.2, RA 8293).

b. *USE BY THE GOVERNMENT

A Government agency or third person authorized by the Government may exploit the invention
even without agreement of the patent owner where:
1. The public interest, in particular, national security, nutrition, health or the development of
other sectors, as determined by the appropriate agency of the government, so requires (Sec.
74.1(a), RA 8293);
2. A judicial or administrative body has determined that the manner of exploitation, by the
owner of the patent or his licensee, is anti-competitive (Sec. 74.1(b), RA 8293);

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 3. In the case of drugs and medicines, there is a national emergency or other circumstance of
extreme urgency requiring the use of the invention (Sec. 74.1(c), RA 8293 as amended by
RA 9502);
4. In the case of drugs and medicines, there is public non-commercial use of the patent by the
patentee, without satisfactory reason (Sec. 74.1(d), RA 8293 as amended by RA 9502);
5. In the case of drugs and medicines, the demand for the patented article in the Philippines
is not being met to an adequate extent and on reasonable terms, as determined by the
Secretary of the Department of Health (Sec. 74.1(e), RA 8293, as amended by RA 9502);

8. PATENT INFRINGEMENT
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 constitutes patent infringement: Provided, That, this shall not apply
to instances covered by Sections 72.1 and 72.4 (Limitations of Patent Rights); Section 74 (Use of
Invention by Government); Section 93.6 (Compulsory Licensing); and Section 93-A (Procedures
on Issuance of a Special Compulsory License under the TRIPS Agreement) of this Code (Sec. 76.1,
RA 8293 as amended by R.A. 9502).

a. TEST OF PATENT INFRINGEMENT

i. LITERAL INFRINGMENT
In using literal infringement as a test, resort must be had in the first instance to the words of the
claim. To determine whether the particular item falls within the literal meaning of the patent
claims, the court must juxtapose (compare) the claims of the patent and the accused product within
the overall context of the claims and specifications, to determine whether there is exact identity
of all material elements (Godinez v. CA, G.R. No. L-97343 (1993)).

The test is satisfied if:

The item that is being sold, made, or used conforms exactly to the patent claim of another; One
makes, uses, or sells an item that has all the elements of the patent claim of another plus other
elements.

ii. DOCTRINE OF EQUIVALENTS

Under the doctrine of equivalents, an infringement occurs when a device:
1. Appropriates a prior invention by incorporating its innovative concept, albeit with some
modification and change,
2. Performs substantially the same function in substantially the same way, and
3. Achieves substantially the same result (Godinez v. CA, G.R. No. L-97343 (1993)).

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
(Smith Klein Beckman Corp. v. CA, G.R. No. 126627 (2003)).

b. CIVIL AND CRIMINAL ACTIONS

Civil Actions for Infringement

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Any patentee, or anyone possessing any right, title, or interest in and to the patented invention,
whose rights have been infringed, may bring a civil action before a court of competent jurisdiction:
1. To recover from the infringer such damages sustained thereby, plus attorney’s fees and
other expenses of litigation, and
2. To secure an injunction for the protection of his rights (Sec. 76.2, RA 8293).

If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court
may award, by way of damages, a sum equivalent to reasonable royalty (Sec. 76.3, RA 8293).

The court may, according to the circumstances of the case, award damages in a sum above the
amount found as actual damages sustained: Provided, That the award does not exceed 3 times the
amount of such actual damages (Sec. 76.4, RA 8293).

Criminal Action Only After Finality of Judgment in Civil Action and After Repetition of
Infringement
If infringement is repeated by the infringer or by anyone in connivance with him after finality of
the judgment of the court against the infringer, the offenders shall:
1. Be criminally liable therefor, and
2. Upon conviction, suffer imprisonment for the period of not less than 6 months but not more
than 3 years and/or a fine of not less than P100,000 but not more than P300,000, at the
discretion of the court.

NOTE: Such criminal action is without prejudice to the institution of a civil action for damages
(Sec. 84, RA 8293).

c. PRESCRIPTIVE PERIOD

Civil Action: No damages can be recovered for acts of infringement committed more than 4 years
before the institution of the action for infringement (Sec. 79, RA 8293).

Criminal Action: 3 years from date of the commission of the crime (Sec. 84, RA 8293).

d. DEFENSES IN ACTION FOR INFRINGEMENT

In an action for infringement, the defendant, in addition to other defenses available to him, may
show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition
of cancellation can be brought under Section 61 (Sec. 81, RA 8293).

Patent found invalid may be cancelled

In an action for infringement, if the court shall find the patent or any claim to be invalid, it shall
cancel the same, and the Director of Legal Affairs upon receipt of the final judgment of
cancellation by the court, shall record that fact in the register of the Office and shall publish a
notice to that effect in the IPO Gazette (Sec. 82, RA 8293).

9. LICENSING
a. VOLUNTARY

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Voluntary Licensing is the grant by the patent owner to a third person of the right to exploit the
patented invention (Sec. 85, RA 8293).

To encourage the transfer and dissemination of technology, prevent or control practices and
conditions that may in particular cases constitute an abuse of intellectual property rights having an
adverse effect on competition and trade, all voluntary technology transfer arrangements or
licensing contracts shall:
1. Not contain any of the prohibited clauses for voluntary license contracts under Sec. 87
2. Contain all of the mandatory provisions for voluntary license contracts under Sec. 88
3. Be approved and registered with the Documentation, Information, and Technology
Transfer Bureau (of the IPOPHL) as an exceptional case under Sec. 91, ONLY IF the
agreement fails to comply with Sec. 87 and 88 (See Secs. 85& 92, RA 8293).

Mandatory Provisions
The following provisions shall be included in voluntary license contracts:
1. That the laws of the Philippines shall govern the interpretation of the same and in the event
of litigation, the venue shall be the proper court in the place where the licensee has its
principal office (Sec. 88.1, RA 8293);
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 (Sec. 88.2,
RA 8293);
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 Rules of the
United Nations Commission on International Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply
and the venue of arbitration shall be the Philippines or any neutral country (Sec. 88.3, RA
8293);
4. The Philippine taxes on all payments relating to the technology transfer arrangement shall
be borne by the licensor (Sec. 88.4, RA 8293).

Prohibited Clauses
The following provisions shall be deemed prima facie to have an adverse effect on competition
and trade:
1. Those which impose upon the licensee the obligation to acquire from a specific source
capital goods, intermediate products, raw materials, and other technologies, or of
permanently employing personnel indicated by the licensor (Sec. 87.1, RA 8293);
2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the
products manufactured on the basis of the license (Sec. 87.2, RA 8293);
3. Those that contain restrictions regarding the volume and structure of production (Sec. 87.3,
RA 8293);
4. Those that prohibit the use of competitive technologies in a non-exclusive technology
transfer agreement (Sec. 87.4, RA 8293);
5. Those that establish a full or partial purchase option in favor of the licensor (Sec. 87.5, RA
8293);

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 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 (Sec. 87.6,
RA 8293);
7. Those that require payment of royalties to the owners of patents for patents which are not
used (Sec. 87.7, RA 8293);
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 (Sec. 87.8, RA 8293);
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 (Sec. 87.9, RA 8293);
10. Those which require payments for patents and other industrial property rights after their
expiration, termination arrangement (Sec. 87.10, RA 8293);
11. Those which require that the technology recipient shall not contest the validity of any of
the patents of the technology supplier (Sec. 87.11, RA 8293);
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 in connection with new products, processes or equipment (Sec.
87.12, RA 8293);
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 quality
standards prescribed by the licensor (Sec. 87.13, RA 8293);
14. Those which exempt the licensor for liability for non-fulfillment of his 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 (Sec. 87.14, RA
8293);
15. Other clauses with equivalent effects (Sec. 87.15, RA 8293).

Effect of Non-compliance with any Provisions of Secs. 87 and 88

The technology transfer arrangement (TTA) shall automatically be rendered unenforceable,
unless said technology transfer arrangement is approved and registered with the Documentation,
Information and Technology Transfer Bureau (DITTB of the IPOPHL) under the provisions of
Section 91 on exceptional cases (Sec. 92, RA 8293).

Exceptional Cases
1. In exceptional or meritorious cases where substantial benefits will accrue to the economy,
such as high technology content, increase in foreign exchange earnings, employment
generation, regional dispersal of industries and/or substitution with or use of local raw
materials;
2. The case of Board Of Investments-registered companies with pioneer status (Sec. 91, RA
8293).

Jurisdiction
Decisions of the Director of DITTB on TTAs are appealable to the Director General, IPOPHL,
whose decisions thereon are appealable to the Secretary of Trade and Industry.

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Right of Licensor
Unless otherwise provided in the technology transfer agreement, the licensor shall have the right
to:
1. Grant further licenses to third person;
2. Exploit the subject matter of the technology transfer agreement (Sec. 89, RA 8293).

Right of the Licensee

To exploit the subject matter of the technology transfer agreement during the whole term of the
agreement (Sec. 90, RA 8293).

b. COMPULSORY
Compulsory Licensing is the grant of 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 (Sec. 93, RA 8293 as amended by RA 9502).

Grounds
The Director General of the Intellectual Property Office may grant 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 any of the following circumstances:

1. National emergency or other circumstances of extreme urgency (Sec. 93.1, RA 8293 as

amended by RA 9502);
2. Where the public interest, in particular, national security, nutrition, health or the
development of other vital sectors of the national economy as determined by the
appropriate agency of the Government, so requires (Sec. 93.2, RA 8293 as amended by RA
9502);
3. Where a judicial or administrative body has determined that the manner of exploitation by
the owner of the patent or his licensee is anti-competitive (Sec. 93.3, RA 8293 as amended
by RA 9502);
4. In case of public non-commercial use of the patent by the patentee, without satisfactory
reason (Sec. 93.4, RA 8293 as amended by RA 9502);
5. If the patented invention is not being worked in the Philippines on a commercial scale,
although capable of being worked, without satisfactory reason: Provided, That the
importation of the patented article shall constitute working or using the patent (Sec. 93.5,
RA 8293 as amended by RA 9502);
6. Where the demand for patented drugs and medicines is not being met to an adequate extent
and on reasonable terms, as determined by the Secretary of the Department of Health (Sec.
93.6, RA 8293 as amended by RA 9502);
7. If the invention protected by a patent, hereafter referred to as the "second patent," within
the country cannot be worked without infringing another patent, hereafter referred to as the
"first patent," granted on a prior application or benefiting from an earlier priority, a
compulsory license may be granted to the owner of the second patent to the extent
necessary for the working of his invention, subject to certain conditions (Sec. 97, RA 8293);
8. Manufacture and export of drugs and medicines to any country having insufficient or no
manufacturing capacity in the pharmaceutical sector to address public health problems:

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 Provided, That, a compulsory license has been granted by such country or such country
has, by notification or otherwise, allowed importation into its jurisdiction of the patented
drugs and medicines from the Philippines in compliance with the TRIPS Agreement (Sec.
93-A.2, RA 8293 as amended by RA 9502).

Period for Filing a Petition for Compulsory License

At any time after the grant of patent. However, a compulsory license may not be applied for on
the ground stated in Sec. 93.5 before the expiration of a period of 4 years from the date of filing
of the application or 3 years from the date of the patent whichever period expires last (Sec. 94, RA
8293 as amended by RA 9502).

Requirement to Obtain a License on Reasonable Commercial Terms

GR: The license will only be granted after the petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial terms and conditions but such efforts have not
been successful within a reasonable period of time (Sec. 95.1, RA 8293 as amended by RA 9502).

XPNs: The requirement of authorization shall NOT apply in the following cases:
1. Where the petition for compulsory license seeks to remedy a practice determined after
judicial or administrative process to be anti-competitive;
2. In situations of national emergency or other circumstances of extreme urgency;
3. In cases of public non-commercial use;
4. In cases where the demand for the patented drugs and medicines in the Philippines is not
being met to an adequate extent and on reasonable terms, as determined by the Secretary
of the Department of Health (Sec. 95.2, RA 8293 as amended by RA 9502).

Terms and Conditions of Compulsory License

1. The scope and duration of such license shall be limited to the purpose for which it was
authorized (Sec. 100.1, RA 8293);
2. The license shall be non-exclusive (Sec. 100.2, RA 8293);
3. The license shall be non-assignable, except with that part of the enterprise or business with
which the invention is being exploited (Sec. 100.3, RA 8293);
4. Use of the subject matter of the license shall be devoted predominantly for the supply of
the Philippine market: Provided, that this limitation shall not apply where the grant of the
license is based on the ground that the patentee's manner of exploiting the patent is
determined by judicial or administrative process, to be anti-competitive (Sec. 100.4, RA
8293);
5. The license may be terminated upon proper showing that circumstances which led to its
grant have ceased to exist and are unlikely to recur: Provided, That adequate protection
shall be afforded to the legitimate interest of the licensee (Sec. 100.5, RA 8293);
6. The patentee shall be paid adequate remuneration taking into account the economic value
of the grant or authorization, except that in cases where the license was granted to remedy
a practice which was determined after judicial or administrative process, to be anti-
competitive, the need to correct the anti-competitive practice may be taken into account in
fixing the amount of remuneration (Sec. 100.6, RA 8293).

10. ASSIGNMENT AND TRANSMISSION OF RIGHTS

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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
(Sec. 103.2, RA 8293).

An assignment may be of:

1. The entire right, title, or interest in and to the patent and the invention covered thereby, or
2. An undivided share of the entire patent and invention, in which event the parties become
joint owners thereof.

An assignment may be limited to a specified territory (Sec. 104, RA 8293).

Rights of Joint Owners

If two or more persons jointly own a patent and the invention covered thereby, each joint owner
shall be entitled to personally make, use, sell, or import the invention for his own profit.

However, neither of the joint owners shall be entitled to grant licenses or to assign his right, title
or interest or part thereof without the consent of the other owner or owners, or without
proportionally dividing the proceeds with such other owner or owners (Sec. 107, RA 8293).

Form of Assignment
The assignment must be in writing and must be notarized (Sec. 105 RA 8293). It shall be void as
against any subsequent purchaser or mortgagee for valuable consideration and without notice,
unless, it is so recorded in the Office, within 3 months from the date of said instrument, or prior
to the subsequent purchase or mortgage (Sec. 106.2, RA 8293).

*NOTE: E. I. Dupont vs. IPO, G.R. No. 174379

A patent is granted to provide rights and protection to the inventor after an invention is disclosed
to the public. It also seeks to restrain and prevent unauthorized persons from unjustly profiting
from protected invention. However, ideas not converted by a patent are free for the public to use
and exploit (public domain). Thus, there are procedural rules on the application and grant of
patents established to protect against any infringement. To balance the public interests involved,
failure to comply with strict procedural rules will result in the failure to obtain patent.

The patent law has a 3-fold purpose: (1) patent law seeks to foster and reward invention; (2) it
promotes disclosure of inventions to stimulate further innovation and to permit the public to
practice the invention once the patent expires; (3) the stringent requirements for patent protection
seek to ensure that ideas in the public domain remain there for the free use of the public.

A patent is a monopoly granted only for specific purposes and objectives. Thus, its procedures
must be complied with to attain its social objective.

C. TRADEMARKS
1. DEFINITION OF MARKS, COLLECTIVE MARKS, AND
TRADE NAMES

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Marks
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 (Sec. 121.1, RA 8293).

Collective Marks
Any visible sign designated as such in the application for registration and capable of (1)
distinguishing the origin or (2) any other common characteristic, including the (3) quality of goods
or services of different enterprises which use the sign under the control of the registered owner of
the collective mark (Sec. 121.2, RA 8293). (i.e., Halal)

Trade Name
The name or designation identifying or distinguishing an enterprise (Sec. 121.3, RA 8293).

Any individual name or surname, firm name, device or word used by manufacturers, industrialists,
merchants, and others to identify their businesses, vocations, or occupations (Converse Rubber
Corp. v. Universal Rubber Products, Inc., G.R. No. L-27906 (1987)).

2. *ACQUISITION OF OWNERSHIP MARKS

GR: To acquire rights in a mark, REGISTRATION is required (Sec. 122, RA 8293).

XPN: Well-known marks are protected even without registration.

NOTE: However, when the well-known mark is not registered, its protection is limited, as it only
prevents the registration of confusingly similar marks that are used for identical or similar goods
or services (Sec. 123.1(e), RA 8293).

While the IP Code expressly provides that the rights to a mark shall be acquired through
registration, the Supreme Court held that notwithstanding this express provision in the IP Code,
prior use (in good faith) is still the basis of trademark ownership (Berris Agricultural Co., Inc.
vs. Norvy Abyadang, G.R. No. 183404, (2010)).

Registration is not a mode of acquiring ownership, rather, it merely gives rise to a prima facie
presumption of ownership of the registrant over the mark (Sec. 138, RA 8293).

Said presumption of ownership may be rebutted by the true owner of the mark in an opposition or
cancellation proceeding.

Filing Date
The filing date of an application shall be the date on which the Office received the following
indications and elements in English or Filipino:
1. An express or implicit indication that the registration of a mark is sought;
2. The identity of the applicant;
3. Indications sufficient to contact the applicant or his representative, if any;
4. A reproduction of the mark whose registration is sought; and
5. The list of the goods or services for which the registration is sought (Sec. 127.1, RA 8293).

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Priority Right
An application for registration of a mark filed in the Philippines by a person referred to in Section
3, and who previously duly 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 (Provided, the Philippine application is filed within 6 months from the filing of the foreign
application) (Sec. 131.1, RA 8293).

No registration of a mark in the Philippines by a person described in this section shall be granted
until such mark has been registered in the country of origin of the applicant (Sec. 131.2, RA 8293).

Significance of Priority Right

A Philippine application filed by another applicant after the priority date but earlier than the foreign
applicant’s actual filing may be refused registration if it is identical to the mark with a priority date
(Agpalo, The Law on Trademark, Infringement and Unfair Competition (2000)).

3. ACQUISITION OF OWNERSHIP OF TRADE NAME

The ownership of a trade name is acquired through ADOPTION AND USE.

Such names shall be protected, even prior to or without registration, against any unlawful act
committed by third parties (Sec. 165.2 (a), RA 8293).

Any subsequent use of the trade name by a third party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade name or mark, likely to mislead the public, shall
be deemed unlawful (Sec. 165.2 (b), RA 8293).

A name or designation may NOT be used as a trade name:

1. If by its nature or the use to which such name or designation may be put, it is contrary to
public order or morals; and
2. If, in particular, it is liable to deceive trade circles or the public as to the nature of the
enterprise identified by that name (Sec.165.1, RA 8293).

Any change in the ownership of a trade name shall be made with the transfer of the enterprise
or part thereof identified by that name (Sec. 165.4, RA 8293).

4. NON-REGISTRABLE MARKS
A mark cannot be registered if it:
1. Consists of immoral, deceptive, or scandalous matter, or matter which may disparage
(belittle) or falsely suggest a connection with persons, living or dead, institutions, beliefs,
or national symbols, or bring them into contempt or disrepute (Sec. 123.1(a), RA 8293);
2. Consists of flags, coat of arms or other insignia of the Philippines or any foreign country
(Sec. 123.1(b), RA 8293);
3. Consists of a name, portrait, or signature identifying a particular living individual except
by his written consent, or of a deceased President of the Philippines, during the life of his
widow, except by written consent of the widow (Sec. 123.1(c), RA 8293);

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 4. Is identical with a registered mark of another or a mark with an earlier filing or priority
date, in respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely to deceive or cause confusion (Sec.
123.1(d), RA 8293);

5. Is identical with, or confusingly similar to, or constitutes a translation of a well-known

mark, WHETHER OR NOT registered in the Philippines, and used for identical or similar
goods or services (Sec. 123.1(e), RA 8293);
6. Is identical with, or confusingly similar to, or constitutes a translation of a well-known
mark which is REGISTERED in the Philippines, and used for goods or services which are
not similar (Sec. 123.1(f), RA 8293);
7. Likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services (Sec. 123.1(g), RA 8293);
8. Consists exclusively of signs that are generic for the goods or services that they seek to
identify (Sec. 123.1(h), RA 82930);
9. Consists exclusively of signs or of indications that have become customary or usual to
designate the goods or services in everyday language or in a bona fide and established trade
practice (Sec. 123.1(i), RA 8293);
10. Consists exclusively of signs or of indications that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, geographical origin, time or production of the
goods or rendering of the services, or other characteristics of the goods or services (Sec.
123.1(j), RA 8293);
11. Consists of shapes that may be necessitated by technical factors or by the nature of the
goods themselves or factors that affect their intrinsic value (Sec. 123.1(k), RA 8293);
12. Consists of color alone, unless defined by a given form (Sec. 123.1(l), RA 8293);
13. Is contrary to public order or morality (Sec. 123.1(m), RA 8293).

The Office may accept as prima facie evidence that the mark has become distinctive, proof of
substantially exclusive and continuous use thereof by the applicant:
1. In commerce in the Philippines
2. For 5 years before the date on which the claim of distinctiveness is made (Sec. 123.2, RA
8293).

5. PRIOR USE OF MARK AS A REQUIREMENT

While RA 8293 No Longer Requires Prior Use Before Filing the Application, It Still Requires
Use of the Mark After Filing, Registration and Renewal
Under the old trademark law or R.A. 166, actual commercial use of a trademark in the Philippines
was required prior to its registration (RA 166, Sec. 2-A).

RA 8293 no longer requires prior use before filing the application (i.e., it shifted to an intent to
use system). However, the law still requires use of the mark after filing.

Declaration of Actual Use (DAU)

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The applicant or the registrant is required to file a Declaration of Actual Use of the mark after
filing and registration.

NOTE: Failure to file declaration of actual use (DAU) automatically results in the denial of the
registration or the cancellation of the registration by operation of law (Secs. 124.2 & 145, RA
8293).

Non-Use of Mark When Excused

Non-use caused by circumstances arising independently of the will of the trademark owner shall
be excused. However, non-use due to lack of funds shall NOT excuse non-use of a mark (Sec.
152.1, RA 8293).

The ff. shall NOT be grounds for cancellation or removal of a mark:

1. Use which does not alter its distinctive character though the use is different from the form
in which it is registered (Sec. 152.2, RA 8293).
2. Use of a mark in connection with one or more of the goods/services belonging to the class
in which the mark is registered (Sec. 152.3, RA 8293).
3. Use of the mark by a company related to the applicant or registrant (Sec. 152.4, RA 8293).
4. Use of the mark by a person controlled by the registrant (Sec. 152.4, RA 8293).

NOTE: The use of a mark by a company related with, or controlled by the registrant or
applicant shall inure to the latter's benefit: Provided, that such mark is not used in such manner
as to deceive the public (Sec.152.4, RA 8293).

6. TESTS TO DETERMINE CONFUSING SIMILARITY

BETWEEN MARKS
a. *DOMINANCY TEST
The dominancy test considers the dominant features in the competing marks in determining
whether they are confusingly similar.

Under the dominancy test:

a. Greater weight is given to the similarity of the appearance of the product arising from the
adoption of the dominant features of the registered mark.
b. Minor differences between the registered mark and the mark in question are disregarded.
c. The aural and visual impressions created by the marks in the public mind are considered.
d. Little weight is given to factors like prices, quality, sales outlets and market segments.

The dominancy test is now embodied in Sec. 155 of the IPC and is therefore the controlling test.

b. *HOLISTIC TEST
The holistic test, to determine whether a trademark has been infringed, considers the mark as a
whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not
usually to any part of it.

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c. IDEM SONANS
The rule on idem sonans is also a test to resolve the confusing similarity of trademarks.
a. A mark with a different spelling but is similar in sound with a registered mark when read,
may be ruled as being confusingly-similar with the said registered mark or senior mark.
b. Two names are said to be "idem sonantes" if the attentive ear finds difficulty in
distinguishing them when pronounced.

Similarity of sound is sufficient to rule that the two marks are confusingly similar when applied
to merchandise of the same descriptive properties (Marvex Commercial v. Director of Patent, G.R.
No. L-19297 (1966)).

7. WELL-KNOWN MARKS
A well-known mark is a mark which a competent authority of the Philippines has designated to be
well-known internationally and in the Philippines (Sec. 123.1(e), RA 8293).

"Competent authority" for purposes of determining whether a mark is well-known, means:

1. The Court;
2. The Director General;
3. The Director of the Bureau of Legal Affairs (Rule 101 (d), Trademark Regulations of
2017);
4. Any administrative agency or office vested with quasi-judicial or judicial jurisdiction to
hear and adjudicate any action to enforce the rights to a mark.

In determining whether a mark is well-known, account shall be taken of 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 (Sec. 123.1(e), RA
8293).

Protection Extended to Well-Known Marks

The owner of a well-known mark has the right to be protected, whether or not the mark is registered
in the Philippines (Sec. 123.1(e)).

If the well-known mark is registered or not registered in the Philippines:

A mark cannot be registered if it is identical with, or confusingly similar to, or constitutes
a translation of an internationally well-known mark if used for identical or similar goods
or services (Sec. 123.1(e))

If the well-known mark is registered in the Philippines:

A mark cannot be registered if it is identical with, or confusingly similar to, or constitutes
a translation of an internationally well-known mark even if it is used for goods or services
which are NOT similar to those with respect to which registration is applied (Sec. 123.1(f)).

Other persons or entities cannot use the registered well-known mark even for
unrelated goods, provided that:
1. The use of the mark in relation to those goods or services would indicate a connection
between those goods or services, and the owner of the registered mark; and

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 2. That the interests of the owner of the registered mark are likely to be damaged by such
use (Sec. 123.1(f)).

8. RIGHTS CONFERRED BY REGISTRATION

The owner of a registered mark shall have the exclusive right to prevent all third parties not
having the owner's consent from using in the course of trade:
1. Identical or similar signs or containers,
2. For goods or services which are identical or similar to those in respect of which the
trademark is registered,
3. Where such use would result in a likelihood of confusion.

NOTE: In case of the use of an identical sign for identical goods or services, a likelihood of
confusion shall be presumed (Sec. 147.1, RA 8293 as amended by RA 9502).

XPN: In cases of importation of drugs and medicines allowed under Section 72.1 of this Act and
of off-patent drugs and medicines, third parties can import the same even without the owner’s
consent, provided that:
1. Said drugs and medicines bear the registered marks
2. The registered marks have not been tampered, unlawfully modified, or infringed upon (Sec.
147.1, RA 8293 as amended by RA 9502).

When Such Rights Are Conferred

The rights of the owner are conferred upon registration of the mark, and a mark is deemed
registered on the 31st day from the publication for purposes of opposition, provided no
opposition is filed.
1. On the 31st day from the publication for purposes of opposition (if no opposition is filed)
2. On the date the decision or final order giving due course to the application becomes final
and executory (if opposition is filed).

Certificates of Registration
A certificate of registration of a mark shall be prima facie evidence of:
1. The validity of the registration,
2. The registrant's ownership of the mark, and
3. The registrant's exclusive right to use the same in connection with the goods or services
and those that are related thereto specified in the certificate (Sec. 138, RA 8293).

Duration
A certificate of registration shall remain in force for 10 years from registration and may be
renewed for periods of 10 years at its expiration upon payment of the prescribed fee and upon filing
of a request (Sec. 145-146, RA 8293).

Limitations on Such Rights

1. Duration (except that, inasmuch as the registration of a trademark could be renewed every
10 years, provided a Declaration of Actual Use is timely submitted, a trademark could
conceivably remain registered forever);

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 2. Territorial (except well-known marks);
3. Fair Use: The registration of the mark shall not confer on the registered owner the right to
preclude third parties from using bona fide their names, addresses, pseudonyms, a
geographical name, or exact indications concerning the kind, quality, quantity, destination,
value, place of origin, or time of production or of supply, of their goods or services.
Provided That:
a. Such use is confined to the purposes of mere identification or information; and
b. Such use cannot mislead the public as to the source of the goods or services (Sec.
148, RA 8293).
4. Prior User: A registered mark shall have no effect against any person who, in good faith,
before the filing date or the priority date, was using the mark for the purposes of his
business or enterprise (Sec. 159.1, RA 8293).
5. Non-Use: Failure to file declaration of actual use automatically results in the denial of the
registration or the cancellation of the registration by operation of law (Sec. 124.2).

Assignment and Transfer of Application and Registration

1. An application for registration of a mark, or its registration, may be assigned or transferred
with or without the transfer of the business using the mark (Sec. 149.1, RA 8293).
2. Such assignment or transfer shall, however, be null and void if it is liable to mislead the
public, particularly as regards the nature, source, manufacturing process, characteristics, or
suitability for their purpose, of the goods or services to which the mark is applied (Sec.
149.2, RA 8293).
3. The assignment of the application for registration of a mark, or its registration, shall be in
writing and require the signatures of the contracting parties. Transfers by mergers or other
forms of succession may be made by any document supporting such transfer (Sec. 149.3,
RA 8293).
4. Assignments and transfers shall have no effect against third parties until they are recorded
at the Office (Sec. 149.5, RA 8293).

Any license contract concerning the registration of a mark, or an application therefor, shall provide
for effective control by the licensor of the quality of the goods or services of the licensee in
connection with which the mark is used. If the license contract does not provide for such quality
control, or if such quality control is not effectively carried out, the license contract shall not be
valid (Sec. 150.1, RA 8293).

9. USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO

REGISTERED MARK
Use of Indications by Third Parties for Purposes Other than those for which the Mark is
Used. — Registration of the mark shall not confer on the registered owner the right to preclude
third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or
exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time
of production or of supply, of their goods or services: Provided, That such use is confined to the
purposes of mere identification or information and cannot mislead the public as to the source of
the goods or services (Sec. 148, RA 8293).

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The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade
name or a mark or collective mark, or any such use of a similar trade name or mark, likely to
mislead the public (Sec. 165.2 (b), RA 8293).

10. INFRINGEMENT AND REMEDIES

a. TRADEMARK INFRINGEMENT
The following shall be liable in a civil action for infringement:

1. Any person who shall, without the consent of the owner of the registered mark, use in
commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark
or the same container or a dominant feature thereof:
a. In connection with the sale, offering for sale, distribution, advertising of any goods
or services, including other preparatory steps necessary to carry out the sale of any
goods or services on; or
b. In connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive (Sec. 155.1, RA 8293).

2. Any person who shall, without the consent of the owner of the registered mark:
a. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant
feature thereof; and
b. Apply such reproduction, counterfeit, copy or colorable imitation to labels, signs,
prints, packages, wrappers, receptacles or advertisements, intended to be used in
commerce:
i. In connection with the sale, offering for sale, distribution, or advertising of
goods or services on; or
ii. In connection with which such use is likely to cause confusion, or to cause
mistake, or to deceive (Sec. 155.2, RA 8293).

NOTE: The infringement takes place at the moment any of the acts stated in Subsection 155.1 or
155.2 are committed, regardless of whether there is actual sale of goods or services using the
infringing material.

b. DAMAGES
The owner of a registered mark may recover damages from any person who infringes his rights,
and the measure of the damages suffered shall be either:
1. The reasonable profit which the complaining party would have made, had the defendant
not infringed his rights; or
2. The profit which the defendant actually made out of the infringement; or
3. In the event such measure of damages cannot be readily ascertained with reasonable
certainty, then the court may award as damages –
a. A reasonable percentage based upon the amount of gross sales of the defendant; or
b. The value of the services in connection with which the mark or trade name was
used in the infringement of the rights of the complaining party (Sec. 156.1, RA
8293).

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c. REQUIREMENT OF NOTICE
The owner of the registered mark shall not be entitled to recover profits or damages unless the acts
have been committed with knowledge that such imitation is likely to cause confusion, or to cause
mistake, or to deceive.

Such knowledge is presumed if:

1. The registrant gives notice that his mark is registered by displaying with the mark the words
'"Registered Mark" or the letter R within a circle or
2. The defendant had otherwise actual notice of the registration (Sec. 158, RA 8293).

d. PENALTIES
Independent of the civil and administrative sanctions imposed by law, a criminal penalty of
imprisonment from 2-5 years and a fine ranging from P50,000-P200,000, shall be imposed on
any person who is found guilty of committing any of the acts mentioned in Section 155, Section
168 and Subsection 169.1 (Arts. 188 and 189, Revised Penal Code) (Sec. 170, RA 8293).

11. UNFAIR COMPETITION

The ff. shall be guilty of unfair competition, and shall be subject to an action therefor:
1. Any person who shall employ deception or any other means contrary to good faith, by
which he shall pass off the goods manufactured by him or in which he deals, or his
business, or services for those of the one having established such goodwill; or
2. Any person who shall commit any acts calculated to produce said result (Sec. 168.2, RA
8293)

Particular acts of unfair competition:

1. Selling one’s goods and giving them the general appearance of goods of another
manufacturer or dealer, either:
a. As to the goods themselves or in the wrapping of the packages in which they are
contained, or the devices or words thereon; or
b. In any other feature of their appearance, which would be likely to influence
purchasers to believe that the goods offered are those of a manufacturer or dealer,
other than the actual manufacturer or dealer (Sec. 168.3(a), RA 8293).
2. Clothing one’s goods with such appearance as shall deceive the public and defraud another
of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor
engaged in selling such goods with a like purpose (Sec. 168.3(a), RA 8293).
3. Using any artifice, or device, or employing 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 (Sec. 168.3(b), RA 8293).
4. Making any false statement in the course of trade or committing any other act contrary to
good faith of a nature calculated to discredit the goods, business, or services of another
(Sec. 168.3(c), RA 8293).

12. *REGISTRATION OF MARKS UNDER THE MADRID

PROTOCOL

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a. COVERAGE

What is the Madrid Protocol (filing system; not registration system)

The Madrid Protocol is a system facilitating, by way of a single international application and
registration:
1. The securing of protection of trademarks in multiple designated territories that are
members to the Protocol (Art 2); and
2. The management of such registered trademarks.

Territorial Effect only on Designated Territories

The protection resulting from the international registration shall extend to any Contracting Party
only at the request of the person who files the international application or who is the holder of the
international registration.

However, no such request can be made with respect to the Contracting Party whose Office is the
Office of origin (Art.3).

b. RIGHTS CONFERRED
An international registration is equivalent to a bundle of national registrations in the designated
Contracting Parties.

The rights conferred to the registered owner of the marks are the respective exclusive rights granted
by the trademark law of each designated country.

The protection of the mark in each of the designated Contracting Parties is the same as if the mark
had been the subject of an application for registration filed direct with the Office of that
Contracting Party (Art. 4(1)).
If no provisional refusal is notified to the International Bureau within the relevant time limit, or if
any such refusal is subsequently withdrawn, the protection of the mark in each designated
Contracting Party is the same as if it had been registered by the Office of that Contracting Party.
(Art. 4(1)).

When protection under international registration lost

The protection resulting from the international registration may no longer be invoked if, before the
expiry of 5 years from the date of the international registration, the basic application or the
registration resulting therefrom, or the basic registration, as the case may be, has been (1)
withdrawn, (2) has lapsed, (3) has been renounced or (4) has been the subject of a final decision
of rejection, revocation, cancellation or invalidation, in respect of all or some of the goods and
services listed in the international registration.

The same applies if:

1. An appeal against a decision refusing the effects of the basic application;
2. An action requesting the withdrawal of the basic application or the revocation, cancellation
or invalidation of the registration resulting from the basic application or of the basic
registration; or

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 3. An opposition to the basic application results, after the expiry of the 5-year period, in a
final decision of rejection, revocation, cancellation or invalidation, or ordering the
withdrawal, of the basic application, or the registration resulting therefrom, or the basic
registration, as the case may be, provided that such appeal, action or opposition had begun
before the expiry of the said period (Art. 6(3)).

c. REQUIREMENTS FOR REGISTRATION

Prior application or registration
An applicant must have first (1) applied for an application (“basic application”) for, or (2)
registered (“basic registration”) the mark sought to be internationally registered through his
“home” national or regional Intellectual Property Office before filing an international application.

The “Home” or Office of Origin

Must be in a territory that is: a Contracting Party to the Protocol (e.g. Philippines), or within a
Contracting Organization (e.g. European Union).

The Applicant Must:

1. be a national of;
2. be domiciled in; or
3. have a real and effective industrial or commercial establishment in the Contracting State
or Contracting Organization (Art. 2).

Three-step Process
1. Application through the National or Regional IP Office.
a. Applicant needs to have first filed an application or register the mark sought to be
internationally registered through a national or regional IP Office.
b. Applicant submits international application (see Art 3) of the Protocol through the
same IP Office, which will certify and forward it to the World Intellectual Property
Organization (WIPO).

2. Formal Examination by WIPO

a. WIPO, through its International Bureau (IB), conducts a formal examination of the
international application.
b. Once approved, the mark is recorded in the International Register and published.
c. The applicant a certificate of international registration and notifies the IP Offices
designated where protection is sought.

3. Substantive Examination by National or Regional designated Offices

a. The respective IP Offices will assess the application in accordance with the local
legislation and decide within 12-18 months whether the mark is registrable therein,
or will be provisionally refused.
b. WIPO will inform the applicant of the decision of the IP Office.

The refusal of an IP Office to protect the mark will not affect the decisions of other IP Offices.

Independence of International Registration

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Upon expiry of a period of 5 years from the date of the international registration, such registration
shall become independent of the basic application or the registration resulting therefrom, or of the
basic registration, as the case may be (Art. 6(2))

See discussion above on When protection under international registration lost in relation to this
concept.

d. TERM OF PROTECTION

Term
Registration of a mark at the International Bureau is effected for 10 years (Art. 6(1)).

Renewal
Any international registration may be renewed for a period of 10 years from the expiry of the
preceding period, by the mere payment of the basic fee, supplementary, and complementary fees
(Art.7).

D. COPYRIGHT
The scope of a copyright is confined to literary and artistic works which are original intellectual
creations in the literary and artistic domain protected from the moment of their creation.

1. BASIC PRINCIPLES
Works are Protected by the Sole Fact of Their Creation

PRINCIPLE OF AUTOMATIC PROTECTION- Copyright is vested from the very

moment of creation irrespective of their mode or form of expression, as well as of their
content, quality, and purpose (Sec. 171.1-172.2, RA 8293).

The enjoyment and exercise of copyright, including moral rights, shall not be the subject
of any formality; such enjoyment and such exercise shall be independent of the existence
of protection in the country of origin of the work.

Protection Extends Only to the Expression of an Idea, Not the Idea Itself
No protection shall extend, under this law, to any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated
or embodied in a work (Sec. 175, RA 8293).

The Copyright is Distinct from the Property in the Material Object Subject to it

Consequently:
1. The transfer or assignment of the copyright shall NOT itself constitute a transfer of the
material object
2. The transfer or assignment of the sole copy or of one or several copies of the work shall
NOT imply transfer or assignment of the copyright (Sec. 181, RA 8293).

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Copyright, like other intellectual property rights, is a Statutory Right
1. The rights are limited to what the statute confers.
2. 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.
3. It can cover only the works falling within the statutory enumeration or description (Pearl
and Dean vs. Shoemart, G.R. No. 148222 (2003)).

2. COPYRIGHTABLE WORKS
a. ORIGINAL WORKS
Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in
the literary and artistic domain protected from the moment of their creation and shall include in
particular:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not
reduced in writing or other material form;
4. Letters;
5. Dramatic or dramatico-musical compositions; choreographic works or entertainment in
dumb shows;
6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works
of art; models or designs for works of art;
8. Original ornamental designs or models for articles of manufacture, whether or not
registrable as an industrial design, and other works of applied art;
9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to
geography, topography, architecture or science;
10. Drawings or plastic works of a scientific or technical character;
11. Photographic works including works produced by a process analogous to photography;
lantern slides;
12. Audiovisual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works (Sec. 172.1, RA 8293).

When a work is considered original:

1. The work is an independent creation of the author; and
2. It must not be copied from the work of another.

A person must be the original creator of the work to be entitled to a copyright.

He must have created it by his own skill, labor ,and judgment without directly copying or evasively
imitating the work of another (Ching Kian Chuan vs. CA, G.R. No. 130360 (2001)).

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Originality is NOT determined by novelty, aesthetic merit, or ingenuity but that it is an independent
creation.

Works are protected irrespective of their mode or form of expression (Sec. 172.2, RA 8293).

b. DERIVATIVE WORKS
The following derivative works shall also be protected by copyright:
1. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations
of literary or artistic works; and
2. Collections of literary, scholarly, or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement of
their contents (Sec. 173.1, RA 8293).

Derivative works are protected as new works, provided they shall NOT:
1. Affect the force of any subsisting copyright upon the original works employed or any part
thereof; or
2. Be construed to imply any right to such use of the original works, or to secure or extend
copyright in such original works (Sec. 173.2, RA 8293).

3. NON-COPYRIGHTABLE WORKS
Unprotected Subject Matter
1. Any idea, procedure, system, method of operation, concept, principle, discovery or mere
data as such, even if they are expressed, explained, illustrated or embodied in a work;
2. News of the day and other miscellaneous facts having the character of mere items of press
information;
3. Any official text of a legislative, administrative, or legal nature, as well as any official
translation thereof;
4. Pleadings;
5. Original decisions of courts and tribunals
NOTE: This pertains to the “original decisions” not the SCRA published volumes since
these are protected under derivative works under Sec. 173.1) (Sec. 175, RA 8293).

Television newscasts are subject to copyright. Although news or the events themselves are not
copyrightable, expression of the news particularly when it underwent a creative process is
entitled to copyright protection (ABS-CBN Corp. vs. Gozon, G.R. No. 195956 (2015)).

The format or mechanics of a TV show is NOT copyrightable as copyright does not extend to
ideas, procedures, processes, systems, methods of operation, concepts, principles or discoveries
regardless of the form in which they are described, explained, illustrated or embodied (Joaquin Jr.
et al vs. Drilon, et al, G.R. No. 108946 (1999)).

No one may claim originality as to facts as these do not owe their origin to an act of authorship.
The first person to find and report a particular fact has not created the same; he has merely
discovered its existence.

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Works of the Government of The Philippines
Work of the Government of the Philippines- A work created by an officer or employee of the
Philippine Government or any of its subdivisions and instrumentalities, including government-
owned or controlled corporations as a part of his regularly prescribed official duties (Sec. 171.11,
RA 8293)

GR: No copyright shall subsist in any work of the Government.

XPNs:
1. When copyright is transferred by assignment or bequest in favor of the government (Sec.
176.3);
2. Author of speeches, lectures, sermons, addresses and dissertations shall have exclusive
right of making a collection of his work.

However, prior approval of the government agency or the office wherein the work is created
shall be necessary for the exploitation of such work for profit (Sec. 176.1).

Publication or republication by the Government in a public document of any work in which

copyright is subsisting shall not be taken:
1. To cause any abridgment or annulment of the copyright; or
2. To authorize any use or appropriation of such work without the consent of the copyright
owner (Sec. 176.3, RA 8293).

NOTE: Works made by an officer or employee of the Government as part of his regularly
prescribed duty do not enjoy copyright. Works made by an employee of the government which is
not as a part of his regularly prescribed official duties (i.e. not considered a “Work of the
Government”) may enjoy copyright.

Works of the Public Domain

Works of the public domain are non- copyrightable.

To this class of works belong:

1. Works, whose term of copyright has expired;
2. Works wherein the copyright over them are waived by the owner in favor of the public;
and
3. Works which did not enjoy copyright protection in the first place, as in the case of
unregistered works made under previous laws that required the registration of copyright

Useful Articles
A “useful article” is defined as an article “having intrinsic utilitarian function that is not merely to
portray the appearance of the article or to convey information” is EXCLUDED from copyright
eligibility. The only instance when a useful article may be the subject of copyright protection is
when it incorporates a design element that is physically or conceptually separable from the
underlying product (Olaño v. Lim Eng Co, G.R. No. 195835 (2016)).

USEFUL ARTICLE DOCTRINE

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 Works whose sole purpose is utilitarian, and have no separate artistic value are non-
copyrightable works.
In contrast, a work of applied art, which has utilitarian functions, but has an identifiable
artistic work or creation incorporated thereto, can be the subject of a copyright to the extent
that the design features:
-Can be identified separately from, and
-Are capable of existing independently of the utilitarian aspects of the article.
(Brandir Int’l v. Cascade Pacific, 834 F. 2nd 1142 (2nd Cir.) (1987))

4. RIGHTS OF COPYRIGHT OWNER

Works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality, and purpose (Sec. 172.2, RA 8293).

The issuance of the certificates of registration and deposit as provided by Sec. 2, Rule 7 of the
Copyright Safeguards and Regulations, are purely for recording the date of registration and deposit
of the work, and are not conclusive as to copyright ownership (nor does it determine the time when
copyright vests)

Copyright or Economic Rights

Copyright or economic rights shall consist of the exclusive right to carry out, authorize, or prevent
the following acts:
1. Reproduction of the work or substantial portion of the work;
2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of
the work;
3. The first public distribution of the original and each copy of the work by sale or other forms
of transfer of ownership;
4. Rental of the original or a copy of:
a. An audiovisual or cinematographic work,
b. A work embodied in a sound recording,
c. A computer program,
d. A compilation of data and other materials or a musical work in graphic form
e. Irrespective of the ownership of the original or the copy which is thesubject of the
rental;
5. Public display of the original or a copy of the work;
6. Public performance of the work; and
7. Other communication to the public of the work (Sec. 177, RA 8293).

Moral Rights
The author of a work shall, independently of the economic rights in Section 177 (economic rights)
or the grant of an assignment or license with respect to such right, have the right:
1. To require that the authorship of the works be attributed to him, in particular, the right that
his name, as far as practicable, be indicated in a prominent way on the copies, and in
connection with the public use of his work (Sec. 193.1, RA 8293);
2. To make any alterations of his work prior to, or to withhold it from publication (Sec. 193.2,
RA 8293);

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 3. 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 (Sec. 193.3,
RA 8293);
4. 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. 193.4, RA 8293);

ASSIGNMENT OR LICENSE OF MORAL RIGHTS

Moral rights CANNOT be assigned or licensed (Sec. 198, RA 8293)

WAIVER OF MORAL RIGHTS

While Moral Rights cannot be assigned or licensed, it can be waived (Sec. 198, RA 8293)

GR: Moral rights can be waived in writing, expressly stating such waiver (Sec. 195, RA 8293)

XPNs: Even if made in writing, waiver is still not valid if:

1. Use of the name of the author, title of his work, or his reputation with respect to any version
or adaptation of his work, which because of alterations substantially tends to injure the
literary or artistic reputation of another author (Sec. 195.1, RA 8293);
2. It uses the name of the author in a work that he did not create (Sec. 195.1, RA 8293)

The right of attribution is waived by contribution to a collective work unless such is expressly
reserved (Sec. 196, RA 8293).

Right to Transfer, Assign, or License

The author has the right to assign or license the copyright and/or the material object in whole or in
part, and they allow the owner to derive financial reward from the use of his works by others (Sec.
180.1, RA 8293 as amended by RA 10372).

Rights of Assignee or Licensee

The assignee or licensee is entitled to all the rights and remedies which the assignor or licensor
had with respect to the copyright, within the scope of the assignment or license (Sec. 180.1).

The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical

for publication shall constitute only a license to make a single publication unless a greater right is
expressly granted. If two (2) or more persons jointly own a copyright or any part thereof, neither
of the owners shall be entitled to grant licenses without the prior written consent of the other owner
or owners (Sec. 180.3, RA 8293).

Any exclusivity in the economic rights in a work may be exclusively licensed. Within the scope
of the exclusive license, the licensee is entitled to all the rights and remedies which the licensor
had with respect to the copyright (Sec. 180.4, RA 8293).

Filing of Assignment or License

An assignment or exclusive license may be filed in duplicate with the National Library upon
payment of the prescribed fee for registration in books and records kept for the purpose (Sec. 182,
RA 8293).

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Rights to Proceeds on Subsequent Transfers (Droit De Suite or Follow Up Rights)
In every sale or lease of an original work of painting or sculpture or of the original manuscript of
a writer or composer, subsequent to the first disposition thereof by the author, the author or his
heirs shall have:
-An inalienable right to participate in the gross proceeds of the sale or lease to the extent
of five percent (5%)

Duration of Right
This right shall exist during the lifetime of the author and for 50 years after his death (Sec. 200,
RA 8293)

Works not covered

Prints, etchings, engravings, works of applied art, or works of similar kind wherein the author
primarily derives gain from the proceeds of reproductions (Sec. 201, RA 8293).

5. RULES ON OWNERSHIP OF COPYRIGHT

WORK OWNERSHIP
Single Creator of an Belongs to the author of the work (Sec. 178.1, RA Work 8293).
Original the work
Works of Joint Ownership Belongs of the co-authors; in the absence of agreement, their rights
shall be governed by the rules on co-ownership. However, if the
work consists of parts that can be used separately and identified,
the author of each part owns the copyright of the part he has
created (Sec. 178.2, RA 8293).
Works created during the Belongs to the employee if the creation is not a part of his regular
course of employment duties, even if he used the time, facilities, and materials of the
employer. However, copyright belongs to the employer if the
work is in the performance of the employee’s regular duties unless
there is an agreement to the contrary (Sec. 178.3, RA 8293).
Work commissioned by a The person who commissioned the work and pays for it holds
person other than the ownership of the work per se, BUT COPYRIGHT REMAINS
employer WITH THE CREATOR unless there was a stipulation to the
contrary (Sec. 178.4, RA 8293).
Audio visual works Belongs to the producer, author of the scenario, composer of the
music, film director, and author of the adapted work. However,
subject to stipulations, the PRODUCERS SHALL EXERCISE
THE COPYRIGHT as may be required for the exhibition of the
work, except for the right to collect license fees for the
performance of musical compositions in the work (Sec. 178.5, RA
8293).
Letters Belongs to the writer, but the court may authorize their publication
or dissemination if the public good or interest if justice requires,
pursuant to Art. 723, New Civil Code. (Sec. 178.6, RA 8293).

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 Anonymous and Publishers are deemed to represent the authors, unless the contrary
pseudonymous works appears, the pseudonyms or adopted names leave no doubt as to
the author’s identity or if the author discloses his identity (Sec.
179, RA 8293).
Collective works A contributor is deemed to have waived his right unless he
expressly reserves it (Sec. 196, RA 8293).

Presumption of Authorship
GR: 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.

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,
RA 8293).

Transfer or Assignment of Copyright

The copyright may be assigned or licensed in whole or in part (Sec. 180.1, RA 8293).
1. The copyright is not deemed assigned or licensed inter vivos in whole or in part unless
there is a written indication of such intention (Sec. 180.2, RA 8293 as amended by RA
10372).
2. If two or more persons jointly own a copyright or any part thereof, neither of the owners
shall be entitled to grant licenses without the prior written consent of the other owner or
owners (Sec. 180.3, RA 8293).

Collective Management Organizations (CMO)

CMOs are entities composed of artists, writers, composers and other creators, or copyright/related
rights holders that manage the bundle of copyrights that their members own by providing the legal
platform to efficiently enforce their intellectual property rights.

The owners of copyright and related rights or their heirs may designate a society of artists,
writers, composers and other right-holders to collectively manage their economic or moral
rights on their behalf.
For the said societies to enforce the rights of their members, they shall first secure the
necessary accreditation from the Intellectual Property Office (Sec. 183, RA 8293 as
amended by RA 10372).

6. LIMITATIONS ON A COPYRIGHT
a. FAIR USE
**Doctrine of Fair Use
The fair use of copyrighted work for criticism, comment, news reporting, teaching (including
limited copies for classroom use), research, and similar purposes is NOT an infringement of
copyright (Sec. 185.1, RA 8293).

A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a
reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the

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copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests
of the public and of society.

Decompilation
Refers to 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 programs.
This may also constitute fair use (Sec. 185.1, RA 8293).

Factors to consider in determining Fair Use

1. The purpose and character of the use, including whether such use is of a commercial nature
or is for non-profit educational purposes;
2. The nature of the copyrighted work;
3. The amount and substantiality of the portion used in relation to the copyrighted work as a
whole; and
4. The effect of the use upon the potential market for or value of the copyrighted work (Sec.
185.1, RA 8293; Harper & Row v. Nation Enterprise, 471 US 539, (1985)).

The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is
made upon consideration of all the above factors (Sec. 185.2, RA 8293).

**ABS-CBN Corp. vs. Gozon, et al., GR 195956, March 11, 2015

Although news or other events themselves are not copyrightable, expression of the news,
particularly when it underwent a creative process, is entitled to copyright protection. With respect
to ideas, although ideas are not subject to copyright, these refer to abstract ideas that should be
distinguished from the concrete tangible embodiments of these abstractions that are the expression
of the ideas. The expression of ideas is subject to copyright protection.

Good faith is not a defense. It is not a defense that the defendant was not aware that he is infringing
a copyright. The liability for copyright infringement is in the nature of strict liability. It does not
require men rea (Intent) or culpa (fault or negligence).

7. COPYRIGHT INFRINGMENT
Infringement of Copyright
The IP Code was amended to expand infringement not only to cover direct infringement but also
third party infringement.

A person infringes a right protected under this Act when one:

1. Directly commits an infringement;
2. Benefits from the infringing activity of another person who commits an infringement if the
person benefiting:
a. Has been given notice of the infringing activity; and
b. Has the right and ability to control the activities of the other person;
3. With knowledge of infringing activity, induces, causes, or materially contributes to the
infringing conduct of another (Sec. 216, RA 8293 as amended by RA 10372).

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It also includes the act of any person who at the time when copyright subsists in a work has in his
possession an article which he known, or ought to know, to be an infringing copy of the 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 (Sec. 217.3, RA 8293).

What Constitutes Infringement

Infringement consists in 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 on the owner of the
copyright.

It can cover a whole range of acts from copying, assembling, packaging to marketing, including
the mere offering for sale of counterfeit goods.

Copyright infringement is thus committed by any person who shall use original literary or artistic
works, or derivative works, without the copyright owner’s consent in such a manner as to violate
the foregoing copy and economic rights.

Reproduction of Published Work

GR: The private reproduction of a published work in a single copy, where the reproduction is
made by a natural person exclusively for research and private study, shall be permitted, without
the authorization of the owner of copyright in the work (Sec. 187.1, RA 8293).

XPNs: Such permission shall not extend to:

1. A work of architecture in the form of building or other construction;
2. An entire book, or a substantial part thereof, or of a musical work in graphicform by
reprographic means;
3. A compilation of data and other materials;
4. A computer program except as provided in Section 189; and
5. Any work in cases where reproduction would unreasonably conflict with a normal
exploitation of the work or would otherwise unreasonably prejudice the legitimate interests
of the author (187.2, RA 8293).

a. REMEDIES

Remedies for Infringement

1. An injunction restraining such infringement (Sec. 216.1(a));
2. Actual damages, including legal costs and other expenses, as he may have incurred due
to infringement, as well as the profits the infringer may have made due to such
infringement;
a. In proving profits: The plaintiff shall be required to prove sales only, and the
defendant shall be required to prove every element of cost which he claims (Sec.
216.1(b)).

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 3. Such damages which to the court shall appear to be just and shall not be regarded as
penalty, in lieu of actual damages and profits (Sec. 216.1(b));
4. Impounding during the pendency of the action, upon such terms and conditions as the
court may prescribe, sales invoices and other documents evidencing sales, all articles and
their packaging alleged to infringe a copyright and implements for making them (Sec.
216.1(c));
5. Deliver under oath for destruction without any compensation all infringing copies or
devices, as well as all plates, molds, or other means for making such infringing copies as
the court may order (Sec. 216.1(d));
6. Such other terms and conditions, including the payment of moral and exemplary
damages, which the court may deem proper, wise and equitable and the destruction of
infringing copies of the work even in the event of acquittal in a criminal case (Sec.
216.1(e));
7. Criminal liability.

The copyright owner may elect, at any time before final judgment is rendered, to recover instead
of actual damages and profits, an award of statutory damages for all infringements involved in
an action in a sum equivalent to the filing fee of the infringement action but not less than
Php50,000.00. In awarding statutory damages, the court may consider the following factors:
1. The nature and purpose of the infringing act;
2. The flagrancy of the infringement;
3. Whether the defendant acted in bad faith;
4. The need for deterrence;
5. Any loss that the plaintiff has suffered or is likely to suffer by reason of the infringement;
and
6. Any benefit shown to have accrued to the defendant by reason of the infringement.

In case the infringer was not aware and had no reason to believe that his acts constitute an
infringement of copyright, the court in its discretion may reduce the award of statutory damages
to a sum of not more than P10,000.00 (Sec. 216.1);

NOTE: The amount of damages to be awarded shall be doubled against any person who:
1. Circumvents effective technological measures; or
2. Having reasonable grounds to know that it will induce, enable, facilitate or conceal the
infringement:
3. Remove or alter any electronic rights management information from a copy of a work,
sound recording, or fixation of a performance; or
4. Distribute, import for distribution, broadcast, or communicate to the public works or copies
of works without authority, knowing that electronic rights management information has
been removed or altered without authority (Sec. 216.1(b));

However, no damages may be recovered under this Act after the lapse of 4 years from the time the
cause of action arose (Sec. 226, RA 8293).

b. CRIMINAL PENALTIES

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Criminal Penalties for Infringement
Any person infringing any right secured by provisions of Part IV of this Act or aiding or abetting
such infringement shall be guilty of a crime punishable by:
1. Imprisonment of 1 year- 3 years plus a fine ranging from P50,000- P150,000 for the first
offense.
2. Imprisonment of 3 years and 1 day- 6 years plus a fine ranging from P150,000- P500,000
for the second offense.
3. Imprisonment of 6 years and 1 day- 9 years plus a fine ranging from P500,000- P1.5M for
the third and subsequent offenses.
4. In all cases, subsidiary imprisonment in cases of insolvency (Sec. 217.1, RA 8293 as
amended by RA 10372).

Determination of Penalty
In determining the number of years of imprisonment and the amount of fine, the court shall
consider:
1. The value of the infringing materials that the defendant has produced or manufactured; and
2. The damage that the copyright owner has suffered by reason of the infringement (Sec.
217.2, RA 8293 as amended by RA 10372).

The respective maximum penalty stated in Section 217.1 for the first, second, third and
subsequent offense, shall be imposed when the infringement is committed by:
1. The circumvention of effective technological measures;
2. The removal or alteration of any electronic rights management information from a copy of
a work, sound recording, or fixation of a performance, by a person, knowingly and without
authority; or
3. The distribution, importation for distribution, broadcast, or communication to the public of
works or copies of works, by a person without authority, knowing that electronic rights
management information has been removed or altered without authority (Sec. 217.2, RA
8293 as amended by RA 10372).

Certificate of Registration and Deposit

The issuance of the certificates of registration and deposit as provided by Sec. 2, Rule 7 of the
Copyright Safeguards and Regulations, are purely for recording the date of registration and deposit
of the work, and are not conclusive as to copyright ownership (nor does it determine the time
when copyright vests) (Manly Sportswear v. Dadodette Enterprises, G.R. No. 165306 (2005)).

Purpose of Registration and Deposit: Completing the records of the National Library and the
Supreme Court Library; provided, that only works in the field of law shall be deposited with the
Supreme Court Library (Sec. 191, RA 8293 as amended by RA 10372). The National Library has
deputized the IPOPHL to receive deposited works in its behalf.

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 VIII. SPECIAL LAWS
A. SECURED TRANSACTIONS
1. PERSONAL PROPERTY SECURITY ACT (PPSA) (RA 11057)
a. DEFINITIONS AND SCOPE

Scope
GR: The PPSA applies to ALL transactions that secure an obligation with movable collateral.

XPNs
1. Interests in aircrafts
2. Interest in ships

Definitions

Security Agreement- The secured transaction under the PPSA is called the security agreement.
1. It is a consensual contract, perfected by the meeting of the minds of the grantor and the
secured creditor.
a. The agreement must be contained in a written contract (Sec.6, PPSA)
b. Writing, for the purposes of the PPSA, includes electronic records (Sec. 3(k), PPSA)
2. It is an accessory obligation entered into by a person who grants a property right to another
person, in order to secure the payment or performance of an obligation.

Security Interest (Sec. 3(j), PPSA)- A security interest is a property right in collateral that secures
payment or other performance of an obligation, regardless of:
1. Whether the parties have denominated it as a security interest; and
2. The type of asset, the status of the grantor or secured creditor, or the nature of the secured
obligation
a. Including the right of a buyer of accounts receivable and a lessor under an operating
lease for not less than 1 year
Proceeds
Under the PPSA, even when the collateral is disposed, the security interest extends to its
identifiable or traceable proceeds (Sec. 8).
Covers sales, leases, licenses, exchanges, other forms of disposition

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 Proceeds are:
1. Any property received upon sale, lease, or other disposition of collateral; or
2. Whatever is collected on or distributed with respect to collateral, claims arising out of the
loss or damage to the collateral, as well as a right to insurance payment or other
compensation for loss or damage of the collateral (Sec. 3(f)).

Parties
The parties to a security agreement under the PPSA are the grantor and the secured creditor (Sec.
3).
Grantor (Sec. 3(c))
1. The person who grants a security interest in collateral to secure its own obligation or
that of another person;
2. A buyer or other transferee of a collateral that acquires its right subject to a security
interest;
3. A transferor in an outright transfer of an accounts receivable; or
4. A lessee of goods.

Secured Creditor (Sec. 3(i))

A secured creditor is a person that has a security interest.

For the purposes of registration and priority only, “secured creditor” includes a (1) buyer
of account receivable and a (2) lessor of goods under an operating lease for not less than 1
year.

b. ASSET-SPECIFIC RULES
i. FUTURE PROPERTY
Section 5. Creation of a Security Interest. - (b) A security agreement may provide for
the creation of a security interest in a future property, but the security interest in that
property is created only when the grantor acquires rights in it or the power to
encumber it.

ii. RIGHTS TO PROCEEDS AND COMMINGLED FUNDS

When the collateral is disposed, the security interest extends to the proceeds from such disposition,
in the form of funds, even when they are credited to a deposit account or money are commingled
with other funds or money (Sec. 8)
1. Despite the fact that they are no longer identifiable
2. Only to the extent that they remain traceable

Rules on Commingled Funds (Sec. 8)

1. The security interest in the commingled funds shall be limited to the amount of the
proceeds immediately BEFORE they were commingled.

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 2. If at any time after the commingling, the balance credited to the deposit account or the
amount of the commingled money is LESS than the amount of the proceeds
immediately before they were commingled:
a. The security interest against the commingled funds or money shall be limited to
the lowest amount of the commingled funds or money.
b. The reckoning period for such amount is between the time when the proceeds were
commingled and the time the security interest in the proceeds is claimed.

iii. TANGIBLE ASSETS COMMINGLED IN A MASS

The PPSA provides rules for the continuity of the security interest over tangible assets (i.e.
movable property) which has either:
1. Become a fixture,
2. Undergone accession or
3. Undergone commingling.

According to the PPSA, the security interest over the said movable will continue, provided that it
can still be reasonably traced. However, as to the question of ownership over the said tangible
assets, Book II of the Civil Code will govern (Sec. 25).

Otherwise, if the tangible asset did not become a fixture, or underwent accession, or commingling,
a party who obtains the asset in good faith will take it free from any security interest.
However, good faith will not exist if the movable property was registered before being obtained
(Sec. 21).

iv. ACCOUNTS RECEIVABLE

Under Sec. 10 of the PPSA, security interests in accounts receivable shall be effective
notwithstanding any agreement between the grantor and the account debtor or any secured creditor
limiting in any way the grantor’s right to create a security interest (Sec. 10(a)).

Likewise, any stipulation limiting the grantor’s right to create a security interest shall be void (Sec.
10(c)).

However, the PPSA limits the application of these provisions to accounts receivable arising from:
1. A contract for the supply or lease of goods or services other than financial services;
2. A construction contract or a contract for the sale or lease of real property; and
3. A contract for the sale, lease, or license of intellectual property (Sec. 10(d)).

Sec. 10 also shall not affect any obligation or liability of the grantor for breach of the agreement
in Sec. 10(a).

c. PERFECTION OF SECURITY INTERESTS

Section 11. Perfection of Security Interest- A security interest shall be perfected when
it has been created and the secured creditor has taken one of the actions in accordance
with Section 12.

On perfection, a security interest becomes effective against third parties.

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It is NOT perfection that gives birth to the security agreement, since it is a consensual contract.
Rather, perfection gives the security interest third-party effectiveness.
Section 12. Means of Perfection.— A security interest may be perfected by:
Registration of a notice with the Registry;
Possession of the collateral by the secured creditor; and
Control of investment property and deposit account.

A security interest in any tangible asset may be perfected by registration or possession. A

security interest in investment property and deposit account may be perfected by
registration or control.

Perfection by Registration
A security interest in the ff. may be perfected by registration of a notice with the Registry (Sec.
12(a)):
1. A tangible movable asset
2. Investment property
3. A deposit account

Notice – a statement of information that is registered in the Registry relating to a security interest
or lien. The term includes an initial notice., amendment notice, and termination notice (Sec. 3(e)).

Perfection by Possession
A security interest in a tangible movable asset may be perfected by possession of the collateral by
the secured creditor (Sec. 12(b)).

Possession in Art. 523 of the Civil Code is defined as “the holding of a thing or the enjoyment of
a right.”

Perfection by Control
A security interest in the ff. may be perfected by control (Sec. 12(c)):
1. Investment property
2. A deposit account

A security interest in a deposit account or investment property may be perfected by control

through:
1. The creation of the security interest in favor of the deposit-taking institution or the
intermediary;
2. The conclusion of a control agreement; or
3. For an investment property that is an electronic security not held with an intermediary, the
notation of the security interest in the books maintained by or on behalf of the issuer for
the purpose of recording the name of the holder of the securities (Sec. 13(a)).

The Intermediary’s Role in Control Agreements

Under Sec. 13(b), a deposit-taking institution or intermediary must consent to the entering of
a control agreement.

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The PPSA does NOT require the intermediary to enter into such agreements, since its obligation
is limited to following the instructions of the grantor, who is its depositor.
i.e. It has the right to refuse to follow the instructions of the secured creditor

Should the intermediary refuse to enter into a control agreement, the remedy of the grantor and
secured creditor is to register the security agreement instead, in order to perfect the security
interest.

Three types of Control Agreements

1. Control agreement with respect to securities
1. An agreement in writing among the issuer or the intermediary, the grantor, and the
secured creditor.
2. The issuer or the intermediary agrees to follow instructions from the secured creditor
with respect to the security, without the further consent of the grantor (Sec. 3 (b) (1)).

2. Control Agreement with Respect to Rights to a Deposit Account

1. An agreement in writing among the deposit-taking institution, the grantor, and the
secured creditor.
2. The deposit-taking institution agrees to follow instructions from the secured creditor
with respect to the payment of funds credited to the deposit account without further
consent from the grantor (Sec. 3(b)(2)).

3. Control Agreement with Respect to Commodity Contracts

1. An agreement in writing among the grantor, secured creditor, and intermediary.
2. The commodity intermediary will apply any value distributed on account of the
commodity contract as directed by the secured creditor without further consent by the
commodity customer or grantor.

d. REGISTRATION
A security interest may be perfected by registration of a notice with the Registry.
Section 26. Establishment of Electronic Registry.— The Registry shall be established in
and administered by the LRA.

The Registry shall provide electronic means for registration and searching of notices.

Procedure
1. The grantor, or any person authorized by the grantor, submits the notice to the Registry,
and pays the prescribed fee. The notice is considered sufficient if it:
a. Identifies the grantor by an identification number
b. Identifies the secured creditor by name
c. Provides an address for the grantor and secured creditor
d. Describes the collateral (Sec. 28).

2. The Registry either accepts or rejects the notice for registration. However, if the notice
meets the minimum requirements and the fee is paid, it shall not be rejected (Sec. 28(a)).

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 a. The Registry DOES NOT determine the correctness, authenticity, or validity of the
information contained in the notice.
b. Thus, questions regarding the validity of the security agreement are expected to be
decided in a proper litigation AFTER registration.

3. If the Registry rejects the registration of a notice, it shall promptly communicate the fact
and reason for its rejection to the person who submitted the notice (Sec. 28).
4. If the Registry accepts the registration of a notice, it shall be effective, from the time it is
discoverable on the records of the Registry, until such time that the duration indicated on
the notice lapses (Sec. 30).
a. Any person may search notices registered in the Registry (Sec. 27).
b. The electronic records of the Registry shall be the official records (Sec. 27).

Effects of Registration
1. The security interest becomes binding on third parties (Sec. 11).
2. The registered notice is considered a public record (Sec. 27).
3. Subsequent purchasers of the collateral are charged with notice of the security interest
burdening the title of said collateral.
Such notice cannot be overcome by proof of good faith (Legarda & Prieto v
Saleeby, G.R. No. L-8936).
4. Establishes the basis of priority of security of interest according to time of registration
(Sec. 17).

e. PRIORITY OF SECURITY INTERESTS

Priority – the right of a person to derive the economic benefit of its security interest in preference
to the right of a competing claimant.

The perfection of a security interest gives rights to the secured creditor against other creditors
asserting rights over the same collateral.

Priority Rules
The priority of security interests and liens on the same collateral shall be determined according to
the time of registration of a notice or perfection by other means (Sec. 17).

GR: Such priority is without regard to the order of creation of the security interests and liens, or
to the mode of perfection (Sec. 17).

XPN: Except as provided in Sections 18- 25 of the PPSA or Sections 6.02-6.05 of these Rules
(Rule VI, Sec, 6.01. IRR of R.A. 11057).

1. Priority Rules for Intangible Assets

Security Interests Over Deposit Accounts/Investment Properties
Section 18. Priority for Perfection by Control. —

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 -A security interest in a deposit account with respect to which the secured creditor is
the deposit-taking institution or the intermediary shall have priority over a competing
security interest perfected by any method.
-A security interest in a deposit account or investment property that is perfected by a
control agreement shall have priority over a competing security interest except a security
interest of the deposit-taking institution or the intermediary.
-The order of priority among competing security interests in a deposit account or
investment property that were perfected by the conclusion of control agreements shall be
determined on the basis of the time of conclusion of the control agreements.
-Any rights to set-off that the deposit- taking institution may have against a grantor’s
right to payment of funds credited to a deposit account shall have priority over a
security interest in the deposit account.

Priority* of Security Interests Over Deposit Accounts/Investment Property

*NOTE: With (1) having the highest priority

1. Right to set-off of the deposit-taking institution against a grantor’s right to payment of

funds credited to a deposit account (Highest Priority)
2. Security interest in a deposit account with respect to which the secured creditor is the
deposit-taking institution
3. Security interest in a deposit account or investment property that is perfected by a control
agreement
a. The earlier the conclusion of the control agreement, the higher in priority
b. Security interest in a deposit account or investment property that is perfected by
registration

Security Interests Over Electronic Securities

Section 18. Priority for Perfection by Control.—
a. A security interest in electronic securities NOT held with an intermediary
perfected by a notation of the security interests in the books maintained for that
purpose by or on behalf of the issuer shall have priority over a security interest in
the same securities perfected by any other method.
b. A security interest in electronic securities NOT held with an intermediary
perfected by the conclusion of a control agreement shall have priority over a
security interest in the same securities perfected by registration of a notice in the
Registry.
c. The order of priority among competing security interests in electronic securities not
held with an intermediary perfected by the conclusion of control agreements is
determined on the basis of the time of conclusion agreements.

Priority of Security Interests Over Non- Intermediated Electronic Securities

1. Security interest in non-intermediated electronic securities perfected by a notation of such
interest in the books of the issuer
2. Security interest in non-intermediated electronic securities perfected by control
3. The earlier the conclusion of the control agreement, the higher in priority

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2. Priority Rules for Tangible Assets

Security Interests Over Security Certificates

Certificated non-intermediated securities are considered tangible property if the mere possession
of such instruments results in the ownership of the underlying rights or property embodied by them
(IRR of R.A. 11057, Section 1.05(kk)).

Section 18. Priority for Perfection by Control.

A security interest in a security certificate perfected by the secured creditor’s possession
of the certificate shall have priority over a competing security interest perfected by
registration of a notice in the Registry.

Priority of Security Interests Over Security Certificates

1. Security interest in a security certificate perfected by possession of said certificate
2. Security interest in a security certificate perfected by registration of a notice in the Registry.

Security Interests Over Instruments or Negotiable Documents

Section 19. Priority for Instruments and Negotiable Documents. -A security interest in
an instrument or negotiable document that is perfected by possession of the instrument
or the negotiable document shall have priority over a security interest in the instrument
or negotiable document that is perfected by registration of a notice in the Registry.

Priority of Security Interests Over Instruments or Negotiable Documents

1. A security interest in an instrument or negotiable document that is perfected by possession
2. A security interest in an instrument or negotiable document that is perfected by registration

Security Interests Over Livestock

Section 24. Livestock. -A perfected security interest in livestock securing an obligation
incurred to enable the grantor to obtain food or medicine for the livestock shall have
priority over any other security interest in the livestock, except for a perfected purchase
money security interest in the livestock, if the secured creditor providing credit for food
or medicine gives written notification to the holder of the conflicting perfected security
interest in the same livestock before the grantor receives possession of the food or
medicine.

Priority of Security Interests Over Livestock

1. A perfected purchase money security interest in the livestock incurred to enable the grantor
to obtain food or medicine for the livestock, provided that –
a. The secured creditor providing credit for said food or medicine gives written
notification to the holder of the conflicting perfected security interest in the same
livestock
b. Such notice must be given before the grantor receives possession of the food or
medicine
2. A perfected security interest in livestock securing an obligation incurred to enable the
grantor to obtain food or medicine for the livestock
3. Any other security interest in the livestock, incurred for any other purpose

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NOTE: A purchase money security interest is a security in goods, taken by:
1. The seller to secure the price; or
2. A person who gives value to enable the grantor acquire the goods to the extent that the
credit is used for that purpose (Sec. 3(g)).

iii. Priority Rules for Specific Cases

Security Interests Over Goods that are Subject to the Right of Retention
Section 20. Priority and Right of Retention by Operation of Law. -A person who
provides services or materials with respect to the goods, in the ordinary course of
business, and retains possession of the goods shall have priority over a perfected
security interest in the goods until payment thereof.

Priority of Security Interests Over Goods

1. Lien over goods created by operation of law in favor of a person who provides services or
materials with respect to the goods, in the ordinary course of business
2. Any perfected security interest over the same goods.

Purchase Money Security Interests

A Purchase Money Security Interest (PMSI) is a security in goods, taken by:
1. The seller to secure the price; or
2. A person who gives value to enable the grantor acquire the goods to the extent that the
credit is used for that purpose (Sec. 3(g)).

Section 23. Purchase Money Security Interest.—

A purchase money security interest in equipment and its proceeds shall have priority
over a conflicting security interest, if a notice relating to the purchase money security
interest is registered within 3 business days after the grantor receives possession of the
equipment.

A purchase money security interest in consumer goods that is perfected by registration

of notice not later than 3 business days after the grantor obtains possession of the
consumer goods shall have priority over a conflicting security interest.

A purchase money security interest in inventory, intellectual property, or livestock shall

have priority over a conflicting perfected security interest in the same inventory,
intellectual property or livestock if:
The purchase money security interest is perfected when the grantor receives
possession of the inventory or livestock, or acquires rights to intellectual
property; and

Before the grantor receives possession of the inventory or livestock, or acquires

rights in intellectual property, the purchase money secured creditor gives
written notification to the holder of the conflicting perfected security interest in
the same types of inventory, livestock, or intellectual property. The notification sent

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 to the holder of the conflicting security interest may cover multiple transactions
between the purchase money secured creditor and the grantor without the need to
identify each transaction.

The purchase money security interest in equipment or consumer goods perfected timely in
accordance with subsections (a) and (b), shall have priority over the rights of a buyer,
lessee, or lien holder which arise between delivery of the equipment or consumer goods to
the grantor and the time the notice is registered.

Priority of Security Interests Over Equipment and its Proceeds (Sec. 23)
1. A PMSI in equipment and its proceeds shall have priority, provided that –
a. A notice relating to the PMSI is registered within 3 business days after the grantor
receives possession of the equipment
2. Right over the same equipment in favor of a buyer, lessee, or lien holder which arise
between delivery of the equipment to the grantor and the time the notice is registered
3. Any perfected security interest in the same equipment.

Priority of Security Interests Consumer Goods (Sec. 23)

1. A PMSI in consumer goods shall have priority, provided that –
a. A notice relating to the PMSI is registered within 3 business days after the grantor
receives possession of the consumer goods
2. Right over the same goods in favor of a buyer, lessee, or lien holder which arise between
delivery of the consumer goods to the grantor and the time the notice is registered
3. Any perfected security interest in the same goods.

Priority of Interests Over Inventory, Intellectual Property or Livestock (Sec. 23)

1. A PMSI in inventory, intellectual property, or livestock shall have priority, provided that
–
a. The PMSI is perfected when the grantor receives possession of the inventory or
livestock, or acquires rights to intellectual property;
b. The secured creditor gives a written notification to the holder of the conflicting
perfected security interest in the same types of inventory, livestock, or intellectual
property
i. Such notification must be given before the grantor receives possession of
the inventory or livestock, or acquires rights in intellectual property; and
ii. The notification may cover multiple transactions between the secured
creditor and the grantor, without the need to identify each transaction.

2. Any perfected security interest in the same inventory, intellectual property or livestock.

Priority of Perfected Security Interest Prior to Insolvency Proceedings

Section 22. Effect of the Insolvency on the Priority of a Security Interest. - Subject to
the applicable insolvency law, a security interest perfected prior to the commencement of
insolvency proceedings in respect of the grantor shall remain perfected and retain the
priority it had before the commencement of the insolvency proceedings.

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f. TANGIBLE ASSETS; INTANGIBLE ASSETS (Sec. 12)

Tangible asset – any tangible movable asset, including:

1. Money
2. Negotiable instruments
3. Negotiable documents; and
4. Certificated non-intermediated securities
Only if the mere possession of such instruments results in the ownership of the
underlying rights or property embodied by them (IRR of R.A. 11057, Section
1.05(kk))

Intangible asset – any movable property other than a tangible asset including, but not limited to,
1. investment property,
2. deposit accounts,
3. commodity contracts, and
4. receivables (IRR of R.A. 11057, Section 1.05(m))

g. ENFORCEMENT OF SECURITY INTERESTS

The creditor with the security interest having the highest priority will be able to enforce his/her
interests via (1) recovery, (2) disposition, or (3) retention.

Section 46. Right of Higher-Ranking Secured Creditor to Take Over Enforcement.—

Even if another secured creditor or a lien holder has commenced enforcement, a secured
creditor whose security-interest has priority over that of the enforcing secured creditor
or lien holder shall be entitled to take over the enforcement process.

The right referred to in subsection (a) of this section may be invoked at any time before the
collateral is sold or otherwise disposed of, or retained by the secured creditor or until the
conclusion of an agreement by the secured creditor for that purpose.

The right of the higher-ranking secured creditor to take over the enforcement process shall
include the right to enforce the rights by any method available to a secured creditor
under this Act.

1. Recovery
Recovery is an enforcement procedure that does not require judicial process. It applies only to the
special cases provided in Sec. 48.

Upon default, the secured creditor may without judicial process:

1. Instruct the account debtor to make payment to the secured creditor, and
2. Apply such payment to the satisfaction of the obligation secured by the security interest
after deducting the secured creditor’s reasonable collection expenses.

NOTE: The account debtor may request the secured creditor to provide evidence of its security
interest to the account debtor when it delivers the instruction to the account debtor (Sec. 48).

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2. Disposition

Right to Dispose of Collateral

After default, a secured creditor may:
1. Sell or otherwise dispose of the collateral, publicly or privately, in its present condition or
following any commercially reasonable preparation or processing;
2. Buy the collateral at any public disposition, or at a private disposition but only if the
collateral is of a kind that is customarily sold on a recognized market or the subject of
widely distributed standard price quotations (Sec. 49)

Disposition is a method of enforcement similar to the general right of the creditor to alienate the
collateral upon default of the debtor under the Civil Code. The difference in the PPSA is that, it
requires commercial reasonableness of the disposition.

Procedure
Before disposition may be availed of, a creditor must:
1. Repossess the collateral, either: Extra–judicially (Sec. 47(a)(b)) or Judicially (Sec. 47(c)),
and
2. There must be compliance with notification requirements in Sec. 51.
3. Let those entitled exercise the right of redemption under Sec. 45.

1. Repossession of Collateral

Extra-judicial Repossession
The secured creditor may:
1. Take possession of the collateral without judicial process if the security agreement so
stipulates: Provided, That possession can be taken without a breach of the peace.
2. Remove the collateral from the real property to which it is affixed, in case it is a fixture,
without judicial process: Provided That –
a. The secured creditor has priority over all owners and mortgagees
b. The secured creditor exercises due care in removing the fixture (Sec. 47(a)(b)).

Judicial Repossession
If, upon default, the secured creditor CANNOT take possession of collateral without breach
of the peace, the secured creditor shall:
1. Be entitled to an expedited hearing upon application for an order granting the secured
creditor possession of the collateral. Such application shall include a statement by the
secured creditor, under oath:
a. Verifying the existence of the security agreement attached to the application;
and
b. Identifying at least one event of default by the debtor under the security
agreement;
2. Provide the debtor, grantor, and, if the collateral is a fixture, any real estate mortgagee,
a copy of the application, including:
a. All supporting documents; and

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 b. Evidence for the order granting the secured creditor possession of the collateral;
and
3. Be entitled to an order granting possession of the collateral
a. Upon the court finding that:
i. A default has occurred under the security agreement; and
ii. The secured creditor has a right to take possession of the collateral.
b. The court may direct the grantor to take such action as the court deems
necessary and appropriate so that the secured creditor may take possession of
the collateral (Sec. 47).

2. Notification of Disposition
Not later than 10 days before disposition of the collateral, the secured creditor shall notify:
1. The grantor; (NOTE: The grantor may waive the right to be notified.)
2. Any other secured creditor or lien holder who, 5 days before the date notification is
sent to the grantor, held a security interest or lien in the collateral that was perfected by
registration; and
3. Any other person from whom the secured creditor received notification of a claim
of an interest in the collateral if the notification was received before the secured
creditor gave notification of the proposed disposition to the grantor (Sec. 51).

Sufficiency of Notification
A notification of disposition is sufficient if it:
1. Identifies the grantor and the secured creditor;
2. Describes the collateral;
3. States the method of intended disposition; and
4. States the time and place of a public disposition or the time after which other disposition
is to be made (Sec. 51).

Exceptions to the Notification Requirement

The requirement to send a notification under this section shall not apply if the collateral is:
a. Perishable; or
b. Threatens to decline speedily in value;
c. Of a type customarily sold on a recognized market (Sec. 51).

3. Right of Redemption
GR: A party who is entitled to a notification is also entitled to redeem the property (Sec.
45(a)).

XPNs: The right of redemption may be exercised, unless:

1. The person entitled to redeem has not, after the default, waived in writing the right to
redeem;
2. The collateral is sold or otherwise disposed of, acquired, or collected by the
secured creditor or until the conclusion of an agreement by the secured creditor for
that purpose; and
3. The secured creditor has retained the collateral (Sec. 45(a)).

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 How Exercised
The right to redeem is exercised by paying or otherwise performing the secured obligation
in full, including the reasonable cost of enforcement (Sec. 45(a)).

Disposition and Application of Proceeds

If there is no redeemer, the secured creditor may dispose of the property, and the proceeds
will be applied according to Section 52, in the following order:
1. The reasonable expenses of taking, holding, preparing for disposition, and disposing of
the collateral, including reasonable attorneys’ fees and legal expenses incurred by the
secured creditor;
2. The satisfaction of the obligation secured by the security interest of the enforcing
secured creditor; and
3. The satisfaction of obligations secured by any subordinate security interest or lien in
the collateral if a written demand and proof of the interest are received before
distribution of the proceeds is completed.

The secured creditor shall account to the grantor for any surplus, and, unless otherwise
agreed, the debtor is liable for any deficiency (Sec. 52).

Commercial Reasonableness Requirement

After repossession and notice, the collateral may be disposed of provided that the creditor
acts in a “commercially reasonable manner” (Sec. 50(a)).

Under Sec. 50, a creditor acts in such manner if he/she “disposes of the collateral in
conformity with commercial practices among dealers in that type of property.” (Sec. 50(b))
1. A disposition is presumed commercially reasonable when approved in any legal
proceeding (Sec. 50(d)).
2. A disposition will still be treated as commercially reasonable even if “a better price could
have been obtained by disposition at a different time or by a different method from the
time and method selected by the secured creditor” (Sec. 50(c)).

3. Retention
Retention of collateral is the result of an offer on the part of the secured creditor and the acceptance
of the proposal by the parties entitled to receive the same.

After default, the secured creditor may propose to the debtor and grantor to take all or part of the
collateral in total or partial satisfaction of the secured obligation, and shall send a proposal to:
1. The debtor and the grantor;
2. Any other secured creditor or lien holder who, 5 days before the proposal is sent to the
debtor and the grantor, perfected its security interest or lien by registration; and
3. Any other person with an interest in the collateral who has given a written notification to
the secured creditor before the proposal is sent to the debtor and the grantor (Sec. 54).

When Retention May Be Exercised (Sec. 54)

The secured creditor may retain the collateral in the case of:

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 1. A proposal for the acquisition of the collateral in full satisfaction of the secured obligation;
or
a. Unless the secured creditor receives an objection in writing from any person
entitled to receive such a proposal within 20 days after the proposal is sent to that
person
2. A proposal for the acquisition of the collateral in partial satisfaction of the secured
obligation
a. Only if the secured creditor receives the affirmative consent of each addressee of
the proposal in writing within 20 days after the proposal is sent to that person.

h. PRIOR INTERESTS AND THE TRANSITIONAL PERIOD

1. Prior Interests
A security interest that was:
1. Created or provided for by an agreement or other transaction that was made or entered into
before the effectivity of this Act; and
2. Had not been terminated before the effectivity of this Act (Sec. 55(b)).

However, a security interest that is renewed or extended by a security agreement or other

transaction made or entered into on or after the effectivity of this Act is NOT considered a prior
interest (Sec. 55(b)).

Creation of Prior Interest

Creation of prior interest shall be determined by prior laws, which are laws that existed or in force
before the effectivity of this Act (Sec. 56)

Effectivity of Prior Interest

A prior interest remains effective between the parties, notwithstanding its creation did not comply
with the creation requirements of this Act (Sec. 56).

Perfection of Prior Interest (Sec. 58)

1. A prior interest that was perfected under prior law continues to be perfected under this Act
until the earlier of:
a. The time the prior interest would cease to be perfected under prior law; and
b. The expiration of the transitional period.
2. If the perfection requirements of the PPSA are satisfied before the perfection of a prior
interest ceases in accordance with (a):
a. The prior interest continues to be perfected under this Act from the time when it
was perfected under the prior law.
3. If the prior interest was perfected by the registration of a notice under prior law, the time
of registration under the prior law shall be the time to be used for purposes of applying the
priority rules of this Act.
4. If the perfection requirements of the PPSA are NOT satisfied before the perfection of a
prior interest ceases in accordance with (a):
a. The prior interest is perfected only from the time it is perfected under this Act.

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 5. A written agreement between a grantor and a secured creditor creating a prior interest is
sufficient to constitute authorization by the grantor of the registration of a notice covering
assets described in that agreement under this Act.

When a Prior Law Over a Prior Interest Applies

GR: The priority of a prior interest as against the rights of a competing claimant is determined by
the prior law if:
1. The security interest and the rights of all competing claimant arose before the effectivity
of this Act; and
2. The priority status of these rights has not changed since the effectivity of this Act (Sec.
58(a)).

XPNs: The priority status of a prior interest has changed (refer to the 2nd instance under the
general rule, i.e. Sec. 58(a)(2)) only if:
1. It was perfected when this Act took effect, but ceased to be perfected; or
2. It was not perfected under prior law when this Act took effect, and was only perfected
under this Act (Sec. 58(b)).

Enforcement of Prior Interest (Sec. 59)

If any step or action has been taken to enforce a prior interest before the effectivity of this Act,
enforcement may continue under prior law or may proceed under this Act.
NOTE: Prior law shall apply to a matter that is the subject of proceedings before a court before
the effectivity of this Act.

2. Transitional Period
The period from the date of effectivity of this Act until the date when the Registry has been
established and operational (Sec. 55 (d))

Thus, the transitional period is from September 7, 2018 until the date when the Registry has been
established and operational
1. All pledges and mortgages created pursuant to the Civil Code and the Chattel Mortgage
Law remain effective between the parties
2. But upon expiration of the transitional period, the binding effect as against third parties of
chattel mortgages is lost, UNLESS the requirements of the PPSA are complied with.

Establishment of Electronic Registry

Section 68. Implementation. —
Notwithstanding the entry into force of this Act under Section 67, the implementation of
the Act shall be conditioned upon the Registry being established and operational under
Section 26.

Section 26. Establishment of Electronic Registry.

The Registry shall be established in and administered by the LRA.
The Registry shall provide electronic means for registration and searching of notices.

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2. REAL ESTATE MORTGAGE LAW (Act No. 3135 as amended by Act No.
4118)

a. DEFINITION AND CHARACTERISTICS

Real Mortgage
A contract whereby the debtor secures to the creditor the fulfillment of a principal obligation (real
security transaction), immediately making immovable property or real rights answerable to the
principal obligation in case it is not complied with at the time stipulated.

A registered real estate mortgage is a right in rem, a lien that a creditor has on the property;
therefore, it is inseparable from the collateral and until discharged, it follows the property.

i. OBLIGATIONS SECURED BY REAL ESTATE MORTGAGE

GR: A real estate mortgage is limited to the principal obligations mentioned in the contract (within
its four corners).

XPN: A real estate mortgage may contain a dragnet or blanket mortgage clause which subsumes
all debts, whether past or future.

NOTE: This clause will be strictly construed and its inclusion makes the mortgage a continuing
security, not to be discharged by repayment of the amount named, but by payment of the full
amount of the principal obligation.

Reliance on Security Test: When the mortgagor takes another loan for which another security
was given, it could not be inferred that such loan was made in reliance solely on the original
security with the dragnet clause, but rather, on the new security given.

ii. OBJECT OF REAL ESTATE MORTGAGE (Art. 2124, NCC)

1. Immovables
2. Alienable real rights over immovables.

NOTE: Article 2127 is modified by the PPSA with regard to property included in a Real Estate
Mortgage. Under Art. 2127, a REM “extends to natural accessions, to the improvements, growing
fruits and the rents or income not yet received when the (principal) obligation becomes due.” These
personal properties are NO LONGER covered by Art. 2127.

Future property CANNOT be an object of mortgage; however:

1. A stipulation subjecting to the mortgage improvements which the mortgagor may
subsequently acquire, install, or use in connection with real property already mortgaged
belonging to the mortgagor is valid.
2. A stipulation in a registered (or recorded) real estate mortgage that all property taken in
exchange or replacement by the mortgagor (after-acquired property) shall become subject
to the mortgage is binding.

iii. RIGHT TO ALIENATE MORTGAGE CREDIT

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 Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole
or in part, with the formalities required by law.

The right to alienate the real estate mortgage credit is the right of the mortgagee to assign its rights
under the principal obligation secured. Although the mortgagee does not become the owner of the
collateral, it owns the real estate mortgage credit and may alienate the same to a third person (Art.
2128, NCC)

iv. RIGHT TO ALIENATE COLLATERAL

The mortgagor may still sell the mortgaged property, and any stipulation to the contrary is void
(Art. 2130, NCC).

Pactum de non alienando (Sp. pacto de non alienando) is prohibited by Art. 2130
1. Stipulations forbidding the mortgagor from selling the collateral
2. Stipulations forbidding the mortgagor from selling the collateral without the consent of the
mortgagee

b. ESSENTIAL REQUISITES
1. The mortgage must be constituted to secure the fulfillment of a principal obligation (Art.
2085);
2. The mortgagor must be the absolute owner of the immovable or alienable real rights (Art.
2085);
3. The mortgagor must have free disposal of the property or is legally authorized for the
purpose (Art. 2085);
4. The mortgage must be subjected to the condition that when the principal obligation
becomes due, the collateral may be alienated for payment to the creditor (Art. 2087);
5. Must be recorded in the Registry of Property (Art. 2125).

However, if the instrument is not recorded, the mortgage is nevertheless binding between the
parties (Art. 2125).

3. GUARANTY
a. NATURE AND EXTENT OF GUARANTY
Art. 2047. By a guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Sec. 4, Ch.
3, Title 1 of this Book shall be observed. In such case the contract is called a suretyship

GR: Guaranty is gratuitous

XPN: When there is a stipulation to the contrary (Art. 2048, NCC)

i. OBLIGATION SECURED BY GUARANTY

1. The guaranty must be founded on a valid principal obligation (Art. 2052 (1), NCC)

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 2. A guaranty may secure the performance of a voidable, unenforceable, and natural
obligation (Art. 2052(2), NCC). This implies that a guaranty may secure the performance
of a:
a. Voidable contract – such contract is binding, unless it is annulled by a proper court
action.
b. Unenforceable contract – because such contract is not void.
c. Natural obligation – the creditor may proceed against the guarantor although he has
no right of action against the principal debtor for the reason that the latter’s
obligation is not civilly enforceable. When the debtor himself offers a guaranty for
his natural obligation, he impliedly recognizes his liability, thereby transforming
the obligation from a natural into a civil one.
3. A guaranty may secure a future debt (Art. 2053, NCC); Continuing Guaranty
a. Not limited to a single transaction but which contemplates a future course of
dealings, covering a series of transactions generally for an indefinite time or until
revoked.
b. It is prospective in its operation and is generally intended to provide security with
respect to future transactions.
c. Future debts, even if the amount is not yet known, may be guaranteed but there can
be no claim against the guarantor until the amount of the debt is ascertained or fixed
and demandable.

ii. PARTIES TO A GUARANTY

1. Creditor
2. Debtor of the Principal Obligation
3. Guarantor

Qualifications of a Guarantor (Art. 2056, NCC)

1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he guarantees.

GR: Creditor has the right to demand another guarantor with the qualifications in Art. 2056 if the
previous guarantor has:
1. Been convicted in first instance of a crime involving dishonesty; or
2. Become insolvent (Art. 2057, NCC)

XPN: Creditor has no right to demand a replacement guarantor if he himself required and
stipulated that the specified person should be the guarantor.

Excussion
The guarantor cannot be compelled to pay the creditor unless the latter has (Art. 2058, NCC]):
1. Exhausted all of the property of the debtor; and
2. Resorted to all the legal remedies against the debtor.

To avail of the benefit of excussion, the guarantor must (Art. 2060, NCC):
1. Set it up against the creditor upon demand for payment; and

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 2. Point out to the creditor available property of the debtor within PH territory sufficient to
cover the amount of the debt.

GR: The guarantor has the right to benefit from excussion/exhaustion

XPN: The excussion shall not take place: (ESIAP)
1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When he has absconded, or cannot be sued within the Philippines unless he has left a
manager or a representative.
5. If it may be presumed that an execution on the property of the principal debtor would not
result in the satisfaction of the obligation (Art. 2059, NCC)

iv. RIGHT TO PROTECTION

Art. 2071 provides a protective remedy in favor of the guarantor, which is available BEFORE he
has paid, but after he is made liable for the debt, and when any of the ff. grounds is applicable:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor or if he is in imminent danger of becoming
insolvent;
3. When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;
4. When the period for payment has expired;
5. After the lapse of 10 years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than 10 years;
6. If there are reasonable grounds to fear that the principal debtor intends to abscond.

To protect his interest, a guarantor can proceed against the principal debtor by:
1. Obtaining release from the guaranty; OR
2. Demanding a security that shall protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor (Art. 2071, NCC).

v. RIGHT TO INDEMNIFICATION
The guarantor who pays for a debtor must be indemnified by the latter,
The indemnity comprises:
1. The total amount of the debt
2. The legal interests thereon from the time the payment was made known to the debtor, even
though it did not earn interest for the creditor
3. The expenses incurred by the guarantor after having notified the debtor that payment had
been demanded of him.
4. Damages if they are due (Art. 2066, NCC)

vi. RIGHT TO SUBROGATION

The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor.

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If the guarantor has compromised with the creditor, he cannot demand of the debtor more than
what he has really paid (Art. 2067, NCC).

vii. RIGHTS OF CO-GUARANTORS

1. Right of excussion against the principal guarantor and the principal debtor (Art. 2064,
NCC);
2. Benefit of division (Art. 2065);
However, the benefit of division will cease if
a. Solidary liability has been stipulated (Art. 2065, NCC); or
b. If any of the exceptions to the benefit of excussion are present (Art. 2059, NCC);
3. Right to reimbursement, i.e. to demand payment from the other co-guarantors their
proportional share owed to him/her. This is available to the co-guarantor who paid the debt
(Art. 2073, par. 1, NCC).
4. Right of an insolvent guarantor to have his share bore by the others, including the payor,
in the same proportion (Art. 2073, par. 2, NCC).
5. Right to set-up defenses against the paying co-guarantor those available to the principal
debtor against the creditor.
a. XPN: Defenses personal to the debtor are not available to the guarantor, hence not
available as well to the co–guarantor (Art. 2081, NCC).
6. Right to benefit from the release of one guarantor (Art. 2078. NCC).

Requisites for the applicability of Art. 2073, NCC

1. There are two or more guarantors of the same debtor for the same debt;
2. Payment has been made by one guarantor;
3. The payment was made:
a. Because of the insolvency of the debtor, or
b. By judicial demand
4. The paying guarantor seeks to be indemnified only to the extent of his proportionate share
in the total obligation.

For purposes of proportionate reimbursement, the other guarantors may interpose such defenses
against the paying guarantor as are available to the debtor against the creditor, except those that
are personal to the debtor (Art. 2074, NCC).

b. EFFECTS OF GUARANTY
1. The guarantor has the right to benefit from excussion/exhaustion (Art. 2058, NCC)
2. The creditor has the right to secure a judgment against the guarantor prior to the
excussion
GR: An ordinary personal guarantor (NOT a pledgor/mortgagor), may demand exhaustion
of all the property of the debtor before he can be compelled to pay.

XPN: The creditor may, prior thereto, secure a judgment against the guarantor, who shall
be entitled, however, to a deferment of the execution of said judgment against him, until
after the properties of the principal debtor shall have been exhausted, to satisfy the latter’s
obligation.

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3. The creditor has the duty to make prior demand for payment from the guarantor
(Art. 2060, NCC)
The demand is to be made only after judgment on the debt.

4. The guarantor has the duty to set up the benefit of excussion (Art. 2060, NCC)
As soon as he is required to pay, the guarantor must also point out to the creditor available
property (not in litigation or encumbered) of the debtor within the Philippines.

5. The creditor has the duty to resort to all legal remedies (Arts. 2058 and 2061, NCC)
After the guarantor has fulfilled the conditions required for making use of the benefit of
excussion, it becomes the duty of the creditor to:
1. Exhaust all the property of the debtor pointed out by the guarantor;
2. If he fails to do so, he shall suffer the loss for the insolvency of the debtor, but
only to the extent of the value of the said property

6. The creditor has the duty to notify the guarantor in the action against the debtor (Art.
2062, NCC)
Notice to the guarantor is mandatory in the action against the principal debtor. The
guarantor, however, is not duty bound to appear in the case, and his non-appearance shall
not constitute default, with its consequential effects.

Rationale: To give the guarantor the opportunity to allege and substantiate whatever
defenses he may have against the principal obligation, and chances to set up such defenses
as are afforded him by law.

7. A compromise shall not prejudice a person not party to it (Art. 2063, NCC)
A compromise between creditor and principal debtor benefits the guarantor but does not
prejudice him.

A compromise between guarantor and the creditor benefits but does not prejudice the
principal debtor.

8. Effects of Guaranty between the Debtor and the Guarantor

a. The guarantor has the duty to notify the debtor before paying the creditor (Art.
2068; see also Arts. 1236 and 1237, NCC)

Should payment be made without notification or against the debtor’s will, and
supposing the debtor has already made a prior payment, the debtor would be justified
in setting up the defense that the obligation has already been extinguished by the time
the guarantor made the payment. The guarantor will then lose the right of
reimbursement and consequently the right of subrogation.

b. The guarantor cannot demand reimbursement for payment made by him

before the obligation has become due (Art. 2069, NCC)

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 GR: Since a contract of guaranty is only subsidiary, the guarantor cannot be liable for
the obligation before the period on which the debtor’s liability will accrue. Any
payment made by the guarantor before the obligation is due cannot be indemnified by
the debtor. The guarantor can only demand reimbursement upon expiration of the
period.
XPN: Prior consent or subsequent ratification by the debtor

c. The guarantor may proceed against the debtor even before payment has been
made (Art. 2071, NCC)

c. EXTINGUISHMENT OF GUARANTY

GR: The obligation of the guarantor is extinguished at the same time as that of the debtor and for
the same causes as all other obligations (Art. 2076, NCC).

Specific Instances that Extinguish the Guaranty

1. Creditor Voluntary Accepts the Immovable for Payment
The guarantor is released if the creditor voluntarily accepts immovable or other property in
payment of the debt, even if he should afterwards lose the same through eviction (Art. 2077,
NCC)
2. When an Extension is Granted to the Debtor without the Consent of Guarantor
An extension granted to the debtor by the creditor without the consent of guarantor
extinguishes the guaranty (Art. 2079, NCC)

However, the mere failure on the part of the creditor to demand payment after the debt has
become due does not, of itself, constitute any extension of time.

3. When Subrogation is Not Feasible

The guarantors, even though they may be solidary, are released from their obligation, whenever
by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference
of the latter (Art. 2080, NCC)

d. LEGAL AND JUDICIAL BONDS

Art. 2051, par. 1 – A guaranty may be conventional, legal, or judicial, or gratuitous or by
onerous title.

It may be constituted, not only in favor of the principal debtor, but also in favor of the other
guarantor, with the latter’s consent, or without his knowledge, or even over his objection.

Bond
An undertaking that is sufficiently secured, and not cash or currency.

Bondsman
A surety offered in virtue of a provision of law or a judicial order.

Qualifications of personal bondsman (Art. 2082 in relation to Art. 2056, NCC)

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 1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he guarantees.

Pledge or mortgage in lieu of bond (Art. 2083, NCC)

Guaranty or suretyship is a personal security.

Pledge or mortgage is a property or real security. If the person required to give a legal or judicial
bond should not be able to do so, a pledge or mortgage sufficient to cover the obligation shall be
admitted in lieu thereof.

Bondsman not entitled to excussion (Art. 2084, NCC)

A judicial bondsman and the sub-surety are NOT entitled to the benefit of excussion.

Reason: They are not mere guarantors, but sureties whose liability is primary and solidary.

Effect of negligence of creditor

Mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety
from liability.

4. SURETY
a. CONCEPT
Art. 2047, NCC. By a guaranty a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Sec. 4,
Ch. 3, Title 1 of this Book shall be observed. In such case the contract is called a
suretyship.

Suretyship
A relation which exists where one person (surety) binds himself solidarily with the principal
debtor, such that the former undertakes a direct and primary obligation or other duty to a third
person (creditor), who is entitled to but one performance, and as between the two who are bound,
the latter rather than the former should perform.

A suretyship is also an agreement whereby a surety guarantees the performance or undertakes to

answer, under specified terms and conditions, for the debt, default or miscarriage of the principal
or obligor, such as failure to perform, or breach of trust, negligence and the like, in favor of a third
party.

It shall be deemed as insurance contract if the surety’s main business is that of suretyship, and
not where the contract is merely incidental to any other legitimate business or activity of the surety.

b. FORM OF SURETY
Generally

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The contract of a surety is evidenced by a document called surety bond which is essentially a
promise to guarantee the obligation of the obligor. In turn, the obligor executes an indemnity
agreement in favor of the insurer.

It is an accessory contract unlike a contract of insurance which is the principal contract itself.

A suretyship is covered by the Statute of Frauds since it constitutes a special promise to answer
for the debt, default, or miscarriage of another (Art. 1403, NCC).

Therefore, a suretyship is unenforceable unless:

1. The suretyship or some note or memorandum thereof, is in writing; and
2. The suretyship is subscribed by the party or by his agent (Art. 1403, NCC).

c. OBLIGATIONS SECURED
A suretyship is valid despite the absence of any direct consideration received by the surety, either
from the principal debtor or from the creditor.

The consideration necessary to support a surety’s obligation need not pass directly to the surety.
A consideration moving the principal debtor alone is sufficient.

Strictissimi juris rule

The obligation of the surety cannot be extended by implication beyond the terms of the contract.

Comprehensive or Continuing Surety

Art. 2053 applies to suretyships as well, such that a surety may also be given as security
for future debts.

It contemplates a prospective or future course of dealing, covering a series of transactions

within the stipulations of the contract, until the expiration or termination of the suretyship.

d. SURETY DISTINGUISHED FROM STANDBY LETTER OF CREDIT

Surety Standby Letters of Credit

Upon debtor’s default, the creditor expects that Upon default, the creditor-beneficiary expects
the surety will perform that it will promptly receive cash before any
litigation
There is no duty to indemnify the creditor until There is a duty to pay the creditor- beneficiary
the creditor establishes the fact of the debtor’s upon presentation of the required documents
non- performance
No need to prove non-performance in
litigation.

e. SURETY DISTINGUISHED FROM GUARANTY

Surety Guaranty

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 An accessory promise by which a person binds A collateral undertaking to pay the debt of
himself for another already bound, and agrees another in case the latter is unable to pay the
with the creditor to satisfy the obligation if the debt
debtor does not
A surety is usually bound with his principal by The contract of guaranty is the guarantor's own
the same instrument, executed at the same separate undertaking, in which the principal
time, and on the same consideration. He is an does not join. It is usually entered into before
original promissor and debtor from the or after that of the principal, and is often
beginning, and is held, ordinarily, to know supported on a separate consideration from
every default of his principal. that supporting the contract of the principal.
The original contract of his principal is not his
contract, and he is not bound to take notice of
its non-performance.
A surety will NOT be discharged, either by the A guarantor is often discharged by the mere
mere indulgence of the creditor to the indulgence of the creditor to the principal, and
principal, or by want of notice of the default of is usually not liable unless notified of the
the principal, no matter how much he may be default of the principal
injured thereby
A surety is the insurer of the debt, and he A guarantor is the insurer of the solvency of
obligates himself to pay if the principal does the debtor and thus binds himself to pay if the
not pay principal is unable to pay

f. SURETY DISTINGUISHED FROM JOINT AND SOLIDARY

OBLIGATIONS

Nature of Liability
Although contractual (limited by the terms of the contract) and accessory (arises only if principal
debtor is held liable), a surety’s liability is direct, primary, and absolute.

Surety Joint and Solidary Obligations

Surety has the right to indemnification and Joint and solidary debtor has only a right to
subrogation as against the principal debtor reimbursement as against his co- debtors (Art.
(Art. 2066- 2067, NCC) 1217, NCC).
Accessory, ancillary, and collateral obligation Not dependent on, or not an incident to a
principal obligation

5. LETTERS OF CREDIT
a. DEFINITION AND PURPOSE

Definition
Letters of credit (L/C) is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person, and assumes responsibility for payment
of debt therefor to the addressee.

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A L/C is a financial device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods. The buyer is required to contract a bank to issue a L/C in favor of the
seller so that, by virtue of the L/C, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the tender of documents required
by the L/C.

Purpose
Its purpose is to substitute for, and support, the agreement of the buyer-importer to pay money
under a contract or other arrangement, but does not necessarily constitute as a condition for the
perfection of such arrangement.

Essential Conditions of Letters of Credit

1. Issued in favor of a definite person and not to order.
2. Limited to a fixed and specified amount, or to one or more undetermined amounts, but
within a maximum the limits of which has to be stated exactly.

Those which do not have one of these conditions shall be mere letters of recommendation (Art.
568, Code of Commerce)

Parties to a Letter of Credit

There would be at least 3 parties to a letter of credit:
1. Buyer/Importer/Account Party – one who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipt of documents of title.
2. Issuing/Opening Bank – the bank which is usually the buyer’s bank and actually issues
the letter of credit.
It undertakes:
1. To pay the seller upon receipt of the draft and proper documents of title; and
2. To surrender the documents to the buyer upon reimbursement.

The obligation of the issuing bank to pay the seller is direct, primary, absolute, definite
and solidary with the buyer, in the absence of stipulation in the letter of credit.

An issuing bank that paid the beneficiary of an expired letter of credit can recover from the
applicant-buyer, who obtained goods from the beneficiary to prevent unjust enrichment.

3. Seller/Exporter/Beneficiary – one who ships the goods to the buyer in compliance with a
contract of sale and delivers the documents of title and draft to the issuing bank to recover
payment.

b. KINDS OF LETTERS OF CREDIT

As to the type of the main contract

1. Commercial Letter of Credit
2. Standby Letter of Credit

Commercial Letter of Credit Standby Letter of Credit

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 Use Method of payment in a contract of Use to guarantee or secure an
sale obligation in a non-sale transaction
Purpose Reduces the risk of non-payment of Reduces the risk of non-performance of
purchase price under a contract of sale a contractual obligation
When The credit is payable upon the The credit is payable upon certification
Payable presentation by the seller-beneficiary of a party’s non-performance of the
that he has taken affirmative steps to agreement.
comply with the sale agreement
Beneficiary Beneficiary must certify by document Beneficiary must certify that his
that he has performed the contract obligor has not performed the contract

As to revocability
1. Revocable L/C - One which can be revoked by the issuing bank without the consent of the
buyer and seller
2. Irrevocable L/C - One which the issuing bank cannot revoke without the consent of the
buyer and seller

As to the obligation assumed by correspondent bank

1. Unconfirmed L/C - One which continues to be the obligation of the issuing bank
2. Confirmed L/C - One which is supported by the absolute assurance to the beneficiary that
the confirming bank will undertake the issuing bank's obligation as its own according to
the terms and conditions of the credit.

c. RULES ON STICT COMPLIANCE

The rule states that documents tendered by the seller must strictly conform to the terms of the letter
of credit. Otherwise, the issuing bank or the concerned correspondent bank is not obliged to
perform its undertaking under the contract.

The tender of documents by the beneficiary (seller) must include all documents required by the
letter. A correspondent bank which departs from what has been stipulated under the letter of credit,
as when it accepts a faulty tender and acts on its own risks, may NOT thereafter be able to recover
from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary.

d. INDEPENDENCE PRINCIPLE

The principle of independence assures the seller-beneficiary of prompt payment regardless or

independent of any breach of the main contract. By this principle, the issuing bank determines
compliance with the letter of credit only by examining the shipping documents presented; it is
precluded from determining whether the main contract is accomplished or not.

B. TRUTH IN LENDING ACT (RA No. 3765)

1. PURPOSE

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To protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a
full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment
of the national economy (Sec. 2.).

2. OBLIGATION OF CREDITORS TO PERSONS TO WHOM

CREDIT IS EXTENDED
A creditor shall furnish to each person to whom credit is extended, prior to the consummation of
the transaction, a clear statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the following information:
1. The cash price or delivered price of the property or service to be acquired;
2. The amounts, if any, to be credited as down payment and/or trade in;
3. The difference between the amounts set forth under clauses (1) and (2);
4. The charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit; The
total amount to be financed;
5. The finance charge expressed in terms of pesos and centavos;
6. The percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation (Sec. 4).

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden
charges, uncertainty of rates, deduction of interests from the loans amount, and the like. The law
thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan,
to enable them to give full consent to contract, and the properly evaluate their options in arriving
at business decisions (UCPB v Sps. Beluso.,G.R. 159912 (2007)).

In addition, the contract or document shall specify additional charges, if any, which will be
collected in case certain stipulations in the contract are not met by the debtor (BSP Memo No. M-
2008-020).

3. COVERED AND EXCLUDED TRANSACTIONS

1. Any loan, mortgage, deed of trust, advance, or discount;
2. Any conditional sales contract;
3. Any contract to sell, or sale or contract of sale of property or services, either for present or
future delivery, under which part or all of the price is payable subsequent to the making of
such sale or contract;
4. Any rental-purchase contract;
5. Any contract or arrangement for the hire, bailment, or leasing of property;
6. Any option, demand, lien, pledge, or other claim against, or for the delivery of, property or
money;
7. Any purchase, or other acquisition of, or any credit upon the security of, any obligation of
claim arising out of any of the foregoing; and
8. Any transaction or series of transactions having a similar purpose or effect (Sec. 3(2)).

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4. CONSEQUENCES OF NON-COMPLIANCE WITH
OBLIGATIONS
1. Any creditor who in connection with any credit transaction fails to disclose to any person
any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice the finance charged
required by such creditor in connection with such transaction, whichever is the greater,
except that such liability shall not exceed P2,000 on any credit transaction.
a. Action to recover such penalty may be brought by such person within 1 year from
the date of the occurrence of the violation, in any court of competent jurisdiction.
b. In any action under this subsection in which any person is entitled to a recovery,
the creditor shall be liable for reasonable attorney's fees and court costs as
determined by the court.
2. Except as specified in subsection (a) of this section, nothing contained in this Act or any
regulation contained in this Act or any regulation thereunder shall affect the validity or
enforceability of any contract or transactions.
3. Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for
not less than 6 months, nor more than 1 year or both.
4. No punishment or penalty provided by this Act shall apply to the Philippine Government
or any agency or any political subdivision thereof.
5. A final judgment hereafter rendered in any criminal proceeding under this Act to the effect
that a defendant has willfully violated this Act shall be prima facie evidence against such
defendant in an action or proceeding brought by any other party against such defendant
under this Act as to all matters respecting which said judgment would be an estoppel as
between the parties thereto (Sec. 6).

C. ANTI-MONEY LAUNDERING ACT (RA No. 9160, as amended by

RA No. 9194; RA No. 10365)

Money Laundering is a crime where the proceeds of an unlawful activity are transacted, thereby
making them appear to have originated from legitimate sources.

1. POLICY OF THE LAW

It is the policy of the State to:
1. Protect and preserve the integrity and confidentiality of bank accounts;
2. Ensure that the Philippines shall not be used as a money laundering site for the proceeds
of any criminal activity.

Consistent with its foreign policy, the State shall extend cooperation in transnational investigations
and prosecutions of persons involved in money laundering activities whenever committed (Sec.
2).

2. COVERED INSTITUTIONS AND THEIR OBLIGATIONS

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Covered Institutions
1. Banks, non-banks, quasi–banks, trust entities, foreign exchange dealers, pawnshops,
money changers, remittance and transfer companies and other similar entities and all other
persons and their subsidiaries and affiliates supervised or regulated by the BSP;
2. Insurance companies, pre-need companies and all other persons supervised or regulated by
the Insurance Commission;
3. Those who are:
a. Securities dealers, brokers, salesmen, investment houses and other similar entities
managing securities or rendering services as investment agent, advisor, or
consultant,
b. Mutual funds, close – end investment companies, common trust funds, pre – need
companies and other similar entities
c. Foreign exchange corporations, money changers, money payment, remittance and
transfer companies and other similar entities, and
d. Other entities administering or otherwise dealing in currency, commodities or
financial derivatives based thereon, valuable objects, cash substitutes and other
similar monetary instruments or property supervised or regulated by the Securities
and Exchange Commission (SEC).
4. Jewelry dealers in precious metals, who, as a business, trade in precious metals, for
transactions in excess of Php1,000,000.
5. Jewelry dealers in precious stones, who, as a business, trade in precious stones, for
transactions in excess of Php1,000,000.
6. Company service providers which, as a business, provide any of the following services to
third parties:
a. Acting as a formation agent of juridical persons;
b. Acting as, or arranging for another person to act as:
i. A director or corporate secretary of a company
ii. A partner of a partnership, or
iii. A similar position in relation to other juridical persons;
c. Providing a registered office, business address or accommodation, correspondence
or administrative address for a company, a partnership or any other legal person or
arrangement; and
d. Acting as, or arranging for another person to act as, a nominee shareholder for
another person
7. Persons who provide any of the following services:
a. Managing of client money, securities or other assets;
b. Management of bank, savings or securities accounts;
c. Organization of contributions for the creation, operation, or management of
companies; and
d. Creation, operation or management of juridical persons or arrangements and buying
or selling business entities (Sec. 1).
e. Casinos, including internet and ship- based casinos, with respect to their casino cash
transactions related to their gaming operations (Sec. 1).

The term ‘covered persons’ excludes lawyers and accountants acting as independent legal
professionals:

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 1. in relation to information concerning their clients; or
2. where disclosure of information would compromise client confidences or the attorney-
client relationship.
Provided:
1. that these lawyers and accountants are authorized to practice in the Philippines and
2. shall continue to be subject to the provisions of their respective codes of conduct and/or
professional responsibility or any of its amendments (Sec. 1).

Obligations of Covered Institutions

1. Customer Identification
Covered institutions shall:
a. Establish and record a true identity of its clients, based on official documents
b. Maintain a system of verifying the true identity of their clients
c. In case of corporate clients, require a system to verify:
i. Legal existence and organizational structure; and
ii. Authority and identification of persons purporting to act on their behalf

Anonymous accounts, accounts under fictitious names, and all other similar accounts shall
be absolutely prohibited. Peso and foreign currency non- checking numbered accounts
shall be allowed. The BSP may conduct annual testing solely limited to the determination
of the existence and true identity of the owners of such accounts (Sec. 9).

2. Record Keeping
All records of all transactions of covered institutions shall be maintained and safely stored
for 5 years from the dates of transactions.

With respect to closed accounts, the records on customer identification, account files and
business correspondence, shall be preserved and safely stored for at least 5 years from the
dates when they were closed.

3. Reporting of Covered and Suspicious Transactions

GR: Covered institutions shall report to the AMLC all covered transactions within 5
working days from occurrence.

XPN: If the Anti Money Laundering Council (AMLC) prescribed a longer period not
exceeding 15 working days (Sec. 9(c)).

When reporting covered transactions to the AMLC:

a. Covered institutions and their officers, and employees are prohibited from
communicating, directly or indirectly, in any manner, to any person, entity, or the
media:
i. The fact that a covered transaction report has or is about to be reported;
ii. The contents thereof;
iii. Any other information in relation thereto; and

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 b. Neither may such reporting be published or aired in any manner or form by the
mass media, electronic mail, or other similar devices (Sec. 9, RA 10365).

In case of violation, criminal liability ensues as against the concerned officer and
employee of the covered person and media.

3. COVERED AND SUSPICIOUS TRANSACTIONS

GR: A covered transaction is a transaction in cash or other equivalent monetary instrument
involving a total amount in excess of Php 500,000 within 1 banking day (Sec. 3(b)).

XPN: for Casinos or “covered persons under Section 3(a)(8),” a single casino transaction
involving an amount in excess of Php 5,000,000 or its equivalent in any other currency.

Suspicious Transactions are transactions with covered institutions, regardless of the amount
involved, where any of the following circumstances exist:
1. There is no underlying legal or trade obligation, purpose, or economic justification;
2. The client is not properly identified;
3. The amount involved is not commensurate with the business or financial capacity of the
client;
4. Taking into account all known circumstances, it may be perceived that the client’s
transaction is structured to avoid being the subject of reporting requirements under this
Act;
5. Any circumstance relating to the transaction which is observed to deviate from the profile
of the client and/or the client’s past transactions with the covered institution;
6. The transaction is in any way related to an unlawful activity or offense under this Act that
is about to be, is being or has been committed (Sec. 3(b-1)).

4. MONEY LAUNDERING; HOW COMMITTED; UNLAWFUL

ACTIVITIES OR PREDICATED CRIMES
Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby
making them appear to have originated from legitimate sources.

Money Laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or property;
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
3. Conceals or disguises the true nature, source, location, disposition, movement or ownership
of or rights with respect to said monetary instrument or property;
4. Attempts or conspires to commit money laundering offenses referred to in paragraphs (a),
(b) or (c);
5. Aids, abets, assists in or counsels the commission of the money laundering offenses
referred to in paragraphs (a), (b) or (c) above; and

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

Money laundering is also committed by any covered person who, knowing that a covered or
suspicious transaction is required under this Act to be reported to the Anti-Money Laundering
Council (AMLC), fails to do so (Sec. 4, RA 10365).

Unlawful activity refers to any act or omission or series or combination thereof involving or
having direct relation to the following:
1. Kidnapping for ransom under Article 267of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of RA 9165, otherwise known as the
Comprehensive Dangerous Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of RA. 3019, as amended; otherwise known as
the Anti-Graft and Corrupt Practices Act;
4. Plunder under RA 7080, as amended;
5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised
Penal Code, as amended;
6. Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as amended and Presidential
Decree No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code, as amended;
9. Swindling under Article 315 of the Revised Penal Code, as amended;
10. Smuggling under RA Nos. 455 and 1937; k. Violations under RA 8792, otherwise known
as the Electronic Commerce Act of 2000;
11. Hijacking and other violations under RA 6235; destructive arson and murder, as
defined under the Revised Penal Code, as amended, including those perpetrated by
terrorists against non-combatant persons and similar targets;
12. Fraudulent practices and other violations under RA 8799, otherwise known as the
Securities Regulation Code of 2000;
13. Felonies or offenses of a similar nature that are punishable under the penal laws of other
countries (Sec. 3 (i)).

5. ANTI-MONEY LAUDERING COUNCIL; FUNCTIONS

The Anti-Money Laundering Council shall be composed of the (1) Governor of the Bangko
Sentral ng Pilipinas (BSP) as chairman, and the (1) Commissioner of the Insurance
Commission and the (3) Chairman of the Securities and Exchange Commission (SEC) as
members (Sec. 7).

Functions
The AMLC shall act unanimously in the discharge of its functions as defined hereunder:
1. To require and receive covered or suspicious transaction reports from covered institutions;
2. To issue orders addressed to the appropriate Supervising Authority or the covered
institution to determine the true identity of the owner of any monetary instrument or
property subject of a covered transaction or suspicious transaction report or request for
assistance from a foreign State, or believed by the Council, on the basis of substantial

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 evidence, to be, in whole or in part, wherever located, representing, involving, or related
to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful
activity;
3. To institute civil forfeiture proceedings and all other remedial proceedings through the
Office of the Solicitor General;
4. To cause the filing of complaints with the Department of Justice or the Ombudsman for
the prosecution of money laundering
5. To investigate suspicious transactions and covered transactions deemed suspicious after an
investigation by AMLC, money laundering activities, and other violations of this Act;
6. To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument
or property alleged to be laundered, proceeds from or instrumentalities used/ intended for
use in any unlawful activity;
7. To implement such measures as may be necessary and justified under this Act to counteract
money laundering;
8. To receive and take action in respect of, any request from foreign states for assistance in
their own anti-money laundering operations provided in this Act;
9. To develop educational programs on the pernicious effects of money laundering, the
methods and techniques used in money laundering, the viable means of preventing money
laundering and the effective ways of prosecuting and punishing offenders;
10. To enlist the assistance of any branch, department, bureau, office, agency or
instrumentality of the government, including government-owned and - controlled
corporations, in undertaking any and all anti-money laundering operations, which may
include the use of its personnel, facilities and resources for the more resolute prevention,
detection and investigation of money laundering offenses and prosecution of offenders;
and
11. To impose administrative sanctions for the violation of laws, rules, regulations and orders
and resolutions issued pursuant thereto (Sec. 7);
12. To require the Land Registration Authority and all its Registries of Deeds to submit to the
AMLC, reports on all real estate transactions involving an amount in excess of Php 500,000
within 15 days from the date of registration of the transaction, in a form to be prescribed
by the AMLC. The AMLC may also require the Land Registration Authority and all its
Registries of Deeds to submit copies of relevant documents of all real estate transactions
(Sec. 7).

6. SAFE HARBOR PROVISION

The Safe Harbor Provision states that no administrative, criminal or civil proceedings shall lie
against any person for having made a covered transaction report in the regular performance of his
duties and in good faith, whether or not such reporting results in any criminal prosecution under
this Act or any other Philippine law (Sec. 9).

Lawyers and accountants acting as independent legal professionals are not subject to the
reporting requirement if the relevant information was obtained in circumstances subject to
professional secrecy or legal professional privilege (Sec. 9(c)).

7. APPLICATION FOR FREEZE ORDER

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a. WHO MAY APPLY
Upon verified ex parte petition by the AMLC and after determination that probable cause exists
that any monetary instrument or property is in any way related to an unlawful activity, the Court
of Appeals may issue a freeze order, which shall be effective immediately, directing the
concerned covered persons and government agency to desist from allowing any transaction,
withdrawal, transfer, removal, conversion, concealment, or other disposition of the subject
monetary instrument or property (Rule 10(a), Revised IRR).

b. EFFECTIVITY
The freeze order shall be effective immediately and shall not exceed 6 months depending upon
the circumstances of the case.

On motion of the AMLC filed before the expiration of the original period of the freeze order, the
court may, for good cause shown, extend its effectivity. Upon the timely filing of such motion and
pending resolution by the Court of Appeals, the freeze order shall remain effective (Rule 10(a)(3),
Revised IRR).

c. DUTIES OF COVERED INSTITUTIONS

1. Implement Freeze Order. - Upon receipt of the notice of the freeze order, the covered
person and government agency concerned shall immediately freeze the monetary
instrument or property subject thereof, and shall immediately desist from and not allow
any transaction, withdrawal, transfer, removal, conversion, other movement or
concealment thereof.
2. Freeze Related Accounts. - Upon receipt of the freeze order and upon verification by the
covered person that there are accounts related to the monetary instrument or property
subject of the freeze order, the covered person shall immediately freeze these related
accounts wherever these may be found. If the related accounts cannot be determined within
24 hours from receipt of the freeze order due to the volume and/or complexity of the
transactions, or any other justifiable factors, the covered person shall effect the freezing of
the related accounts within a reasonable period and shall submit a supplemental return
thereof to the Court of Appeals and the AMLC within 24 hours from the freezing of said
related accounts.
3. Furnish Copy of Freeze Order to Owner or Holder. - The covered person and
government agency concerned shall likewise immediately furnish a copy of the notice of
the freeze order upon the owner or holder of the monetary instrument or property or related
accounts subject thereof.
4. Submit Detailed Return. - Within 24 hours from receipt of the freeze order, the covered
person and government agency concerned shall submit, by personal delivery, to the Court
of Appeals and to the AMLC, a written detailed return on the freeze order.
5. The covered person shall also submit to the AMLC, through the internet, an electronic
detailed return in a format to be prescribed by the latter (Rule 10(e), Revised IRR).

8. AUTHORITY TO INQUIRE INTO BANK DEPOSITS

GR: The AMLC may inquire into or examine any particular deposit or investment, including
related accounts, with any banking institution or non-bank financial institution upon order of any

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competent court in cases of violation of this Act when it has been established that there is probable
cause that the deposits or investments involved are related:
1. To an unlawful activity as defined in Sec. 3(i); or
2. To any money laundering offense under Sec.4

XPN: No court order shall be required in the following cases –

1. Kidnapping for ransom under Article 267 of the RPC
2. Sections 4,5,7,8,9,10,12,13,14,15 and16 of RA No. 9165 (Comprehensive Dangerous
Drugs Act of 2002)
3. Hijacking and other violations under RA No. 6235; destructive arson and murder as defined
under the RPC
4. Felonies or offenses of a nature similar to those mentioned in Section 3(i) (1), (2), and (12)
which are punishable under the penal laws of other countries;
5. Terrorism and conspiracy to commit terrorism as defined and penalized under RA No.
9372.

a. FORFEITURE PROVISIONS

Civil Forfeiture
Upon determination by the AMLC that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity or a money laundering offense, the AMLC
shall file with the appropriate court (through the OSG) a verified ex parte petition for forfeiture
(Sec. 12(a), as amended by RA 10365).

What is covered by the forfeiture

The forfeiture shall include those other monetary instrument or property having an equivalent
value to that of the monetary instrument or property found to be related in any way to an unlawful
activity or a money laundering offense, when:
1. with due diligence, the former cannot be located, or
2. it has been substantially altered, destroyed, diminished in value or otherwise rendered
worthless by any act or omission, or
3. it has been concealed, removed, converted, or otherwise transferred, or
4. it is located outside the Philippines or has been placed or brought outside the jurisdiction
of the court, or
5. it has been commingled with other monetary instrument or property belonging to either the
offender himself or a third person or entity, thereby rendering the same difficult to identify
or be segregated for purposes of forfeiture (Sec. 12(a), as amended by RA 10365).

Claim on Forfeited Assets

Where the court has issued an order of forfeiture of the monetary instrument or property in a
criminal prosecution for any money laundering offense defined under Section 4 of this Act, the
offender or any other person claiming an interest therein may apply, by verified petition, for a
declaration that the same legitimately belongs to him and for segregation or exclusion of the
monetary instrument or property corresponding thereto.

Where filed: With the court which rendered the judgment of forfeiture.

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When filed: Within 15 days from the date of the finality of the order of forfeiture, in default of
which the said order shall become final and executory (Sec. 12(b)).

Payment in Lieu of Forfeiture

Where
1. The court has issued an order of forfeiture of the monetary instrument or property subject
of a money laundering offense (defined under Section 4), and
2. Said order cannot be enforced because:
a. Any particular monetary instrument or property cannot, with due diligence, be
located, or
b. It has been substantially altered, destroyed, diminished in value or otherwise
rendered worthless by any act or omission, directly or indirectly, attributable to the
offender, or
c. It has been concealed, removed, converted, or otherwise transferred to prevent the
same from being found or to avoid forfeiture thereof, or
d. It is located outside the Philippines or has been placed or brought outside the
jurisdiction of the court, or
e. It has been commingled with other monetary instruments or property belonging to
either the offender himself or a third person or entity, thereby rendering the same
difficult to identify or be segregated for purposes of forfeiture

Then the court may, instead of enforcing the order of forfeiture of the monetary instrument or
property or part thereof or interest therein, accordingly order the convicted offender to pay an
amount equal to the value of said monetary instrument or property (Sec.12(c)).
NOTE: This provision shall apply in both civil and criminal forfeiture.

b. MUTUAL ASSISTANCE AMONG STATES

Request for Assistance from a Foreign State
Where a foreign State makes a request for assistance in the investigation or prosecution of a money
laundering offense, the AMLC may execute the request or refuse to execute the same and inform
the foreign State of any valid reason for not executing the request or for delaying the execution
thereof. The principles of mutuality and reciprocity shall, for this purpose, be at all times
recognized (Sec.13(a), RA 9160).

Obtaining Assistance from Foreign States

The AMLC may make a request to any foreign State for assistance in:
1. Tracking down, freezing, restraining and seizing assets alleged to be proceeds of any
unlawful activity;
2. Obtaining information that it needs relating to any covered transaction, money laundering
offense or any other matter directly or indirectly related thereto;
3. To the extent allowed by the law of the foreign State, applying with the proper court therein
for an order to enter any premises belonging to or in the possession or control of, any or all
of the persons named in said request, and/or search any or all such persons named therein
and/or remove any document, material or object named in said request: Provided, That the

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 documents accompanying the request in support of the application have been duly
authenticated in accordance with the applicable law or regulation of the foreign State; and
4. Applying for an order of forfeiture of any monetary instrument or property in the proper
court in the foreign State: Provided, That the request is accompanied by an authenticated
copy of the order of the regional trial court ordering the forfeiture of said monetary
instrument or property of a convicted offender and an affidavit of the clerk of court stating
that the conviction and the order of forfeiture are final and that no further appeal lies in
respect of either (Sec.13(c)).

Limitations on Request for Mutual Assistance

The AMLC may refuse to comply with any request for assistance where the action sought by the
request contravenes any provision of the Constitution or the execution of a request is likely to
prejudice the national interest of the Philippines unless there is a treaty between the Philippines
and the requesting State relating to the provision of assistance in relation to money laundering
offenses (Sec.13(d)).

Requirements for Requests for Mutual Assistance from Foreign States

A request for mutual assistance from a foreign State must:
1. Confirm that an investigation or prosecution is being conducted in respect of a money
launderer named therein or that he has been convicted of any money laundering offense;
2. State the grounds on which any person is being investigated or prosecuted for money
laundering or the details of his conviction;
3. Give sufficient particulars as to the identity of said person;
4. Give particulars sufficient to identify any covered institution believed to have any
information, document, material or object which may be of assistance to the investigation
or prosecution;
5. Ask from the covered institution concerned any information, document, material or object
which may be of assistance to the investigation or prosecution;
6. Specify the manner in which and to whom said information, document, material or object
obtained pursuant to said request, is to be produced;
7. Give all the particulars necessary for the issuance by the court in the requested State of the
writs, orders or processes needed by the requesting State; and
8. Contain such other information as may assist in the execution of the request (Sec.13(e)).

D. FOREIGN INVESTMENTS ACT (RA No. 7042 as amended by RA

No. 8179)

1. POLICY OF THE LAW

1. To attract, promote, and welcome productive investments from foreign individuals,
partnerships, corporations and governments, including their political subdivisions, in
activities which significantly contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws;

2. To encourage foreign investments in enterprises that:

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 a. Significantly expand livelihood and employment opportunities for Filipinos;
b. Enhance economic value of farm products;
c. Promote the welfare of Filipino consumers;
d. Expand the scope, quality, and volume of exports and their access to foreign
markets;
e. Transfer relevant technologies in agriculture, industry, and support services

3. To welcome foreign investment as a supplement to Filipino capital and technology in those

enterprises serving mainly the domestic market.

As a general rule, there are no restrictions on extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can invest as much as 100% equity except in areas
included in the negative list. Foreign owned firms catering mainly to the domestic market shall be
encouraged to undertake measures that will gradually increase Filipino participation in their
businesses by taking in Filipino partners, electing Filipinos to the board of directors, implementing
transfer of technology to Filipinos, generating more employment for the economy and enhancing
skills of Filipino workers (Sec. 2).

2. DEFINITION OF TERMS
a. FOREIGN INVESTMENT
An equity investment made by a non-Philippine national in the form of foreign exchange and/or
other assets actually transferred to the Philippines and duly registered with the Central Bank which
shall assess and appraise the value of such assets other than foreign exchange (Sec. 3(c)).

b. “DOING BUSINESS” IN THE PHILIPPINES

Includes:
1. Soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches;
2. Appointing representatives 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;
3. Participating in the management, supervision, or control of any domestic business, firm,
entity or corporation in the Philippines; and
4. Any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization (Continuity Test) (Sec. 3(d)).

Does Not Include

1. Mere investment and exercise of rights as a shareholder by a foreign entity in domestic
corporations duly registered to do business;
2. Having a nominee director or officer to represent its interests in the corporation;
3. Appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account (Sec. 3(d)).

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c. EXPORT ENTERPRISE
An enterprise wherein a manufacturer, processor, or service (including tourism) enterprise
exports 60% or more of its output, or wherein a trader purchases products domestically and
exports 60% or more of such purchases (Sec. 3(e)).

d. DOMESTIC MARKET ENTERPRISE

An enterprise which produces goods for sale, or renders services to the domestic market entirely
or if exporting a portion of its output fails to consistently export at least 60% thereof (Sec. 3 (f)).

3. REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE

NATIONALS
Non-Philippine Nationals
GR: A non-Philippine national may do business as defined in Section 3 (d) of this Act or invest in
a domestic enterprise up to 100% of its capital:
1. Upon registration with SEC, or
2. With the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the DTI for
single proprietorships

XPN: Unless participation of non- Philippine nationals in the enterprise is prohibited or limited
to a smaller percentage by existing law and/or under the provisions of this Act.

The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign
ownership in an enterprise additional to those provided in this Act.

However, any enterprise seeking to avail of incentives under the Omnibus Investment Code of
1987 must apply for registration with the Board of Investments (BOI).

A non-Philippine national intending to engage in the same line of business as an existing joint
venture, in which he or his majority shareholder is a substantial partner, must disclose the fact and
the names and addresses of the partners in the existing joint venture in his application for
registration with SEC. During the transitory period as provided in Section 15 hereof, SEC shall
disallow registration of the applying non- Philippine national if the existing joint venture
enterprise, particularly the Filipino partners therein, can reasonably prove they are capable to make
the investment needed for the domestic market activities to be undertaken by the competing
applicant. Upon effectivity of this Act, SEC shall effect registration of any enterprise applying
under this Act within 15 days upon submission of completed requirements (Sec. 5).

NOTE: Where a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, the corporation is a Filipino national under
the following conditions:
1. At least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines;
2. At least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines (Sec. 3(a))

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The control test shall be applied for this purpose (Sec. 1(b), IRR).

4. FOREIGN INVESTMENT IN EXPORT ENTERPRISES

Foreign investment in export enterprises whose products and services do not fall within Lists A
and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to
100% ownership.

Export enterprises which are non-Philippine nationals shall register with BOI and submit the
reports that may be required to ensure continuing compliance of the export enterprise with its
export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise
that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the non-
complying export enterprise to reduce its sales to the domestic market to not more than 40% of its
total production; failure to comply with such SEC or BTRCP order, without justifiable reason,
shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties
provided in Section 14 hereof (Sec. 6).

5. FOREIGN INVESTMENTS IN DOMESTIC MARKET

ENTERPRISES
Non-Philippine nationals may own up to 100% of domestic market enterprises unless foreign
ownership therein is prohibited or limited by the Constitution, existing law, or the Foreign
Investment Negative List under Section 8 hereof (Sec. 7).

A domestic market enterprise may change its status to export enterprise if over a 3 year period it
consistently exports in each year thereof 60% or more of its output.

6. FOREIGN INVESTMENT NEGATIVE LIST

The Foreign Investment Negative List shall have 2 component lists; A and B.

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

GR: Small and medium-sized domestic market enterprises, with paid-in equity capital less than
the equivalent US$200,000 are reserved to Philippine nationals,

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XPN: A minimum paid-in capital of US $100 000 is allowed to non-Philippine nationals if they
prove:
1. They involve advanced technology as determined by the Department of Science and
Technology; or
2. They employ at least fifty (50) direct employees Amendments to List B may be made upon
recommendation of (1) the Secretary of National Defense, or (2) the Secretary of Health,
or (3) the Secretary of Education, Culture and Sports, endorsed by the NEDA, approved
by the President, and promulgated by a Presidential Proclamation.

Foreign Investment Negative Lists shall become effective 15 days after publication in a newspaper
of general circulation in the Philippines: Provided, however, That each Foreign Investment
Negative List shall be prospective in operation and shall in no way affect foreign investment
existing on the date of its publication.

Amendments to List B after promulgation and publication of the first Regular Foreign Investment
Negative List at the end of the transitory period shall not be made more often than once every 2
years (Sec. 8).

SUMMARY OF FIA NEGATIVE LIST

Nationality Requirement Industry
100% Filipino Ownership 1. Mass media, except recording
2. Practice of profession
3. Retail trade with paid up capital less than US $2,500,000
4. Cooperatives
5. Private security agencies
6. Small-scale mining
7. Utilization of marine resources in archipelagic waters,
territorial sea, exclusive economic zone, as well as rivers,
lakes, bays, and lagoons
8. Ownership, operation, and management of cockpits
9. Manufacture, repair, stockpiling, and/or distribution of
nuclear weapons
10. Manufacture of firecrackers and other pyrotechnic devices
80% Filipino Ownership Radio communications network
75% Filipino Ownership 1. Private recruitment
2. Contracts for construction and repair of locally-funded
public works, except: (1) infra projects under RA 7717
(BOT Law), and (2) foreign-funded projects
3. Contracts for construction of defense related structures
70% Filipino Ownership Advertising
60% Capital Stock 1. Manufacture, repair, storage, and/or distribution of
Filipino Ownership products and/or ingredients requiring Philippine National
Police (PNP) clearance (i.e., firearms, ingredients used in
making explosives, etc.)

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 2. Manufacture, repair, storage, and/or distribution of
products requiring Department of National Defense
(DND) clearance;
3. Manufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses, massage clinics and other
like activities regulated by law because of risks posed to
public health and morals
5. All forms of gambling, except those covered by investment
agreements with PAGCOR
6. Domestic market enterprise with paid-in equity capital of
less than the equivalent of US $200,000
7. Domestic market enterprise which involve advances
technology or employ at least 50 direct employees with
paid-in equity capital of less than the equivalent of US
$100,000.
40% Filipino Ownership/ 1. Financing companies
60% Foreign Equity 2. Investment houses

E. INSOLVENCY LAWS
1. CONCURRENCE AND PREFERENCE OF CREDITS
a. MEANING OF CONCURRENCE AND PREFERENCE

Concurrence of credits – implies possession by two or more creditors of equal rights or privileges
over the same property or all of the property of the debtor, and the value of such property is
insufficient to pay in full all the claims.

Preference of credits – is a method adopted to determine and specify the order in which credits
should be paid in the final distribution of the proceeds of the insolvent’s assets, as opposed to a
lien, which creates a charge on a particular property.

Preference
The right held by a creditor to be preferred in the payment of his claim above others out of the
debtor’s assets.

When Rules of Preference Applicable

1. There are two or more creditors;
2. With separate and distinct claims;
3. Against the same debtor;
4. Who has insufficient property; and
5. Such debtor is insolvent.

b. EXEMPT PROPERTIES

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 Present Property
1. Family home.
2. Right to receive support, as well as money or property obtained by such support, shall not
be levied upon on attachment or execution.
3. Property exempt from execution (Rule 39, Sec. 13)
4. Public Land Act (CA 141, as amended), Sec. 118.

Future Property
1. A debtor who obtains a discharge from his debts on account of insolvency, is not liable for
the unsatisfied claims of his creditors with said property.
2. Property in custodia legis
3. Property of public dominion

c. CLASSIFICATION OF CREDITS

1. Special Preferred Credits (Art. 2241-2242, NCC)

1. These credits enjoy preference with respect to the specific movable and immovable
property of the debtor.
2. Special preferred credits exclude all other claims to the extent of the value of the affected
property.
a. They must be discharged first out of the proceeds of the property to which they
relate before ordinary preferred credits are paid.
b. If the value of the specific property involved is GREATER than the total of the
special preferred credits, the residual value will form part of the free property.
c. If the value is LESS than the total, the unsatisfied balance of the credits shall be
paid pro rata (Art. 2251, NCC).
3. These are considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency. [Art. 2243, NCC]
4. These take precedence over ordinary preferred credits insofar as the property, to which the
liens attach, are concerned.

2. Ordinary Preferred Credits (Art. 2244, NCC)

1. These enjoy a preference, excluding the credits that are later in order, but only as against
the value of the property not otherwise subjected to any special preferred credit.
2. Does not create a lien on specific property;
3. Creates rights in favor of certain creditors to have the free property of the debtor applied
in accordance with an order of preference.

3. Common Credits (Art. 2245, NCC)

1. These enjoy no preference, as there is only a concurrence of credits.
2. These must be paid pro rata regardless of dates (Arts. 2245, 2251, NCC).
3. These are not liens and do not attach to any specific property of the debtor.

Pro-rating- Total amount to be paid is equal to:

Credit

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 x Value of property
Total amount of concurring debts

4. Special Preferred Credits on Specific Movable Property

Art. 2241, NCC. With reference to specific movable property of the debtor, the following claims or
liens shall be preferred:
1. Duties, taxes, and fees due thereon to the State or any subdivision thereof;
2. Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in
the performance of their duties, on the movables, money or securities obtained by them;
3. Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of
the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is
still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing
by destination, provided it has not lost its form, substance and identity; neither is the right lost by the
sale of the thing together with other property for a lump sum, when the price thereof can be determined
proportionally;
4. Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;
5. Credits for the making, repair, safekeeping or preservation of personal property, on the movable thus
made, repaired, kept or possessed;
6. Claims for laborers' wages, on the goods manufactured or the work done;
7. For expenses of salvage, upon the goods salvaged;
8. Credits between the landlord and the tenant, arising from the contract of tenancy on shares, on the share
of each in the fruits or harvest;
9. Credits for transportation, upon the goods carried, for the price of the contract and incidental expenses,
until their delivery and for thirty days thereafter;
10. Credits for lodging and supplies usually furnished to travelers by hotel keepers, on the movables
belonging to the guest as long as such movables are in the hotel, but not for money loaned to the guests;
11. Credits for seeds and expenses for cultivation and harvest advanced to the debtor, upon the fruits
harvested;
12. Credits for rent for 1 year, upon the personal property of the lessee existing on the immovable leased
and on the fruits of the same, but not on money or instruments of credit;
13. Claims in favor of the depositor if the depositary has wrongfully sold the thing deposited, upon the price
of the sale.

In the foregoing cases, if the movables to which the lien or preference attaches have been
wrongfully taken, the creditor may demand them from any possessor, within 30 days from the
unlawful seizure.

NOTE: Only taxes in Arts. 2241 and 2242, NCC enjoy a preference; for all other claims, there is
only a concurrence of credits.

5. Special Preferred Credits on Specific Immovable Property and Real Rights

Art. 2242, NCC. With reference to specific immovable property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real
right:
1. Taxes due upon the land or building;
2. For the unpaid price of real property sold, upon the immovable sold;
3. Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and
contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works,
upon said buildings, canals or other works;
4. Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals
or other works, upon said buildings, canals or other works;
5. Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;

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 6. Expenses for the preservation or improvement of real property when the law authorizes reimbursement,
upon the immovable preserved or improved;
7. Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions,
upon the property affected, and only as to later credits;
8. Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property
thus divided;
9. Claims of donors or real property for pecuniary charges or other conditions imposed upon the donee,
upon the immovable donated;
10. Credits of insurers, upon the property insured, for the insurance premium for two years.

6. Ordinary Preferred Credits

Art. 2244, NCC. With reference to other property, real and personal, of the debtor, the following claims or
credits shall be preferred in the order named:
1. Proper funeral expenses for the debtor, or children under his or her parental authority who have no
property of their own, when approved by the court;
2. Credits for services rendered the insolvent by employees, laborers, or household helpers for 1 year
preceding the commencement of the proceedings in insolvency;
3. Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental
authority, if they have no property of their own;
4. Compensation due the laborers or their dependents under laws providing for indemnity for damages in
cases of labor accident, or illness resulting from the nature of the employment;
5. Credits and advancements made to the debtor for support of himself or herself, and family, during the
last year preceding the insolvency;
6. Support during the insolvency proceedings, and for 3months thereafter;
7. Fines and civil indemnification arising from a criminal offense;
8. Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common
interest of the creditors, when properly authorized and approved by the court;
9. Taxes and assessments due the national government, other than those mentioned in Articles 2241, No.
1, and 2242, No. 1;
10. Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242,
No. 1;
11. Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1,
and 2242, No. 1;
12. Damages for death or personal injuries caused by a quasi-delict;
13. Gifts due to public and private institutions of charity or beneficence;
14. Credits which, without special privilege, appear in [a] a public instrument; or (b) in a final judgment, if
they have been the subject of litigation. These credits shall have preference among themselves in the
order of priority of the dates of the instruments and of the judgments, respectively.

Other Property
The “other property” referred to in Art. 2244 are those:
1. Property not subject to special preferred credits
2. Property forming part of the free property
(i.e. residual value of the specific property after the satisfaction of the special preferred
credits)

Worker preference in case of bankruptcy

In the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy
first preference as regards their wages and other monetary claims, any provisions of law to
the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full
before claims of the government and other creditors may be paid (Art. 110, Labor Code).

7. Common Credits

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Art. 2245, NCC. Credits of any other kind or class, or by any other right or title not comprised in
the four preceding articles, shall enjoy no preference.

d. ORDER OF PREFERENCE OF CREDITS

1. Credits which enjoy preference with respect to specific movables exclude all others to
the extent of the value of the personal property to which the preference refers (Art. 2246,
NCC).
2. If there are two or more credits with respect to the same specific movable property,
they shall be satisfied pro rata, after the payment of duties, taxes and fees due the State or
any subdivision thereof (Art. 2247, NCC).
3. Those credits which enjoy preference in relation to specific real property or real rights
exclude all others to the extent of the value of the immovable or real right to which the
preference refers (Art. 2248, NCC).
4. If there are two or more credits with respect to the same specific real property or real
rights, they shall be satisfied pro rata, after the payment of the taxes and assessment of the
taxes and assessments upon the immovable property or real right (Art. 2249, NCC).
5. The excess, if any, after the payment of the credits which enjoy preference with respect to
specific property, real or personal, shall be added to the free property which the debtor
may have for the payment of other credits (Art. 2250, NCC).

Those credits which do not enjoy any preference with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be satisfied according to the following rules:
1. Order established by Art. 2244, NCC
2. Common credits referred to in Art. 2245, NCC shall be paid pro rata regardless of dates
(Art. 2251, NCC).

Arts. 2241 and 2242, NCC jointly with Arts. 2246 to 2249, NCC establish a two-tier order of
preference. The first tier includes only taxes, duties and fees due on specific movable or
immovable property. All other special preferred credits stand on the same second tier to be
satisfied pari passu and pro rata, out of any residual value of the specific property to which such
other credits relate.

2. FINANCIAL REHABILITATION AND INSOLVENCY ACT

(FRIA) OF 2010 (RA No. 10142)
a. DEFINITION OF INSOLVENCY
Insolvency refers to the financial condition of a debtor that is:
1. Generally unable to pay liabilities as they fall due on the ordinary course of business (hence
illiquid); or
2. Has liabilities that are greater than its or his assets (balance sheet insolvent) (Sec. 4(p))

b. SUSPENSION OF PAYMENTS
A remedy where an individual debtor (Illiquid debtor) who, possessing sufficient property to cover
all his debts but foreseeing the impossibility of meeting them when they respectively fall due, may

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file a verified petition that he be declared in the state of suspension of payments by the court
of the province or city in which he has resided for 6 months prior to the filing of his petition.

He shall attach to his petition, as a minimum:

1. a schedule of debts and liabilities;
2. an inventory of assess; and
3. a proposed agreement with his creditors (Sec. 94).

Definition- Suspension of payments is a judicial insolvency proceeding by which an individual

debtor submits, for approval by his CREDITORS (?), a proposed agreement, containing
propositions delaying or extending the time of payment of his debts.

Purpose
1. Debt moratorium: To delay or extend the time of payment of one’s debts.
2. Allows distressed debtor to defer payment of his debts by presenting a plan.
1. Must relate to a schedule of payments
2. No haircut (reduction of debts), only a grace period to pay the debts

Suspension of Payments Order

When Issued
1. Within 5 working days if the court finds the petition sufficient in form and substance
2. Remains effective from the time of the filing of the petition until the termination of the
proceedings

Most Important Elements

1. Automatic Stay: No creditor except those exempt shall institute proceedings to collect its
claim from the time of filing until the termination of the proceedings
a. Exempt from stay order:
i. Claims for personal labor,
ii. Expense of last illness and funeral,
iii. Secured creditors
2. Injunction against debtor: The individual debtor is subjected to an injunction against:
i. Disposing of his property except those used in the ordinary operations of
commerce or industry in which he is engaged
ii. Making any payment outside of the necessary or legitimate expenses of his
business

c. REHABILITATION
Refers to the restoration of the debtor to a condition of successful operation and solvency, if it is
shown that:
1. Its continuance of operation is economically feasible; and
2. Its creditors can recover more, by way of the present value of payments projected in the
plan, if the debtor continues as a going concern than if it is immediately liquidated (Sec.
4(gg)).

Rehabilitation proceedings are

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In Rem: Jurisdiction over all persons affected is considered as acquired upon publication of the
notice of proceedings.
Summary and Non-Adversarial (Sec. 3).

i. TYPES

1. Court-Supervised: A judicial proceeding may be voluntary or involuntary.

a. Voluntary (Sec. 12)- Refer to proceedings initiated by the debtor, which may be:
i. Sole Proprietorship: When approved by the owner;
ii. Partnership: When approved by a majority of the partners;
iii. Stock Corporation: When approved by a majority vote of the BOD or
trustees, and authorized by the stockholders representing 2/3 of the
outstanding capital stock in a meeting called for the purpose;
iv. Non-Stock Corporation: When approved by 2/3 of the members in a
meeting called for the purpose.

A group of debtors may file a petition for rehabilitation when:

1. One of more of its members foresee the impossibility of meeting debts when
they respectively fall due; and
2. The financial distress would likely adversely affect the financial condition
and/or operations of the other members of the group, and/or the participation
of the other members of the group is essential under the terms and conditions
of the Rehabilitation Plan.

The debtor must file a verified petition for rehabilitation with the court, to
establish:
1. The insolvency of the debtor; and
2. The viability of the rehabilitation.

b. Involuntary (Secs. 13 and 14)

Refers to proceedings initiated by the creditor(s).

Value Requirement for Creditors

The claim(s), or aggregate thereof, must amount to at least Php 1 million or at least
25% of the subscribed capital stock or partners’ contributions, whichever is higher.

Circumstances for Involuntary Rehabilitation

There is no genuine issue of fact or law on the claims of the creditors; and –
1. That the due and demandable payments have not been made for at least 60 days; or
2. The debtor has failed generally to meet its liabilities as they fall due (illiquidity);
or
3. At least one creditor, other than the petitoner(s), has initiated foreclosure
proceedings against the debtor that will prevent the debtor from paying its debts as
they become due or will render it insolvent.

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2. Pre-Negotiated: An insolvency proceeding involving negotiation of terms between the debtor
and the creditor(s). It commences as an extrajudicial proceeding but terminates as a judicial
proceeding.

Requirements for Petition

An insolvent debtor, either by itself or jointly with any of its creditors, may file a verified
petition for approval of the Pre-Negotiated Rehabilitation Plan that complies with the
following:
1. Approval of creditors holding at least 2/3 of the total liabilities of the debtor, including
–
2. Secured creditors holding more than 50% of the total secured claims; and
3. Unsecured creditors holding more than 50% of the total unsecured claims (Sec. 76).

Within 5 working days, and after determination that the petition is sufficient in form and
substance, the court shall issue an Order (Sec. 77).

Objections to the Petition or Rehabilitation Plan

Any creditor or other interested party may submit a verified objection to the petition or the
Rehabilitation Plan. The objections shall be limited to the following:
1. The allegations in the petition or the Rehabilitation Plan, or the attachments thereto,
are materially false or misleading;
2. The majority of any class of creditors do not in fact support the Rehabilitation Plan;
3. The Rehabilitation Plan fails to accurately account for a claim against the debtor and
the claim is not categorically declared as a contested claim; or
4. The support of the creditors, or any of them, was induced by fraud (Sec. 79).

Approval of the Plan

Within 10 days from the date of the second publication of the Order, the court shall approve
the Rehabilitation Plan unless an objection is submitted.

The court has a maximum period of 120 days from the date of the filing of the petition to
approve the Rehabilitation Plan. If the court fails to act within the same period, the Plan
shall be deemed approved.

Effect of Approval
Approval of a Plan has the same legal effect as confirmation of a Plan in Court- Supervised
Rehabilitation. It also results in a cram down, as it binds not only the debtor but also all
persons affected by it.

3. Out-of-Court: An insolvency proceeding involving a consensual contract between the debtor

and the creditor(s). Unlike pre- negotiation rehabilitation, no petitions are filed with the court.

Out-of-Court Rehabilitation – An extrajudicial insolvency proceeding of an Out-of-

Court or Informal Restructuring Agreement (OCRA), or a restructuring of the claims

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negotiated between the debtor and the creditor(s). No petitions are filed with the court,
though the debtor and/or the creditor may seek court assistance in implementation.

Pending negotiation and finalization of the OCRA, there may be a standstill period that
allows the debtor not to pay liabilities as they fall due and prevents creditors from enforcing
their claims.

Requirements for OCRA

1. The debtor must agree to the out-of-court or informal restructuring/workout agreement
or Rehabilitation Plan;
2. It must be approved by creditors representing at least 67% of the secured obligations;
3. It must be approved by creditors representing at least 75% of the unsecured obligations;
4. It must be approved by creditors holding at least 85% of the total liabilities, secured or
unsecured, of the debtor (Sec. 84).

Standstill Period/Agreement
This refers to the period agreed upon by the debtor and its creditors to enable them to
negotiate and enter into an out-of-court or informal restructuring/workout agreement or
rehabilitation plan. It may include provisions identical with or similar to the legal effects
of a commencement order. (Financial Rehabilitation Rules, Rule 1, Sec. 5(q))

The standstill period/agreement is effective and enforceable not only against contracting
parties but also against other creditors, provided that:
1. Such agreement is approved by creditors representing more than 50% of the total
liabilities of the debtor;
2. Notice of the standstill agreement is published in a newspaper of general circulation in
the Philippines once a week for two consecutive weeks;
3. The standstill period does not exceed 120 days from the date of effectivity.

The notice must invite creditors to participate in the negotiation for the OCRA and inform
them that the agreement would bind all creditors if the minimum vote requirements were
met (Sec. 85).

Effects of the OCRA

1. Results in a cram down, binding not only the debtor but also all persons affected;
2. Any proceedings arising or relating to the OCRA shall not stay its implementation,
unless the relevant party secures a TRO or injunctive relief from the Court of Appeals.

Annulment of the OCRA/Standstill Agreement

The debtor or creditor may file a petition to annul based only on the following grounds:
1. Non-compliance with the requirements for a standstill agreement or an OCRA under
the FRIA or the implementing rules; or
2. Vitiation of consent due to fraud, intimidation or violence if committed against such
number of creditors required to approve the OCRA or the standstill agreement (FR
Rules, Rule 4, Sec. 11).

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ii. COMMENCEMENT ORDER
If the petition for rehabilitation is deficient in form and substance, the court may give a
reasonable period to amend or supplement the petition. If such deficiency is not complied with,
the court may dismiss the petition.

If the petition for rehabilitation is sufficient in form and substance, it shall issue a
Commencement Order within 5 working days from the filing of the petition.

The rehabilitation proceedings shall commence upon the issuance of the Commencement Order.

Contents of the Commencement Order

1. Identifies the debtor, its principal business and principal place of business;
2. Summarize the grounds for initiating proceedings;
3. States the legal effects of the Order;
4. Declares the debtor is under rehabilitation;
5. Directs the publication of the Commencement Order;
6. Directs service by personal delivery of a copy of the petition to the creditor or to the
debtor (not the petitioner);
7. Appoints a rehabilitation receiver;
8. Summarizes the requirements and deadlines for creditors to establish their claims
against the debtor;
9. Directs the BIR to file and serve its comment or opposition;
10. Prohibits the debtor’s suppliers from withholding the supply of goods and services in
the ordinary course of business for as long as the debtor makes payments for services/goods
supplied after issuance of the Order;
11. Authorizes the payment of administrative expenses;
12. Sets the case for initial hearing;
13. Makes available copies of the petition and Rehabilitation Plan for examination and copying
by any interested party;
14. Indicates the location(s) at which documents may be reviewed and copied;
15. States that any creditor or debtor, not the petitioner, may submit the name or nominate any
other qualified person to the position of rehabilitation receive;
16. Includes a Stay or Suspension order (Sec. 16).

Effects of the Commencement Order

In addition to the effects of a Stay or Suspension Order:
1. Vests the rehabilitation receiver with all the powers and functions provided for this Act,
subject to the approval by the court of the performance bond filed by the rehabilitation
receiver;
2. Prohibits or otherwise serves as the legal basis rendering null and void the results of any
attempt to collect or enforce a claim against the debtor after the commencement date, unless
otherwise allowed under the FRIA;
3. Serves as the legal basis for rendering null and void any setoff after the commencement
date of any debt owed to the debtor by any of the debtor's creditors; Serves as the legal
basis for rendering null and void the perfection of any lien against the debtor's property,
after the commencement date; and

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 4. Consolidates the resolution of all legal proceedings by and against the debtor to the court;
however, the court may allow the continuation of cases on other courts where the debtor
had initiated the suit (Sec. 17).

Effectivity and Duration of the Commencement Order

Unless lifted by the court, the Commencement Order shall be effective for the duration of the
rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be
successfully rehabilitated (Sec. 21).

iii. STAY OR SUSPENSION ORDER

Stay And Suspension Order – An order included in the Commencement Order that has the
following effects:
1. Suspending all actions or proceedings, in court or otherwise, for the enforcement of claims
against the debtor;
2. Suspending all actions to enforce any judgment, attachment, or provisional remedies
against the debtor;
3. Prohibiting the debtor from selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and
4. Prohibiting the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein (Sec. 16).

iv. REHABILITATION RECEIVER

Any qualified person, natural or juridical, may serve as a receiver (Sec. 28).

If the receiver is a juridical entity, he must designate a natural person as a representative. Such
representative must possess all the qualifications and none of the disqualifications.

Qualifications
1. Citizen or resident for at least 6 months immediately prior to nomination;
2. Of good moral character and with acknowledged integrity, impartiality, and independence;
3. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and
procedures, as well as the relevant training and/or experience that may be necessary to
enable him to properly discharge the duties and obligations of a receiver; and
4. Has no conflict of interest (Sec. 29).

Principal Duties
1. Preserving and maximizing the value of the assets of the debtor during the rehabilitation
proceedings;
2. Determining the viability of the rehabilitation of the debtor;
3. Preparing and recommending a Rehabilitation Plan; and
4. Implementing the approved Rehabilitation Plan (Sec. 31).

Management
Unless otherwise provided, the management of the debtor remains with the existing
management, subject to laws and agreements, if any, on election or appointment of directors,
managers, or managing partner (Sec. 47).

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The debtor retains control of its business and properties, subject only to monitoring by the receiver.
This is referred to as the principle of debtor–in–possession or debtor–in–place.

XPN: The following are subject to the approval of the receiver or the court:
1. Disbursements affecting title or interest in the property;
2. Payments affecting title or interest in property;
3. Sale, disposal, assignment, transfer or encumbrance of property; or
4. Any other act affecting title or interest in property (Sec. 47).

Immunity from Suit

The receiver, the management committee, and all persons they engage are not subject to any
action, claim, or demand for any act or omission in good faith in the exercise of their powers and
functions. (Sec. 41).

Removal
The receiver may be removed at any time by the court, either by (1) motu propio or (2) motion by
any creditor(s) holding more than 50% of the total obligations of the creditor, on the following
grounds:
1. Incompetence, gross negligence, failure to perform or failure to exercise the proper degree
of care in the performance of his duties and powers;
2. Lack of particular or specialized competency required by the specific case;
3. Illegal acts or conduct in the performance of his duties and powers;
4. Lack or qualification or presence of any disqualification;
5. Conflict of interest that arises after his appointment; and
6. Manifest lack of independence that is detrimental to the general body of the stakeholders.
(Sec. 32).

The Implementing Rules add the following grounds for removal:

1. Failure, without just cause, to perform any of the powers and functions under the Rules; or
2. Any of the grounds for removing a trustee under the general principles for trusts (FR Rules,
Rule 2, Sec. 27).

v. MANAGEMENT COMMITTEE
Upon motion of any interested party, the court may appoint either (1) the rehabilitation receiver
or (2) a management committee to assume the management of the debtor (Sec. 36).

Grounds
There must be clear and convincing evidence of any of the following circumstances: (A P M)
1. Actual or imminent danger of dissipation, loss, waste, or destruction of the debtor’s
assets or other properties;
2. Paralyzation of the business operations of the debtor; or
3. Gross mismanagement of the debtor, or fraud or other wrongful conduct, or gross or
willful violation of the FRIA (Sec. 36).

Composition of the Committee

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3 qualified members appointed as follows:
1. The first member shall be appointed by the debtor;
2. The second member shall be appointed by the creditor(s) holding more than 50% of the
total obligations of the debtor; and
3. The third member shall be appointed by the first and second members within 10 days from
the appointment.

In case of failure to nominate, the court shall appoint the member(s) concerned. In case the
decision to appoint a management committee is due to the third ground (mismanagement, etc.),
the court shall appoint the first member.

vi. REHABILITATION PLAN

Restoration of the debtor to a condition of successful operation and solvency, using various means
including, but not limited to:
1. Debt Forgiveness: Condoning and/or waiving the claims;
2. Debt Rescheduling: Extending the time to pay the claim;
3. Reorganization or Quasi- Reorganization: Changing the equity, corporate or operating
structure of the debtor;
4. Dacion en Pago: Assigning property and assets as payment for certain claims;
5. Debt to Equity Conversion: The issuance of equity and/or ownership interests as payment
for certain claims;
6. Sale of the Business (or parts of it) as a going concern;
7. Setting up of new business entities; or
8. Other similar arrangements as may be approved by the court or the creditors (Sec. 4(ii)).

Approval of the Rehabilitation Plan

The receiver shall notify the stakeholders that the Plan is ready for examination. Within 20 days
from notification, the receiver shall convene the creditors to vote on the Plan.

The Plan must be approved by all classes of creditors whose rights are adversely modified or
affected. Otherwise, it is deemed rejected.

The Plan is approved by a class of creditors if members of the said class holding more than 50%
of the total claims of the class vote in favor of the Plan (Sec. 64).

If the Plan is approved, the receiver shall submit the same to the court for confirmation.

Objections to Rehabilitation Plan

The creditor may file an objection to the Plan with 20 days from receipt of notice that it has been
submitted for confirmation.
Objections are limited to the following:
1. The creditors’ support was induced by fraud;
2. The documents or data relied upon in the Plan are materially false or misleading;
3. The Plan is in fact not supported by the voting creditors (Sec. 66).

If upon hearing, the court finds merit in the objections, it should order the curing of the defect.

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If the court determines the debtor acted in bad faith, or that it is not possible to cure the defect, the
court shall convert the proceedings into one for liquidation.

Confirmation of the Rehabilitation Plan

The court has a maximum period of 1 year from the date of filing to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed, the proceedings may be converted into one for
liquidation (Sec. 72)

Confirmation has the following effects:

1. The Plan and its provisions shall be binding upon the debtor and all persons who may be
affected by it;
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 its creditors shall be interpreted
as continuing to apply to the extent that they do not conflict with the provisions of the
Rehabilitation Plan;
5. Any compromises on amounts or rescheduling of timing of payments by the debtor shall
be binding on creditors regardless of whether the Plan is successfully implemented; and
6. Claims arising after approval of the Plan that are otherwise not treated by the Plan are not
subject to any Suspension Order (Sec. 69).

vii. CRAM DOWN EFFECT

Notwithstanding the rejection of the creditors of the Rehabilitation Plan, the court may
nonetheless confirm the Rehabilitation Plan in what is known as a cram down.

The effect of the cram down is to bind the debtor and all persons who may be affected, whether or
not they participated in the proceedings or opposed the plan.

A cram down is permitted only if all of the following circumstances are present:
1. The Rehabilitation Plan complies with the requirements specified in the FRIA;
2. The receiver recommends confirmation of the Rehabilitation Plan;
3. The shareholders, owners, or partners of the debtor lost at least their controlling interest
as a result of the Rehabilitation Plan; and
4. The Rehabilitation Plan would likely provide the objecting class or creditors with
compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation (Sec. 64).

d. LIQUIDATION
Liquidation is a judicial insolvency proceeding by which the debtor’s assets are reduced and
converted to cash in order to discharge the claims against the debtor.

The concept of liquidation is thus diametrically opposed to that of rehabilitation, and both cannot
be undertaken at the same time.

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i. TYPES
1. Voluntary: Instituted by the debtor; or
2. Involuntary: Instituted by a creditor or a group of creditors; or
3. Conversion: When the court-supervised or pre-negotiated rehabilitation proceeding is
converted by the court into liquidation proceedings.

Proceedings that may be availed of vis-à-vis Type of Debtor

Debtor Proceeding Requirements

Individual Suspension of Payments Possesses sufficient property to cover debts but
foresees the impossibility of meeting them as they
fall due (illiquid)
Voluntary Properties are not sufficient to cover liabilities;
and
Owing debts exceeding P500,000
Involuntary Creditor(s) have claim(s) aggregating at least
P500,000; and

An act of insolvency alleged in the petition

Juridical Voluntary Insolvent: Either unable to pay liabilities as they
fall due or assets are insufficient to pay for
liabilities
Involuntary At least 3 creditors; and

With aggregate claims at least either P1,000,000

or at least 25% of subscribed capital stock or
partner’s contributions, whichever is higher

ii. CONVERSION OF REHABILITATION TO LIQUIDATION PROCEEDINGS

Under the FRIA, court-supervised or pre- negotiated rehabilitation proceedings may be converted
in the following instances:
1. Within 10 days from receipt of the receiver’s report, a court finding that the debtor is
insolvent and there is no substantial likelihood of substantial rehabilitation (Sec. 25(c));
2. If no Rehabilitation Plan is confirmed within 1 year from filing the petition to confirm
the Plan (Sec. 72);
3. If termination of rehabilitation proceedings is due to failure of rehabilitation or dismissal
of the petition for reasons other than technical grounds (Sec. 75); or
4. Motion filed by the insolvent debtor for conversion into liquidation proceedings (Sec.
90).

iii. LIQUIDATION ORDER

Such order results in the dissolution of a juridical debtor, however, the individual debtor is only
discharged upon termination of the proceedings.

The Liquidation Order shall:

1. Declare the debtor insolvent;

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 2. Order the liquidation of the debtor and, in the case of a juridical debtor, declare it as
dissolved;
3. Order the sheriff to take possession and control of all the property of the debtor, except
those that may be exempt from execution;
4. Order the publication of the petition or motion in a newspaper of general circulation once
a week for 2 consecutive weeks;
5. Direct payments of any claims and conveyance of any property due the debtor to the
liquidator;
6. Prohibit payments by the debtor and the transfer of any property by the debtor;
7. Direct all creditors to file their claims with the liquidator within the period set by the rules
of procedure;
8. Authorize the payment of administrative expenses as they become due;
9. State that the debtor and creditors who are not petitioner/s may submit the names of other
nominees to the position of liquidator; and
10. Set the case for hearing for the election and appointment of the liquidator, which date shall
not be less than 30 days nor more than 45 days from the date of the last publication (Sec.
112).

Effects of the Liquidation Order:

1. The juridical debtor shall be deemed dissolved and its corporate or juridical existence
terminated;
2. Legal title to and control of all the assets of the debtor, except those that may be exempt
from execution, shall be deemed vested in the liquidator or, pending his election or
appointment, with the court;
3. All contracts of the debtor shall be deemed terminated and/or breached, unless the
liquidator, within 90 days from the date of his assumption of office, declares otherwise and
the contracting party agrees;
4. No separate action for the collection of an unsecured claim shall be allowed. Such actions
already pending will be transferred to the Liquidator for him to accept and settle or contest.
If the liquidator contests or disputes the claim, the court shall allow, hear, and resolve such
contest except when the case is already on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein for a claim against the debtor shall
be filed and allowed in court; and
5. No foreclosure proceeding shall be allowed for a period of 180 days.

iv. RIGHTS OF SECURED CREDITORS

Creditor refers to natural or juridical persons which have claims against the debtor that arose
on or before the commencement date (Sec. 4).

General Unsecured Creditor refers to a creditor whose claim or a portion thereof is neither
secured, preferred, nor subordinated under the FRIA.

Secured Creditor refers to a claim secured by a lien, which is a statutory or contractual claim or
juridical charge on real or personal property that legally entitles a creditor to resort to said property
for payment of the debt or claim secured.

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GR: Upon issuance of the Liquidation Order, NO foreclosure proceeding shall be allowed for 180
days (Sec. 113).

XPN: However, the Liquidation Order shall NOT affect the right of a secured creditor to
enforce his lien.

During the proceedings, a secured creditor may:

1. Waive his right under the security or lien, prove his claim in the liquidation proceedings
and share in the distribution of the assets of the debtor; or
2. Maintain his rights under the security or lien.

If the secured creditor maintains his rights under the security or lien:
1. The value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator.

If the value of the property is less than the claim, the liquidator may convey the property
to the secured creditor and the latter will be admitted in the liquidation proceedings as a
creditor for the balance.

If its value exceeds the claim secured, the liquidator may convey the property to the creditor
and waive the debtor's right of redemption upon receiving the excess from the creditor.

2. The liquidator may sell the property and satisfy the secured creditor's entire claim from the
proceeds of the sale; or
3. The secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws (Sec. 114).

Rights of Unsecured Creditors

GR: No separate action for the collection of an unsecured claim shall be allowed. Actions already
pending will be transferred to the liquidator.

XPN: When the action is already on appeal, the suit may proceed to judgment, and any final and
executory judgment shall be filed and allowed (Sec. 113).

v. LIQUIDATOR
Liquidator- Any qualified person, natural or juridical, may serve as a receiver.

If the receiver is a juridical entity, he must designate a natural person as a representative. Such
representative must possess all the qualifications and none of the disqualifications.

Qualifications
The liquidator shall have the same qualifications as that of rehabilitator, thus:
1. Citizen or resident for at least 6 months immediately prior to nomination;
2. Of good moral character and with acknowledged integrity, impartiality, and independence;

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 3. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and
procedures, as well as the relevant training and/or experience that may be necessary to
enable him to properly discharge the duties and obligations of a receiver; and
4. Has no conflict of interest, which may be waived by a party who may be prejudiced (Sec.
29).

Powers, Duties, and Responsibilities

The principal duty of the liquidator is to preserve and maximize the value and recover the assets
of the debtor, with the end of liquidating them and discharging all the claims against the debtor.

The powers, duties and responsibilities include:

1. To sue and recover all the assets, debts and claims, belonging or due to the debtor;
2. To take possession of all the property of the debtor except property exempt by law from
execution;
3. To sell, with the approval of the court, any property of the debtor which has come into his
possession or control;
4. To redeem all mortgages and pledges, and to satisfy any judgement which may be an
encumbrance on any property sold by him;
5. To settle all accounts between the debtor and his creditors, subject to the approval of the
court;
6. To recover any property or its value, fraudulently conveyed by the debtor;
7. To recommend to the court the creation of a creditors' committee which will assist him in
the discharge of the functions and which shall have powers as the court deems just,
reasonable and necessary; and
8. Upon approval of the court, to engage such professional as may be necessary and
reasonable to assist him in the discharge of his duties.

vi. DETERMINATION OF CLAIMS

The rules on the determination of claims are as follows:
1. Within 20 days from assuming office, the liquidator shall prepare a preliminary registry
of claims.
2. Secured creditors who have waived their security or have fixed the value of the property
subject of the security shall be considered unsecured.
3. The registry shall be available for public inspection and publication notice shall be
provided to stakeholders (Sec. 123).
4. The debtor and the creditor have the right to set off their debts against each other; only the
balance, if any, shall be allowed in the proceedings (Sec. 124).
5. Within 30 days from expiration of the period for filing of applications for recognition of
claims, interested parties may challenge claims to the court.
6. Upon the expiration of the 30-day period, the liquidator shall submit the registry of claims
containing the claims not subject to challenge. Such claims shall become final upon filing
of the register.
7. Claims that have become final may be set aside only on grounds of fraud, accident,
mistake or inexcusable neglect (Sec. 125).
8. The liquidator shall submit disputed claims to court for final approval (Sec. 126).

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Treatment of Contracts
GR: All contracts are deemed terminated and/or breached.

XPN: When the liquidator, within 90 days from assumption of office, declares otherwise and the
contracting party agrees (Sec. 113).

vii. LIQUIDATION PLAN

Within 3 months from assuming office, the liquidator shall submit a Liquidation Plan
enumerating the assets, claims, and a schedule of liquidation and payment (Sec. 129).

Properties exempted by law shall be set apart from liquidation for the use and benefit of the
insolvent (Sec. 130).
The Plan and its implementation shall observe the concurrence and preference of credits under the
Civil Code (Sec. 133).

Sale of Assets in Liquidation

The liquidator may sell the unencumbered assets of the debtor and convert the same into money.

GR: The sale shall be made at public auction.

XPN: A private sale may be allowed with the approval of the court if:
1. The goods are of perishable nature;
2. The goods are likely to quickly deteriorate in value;
3. The goods are disproportionately expensive to keep or maintain; or
4. The private sale is for the best interest of the debtor and creditors.

F. DATA PRIVACY ACT OF 2012 (RA NO. 10173)

1. DEFINITION AND SCOPE
Personal information – Any information whether recorded in a material form or not:
1. From which the identity of an individual is apparent or can be reasonably and directly
ascertained by the entity holding the information; or
2. When put together with other information would directly and certainly identify an
individual (Sec. 3(g)).

Scope
The Data Privacy Act of 2012 applies to:
1. The processing of ALL types of personal information; and
2. Any natural and juridical person involved in personal information processing
including:
a. Those personal information controllers and processors who use equipment that are
located in the Philippines, although not found or established in the Philippines; or

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 b. Those who maintain an office, branch or agency in the Philippines subject to the
immediately succeeding paragraph: Provided, That the requirements of Section 5
are complied with (Sec. 4).

Nothing in this Act shall be construed as to have amended or repealed the provisions of Republic
Act No. 53, which affords the publishers, editors or duly accredited reporters of any newspaper,
magazine or periodical of general circulation protection from being compelled to reveal the
source of any news report or information appearing in said publication which was related in any
confidence to such publisher, editor, or reporter (Sec. 5).

This Act does NOT apply to the following (Sec. 4):

1. Information about any individual who is or was an officer or employee of a government
institution that relates to the position or functions of the individual, including:
a. The fact that the individual is or was an officer or employee of the government
institution;
b. The title, business address, and office telephone number of the individual;
c. The classification, salary range, and responsibilities of the position held by the
individual; and
d. The name of the individual on a document prepared by the individual in the course
of employment with the government.

2. Information about an individual who is or was performing service under contract for a
government institution that relates to the services performed.

This includes: The terms of the contract, and the name of the individual given in the course
of the performance of those services;

3. Information relating to any discretionary benefit of a financial nature.

Such as the granting of a license or permit given by the government to an individual,
including the name of the individual and the exact nature of the benefit;

4. Personal information processed for journalistic, artistic, literary or research purposes;

5. Information necessary in order to carry out the functions of public authority.

This includes: the processing of personal data for the performance by the independent,
central monetary authority and law enforcement and regulatory agencies of their
constitutionally and statutorily mandated functions.

6. Information necessary for banks and other financial institutions under the jurisdiction
of the independent, central monetary authority or BSP to comply with the Credit
Information System Act (RA 9510) and Anti-Money Laundering Act (RA 9160) and other
applicable laws.
7. Personal information originally collected from residents of foreign jurisdictions in
accordance with the laws of those foreign jurisdictions, including any applicable data
privacy laws, which is being processed in the Philippines.

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2. EXTRATERRITORIAL APPLICATIONS
This Act applies to an act done or practice engaged in and outside of the Philippines by an entity
if:
1. The act, practice. or processing relates to personal information about a Philippine citizen
or a resident;
2. The entity has a link with the Philippines, and the entity is processing personal information
in the Philippines or even if the processing is outside the Philippines as long as it is about
Philippine citizens or residents such as, but not limited to, the following:
a. A contract is entered in the Philippines;
b. A juridical entity unincorporated in the Philippines but has central management and
control in the country; and
c. An entity that has a branch, agency, office or subsidiary in the Philippines and the
parent or affiliate of the Philippine entity has access to personal information; and
3. The entity has other links in the Philippines such as, but not limited to:
a. The entity carries on business in the Philippines; and
b. The personal information was collected or held by an entity in the Philippines (Sec.
6).

3. PROCESSING OF PERSONAL INFORMATION

a. GENERAL PRINCIPLAES

Processing
Any operation or any set of operations performed upon personal information including, but not
limited to, the collection, recording, organization, storage, updating, or modification, retrieval,
consultation, use, consolidation, blocking, erasure, or destruction of data (Sec. 3(j)).

The processing of personal information shall be allowed, subject to:

1. Compliance with the requirements of this Act and other laws allowing disclosure of
information to the public; and
2. Adherence to the principles of transparency, legitimate purpose, and proportionality (Sec.
11)

Personal information must be:

1. Collected for specified and legitimate purposes determined and declared, and later
processed in a way compatible with such declared, specified and legitimate purposes only;
a. When purposes are determined and declared: before, or as soon as reasonably
practicable after collection.
2. Processed fairly and lawfully;
3. Accurate, relevant and, where necessary for purposes for which it is to be used the
processing of personal information, kept up to date.
a. Inaccurate or incomplete data must be rectified, supplemented, destroyed or their
further processing restricted;

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 4. Adequate and not excessive in relation to the purposes for which they are collected and
processed;
5. Retained only for as long as necessary for the fulfillment of the purposes for which the data
was obtained or for the establishment, exercise or defense of legal claims, or for legitimate
business purposes, or as provided by law; and
6. Kept in a form which permits identification of data subjects for no longer than is necessary
for the purposes for which the data were collected and processed.
a. Provided, That personal information collected for other purposes may lie processed
for historical, statistical or scientific purposes, and in cases laid down in law may
be stored for longer periods.
b. Provided, further, That adequate safeguards are guaranteed by said laws authorizing
their processing (Sec. 11).

b. SENSITIVE AND PRIVILEGED INFORMATION

Sensitive personal information- Personal information:

1. About an individual’s race, ethnic origin, marital status, age, color, and religious,
philosophical or political affiliations;
2. About an individual’s health, education, genetic or sexual life of a person, or to any
proceeding for any offense committed or alleged to have been committed by such person,
the disposal of such proceedings, or the sentence of any court in such proceedings;
3. Issued by government agencies peculiar to an individual which includes, but not limited
to, social security numbers, previous or current health records, licenses or its denials,
suspension or revocation, and tax returns; and
4. Specifically established by an executive order or an act of Congress to be kept classified.
(Sec. 3(l)).

Privileged Information- Any and all forms of data which under the Rules of Court and other
pertinent laws constitute privileged communication (Sec. 3(l)).

GR: The processing of sensitive personal information and privileged information shall be
prohibited.

However, it shall be permitted if –

1. Not otherwise prohibited by law; and
2. When at least one of the following conditions exists:
a. The data subject has given his or her consent;
b. The processing is necessary and is related to the fulfillment of a contract with the
data subject or in order to take steps at the request of the data subject prior to
entering into a contract;
c. The processing is necessary for compliance with a legal obligation to which the
personal information controller is subject;
d. The processing is necessary to protect vitally important interests of the data subject,
including life and health;
e. The processing is necessary in order to respond to national emergency, to comply
with the requirements of public order and safety, or to fulfill functions of public

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 authority which necessarily includes the processing of personal data for the
fulfillment of its mandate; or
f. The processing is necessary for the purposes of the legitimate interests pursued by
the personal information controller or by a third party or parties to whom the data
is disclosed.

XPN: Where such interests are overridden by fundamental rights and freedoms of the data
subject which require protection under the Philippine Constitution (Sec. 12).

c. SUBCONTRACTING

Personal information controller – Refers to a person or organization who controls the collection,
holding, processing or use of personal information. (C H P U)

Including:
1. A person or organization who instructs another person or organization to collect, hold,
process, use, transfer or disclose personal information on his or her behalf.
Excluding:
1. A person or organization who performs such functions as instructed by another person or
organization; and
2. An individual who collects, holds, processes or uses personal information in connection
with the individual’s personal, family, or household affairs (Sec. 3(h)).

Subcontracting
A personal information controller may subcontract the processing of personal information,
provided, that the personal information controller shall be responsible for ensuring that proper
safeguards are in place:
1. To ensure the confidentiality of the personal information processed;
2. To prevent the use of the processed personal information for unauthorized purposes; and
3. To comply with the requirements of this Act and other laws for processing of personal
information (Sec.14).

d. PRIVILEGED COMMUNICATION
Personal information controllers may invoke the principle of privileged communication over
privileged information that they lawfully control or process.

Subject to existing laws and regulations, any evidence gathered on privileged information is
inadmissible (Sec.15).

4. RIGHTS OF THE DATA SUBJECT; EXCEPTIONS/NON-

APPLICABILITY
Data subject – An individual whose personal information is processed (Sec. 3(c)).

The data subject is entitled to:

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1. Be informed- As to whether personal information pertaining to him/her shall be, are being,
or have been processed;
2. Be furnished- With the following before the entry of his or her personal information into
the processing system of the personal information controller, or at the next practical
opportunity:
a. Description of the personal information to be entered into the system;
b. Purposes for which they are being or are to be processed;
c. Scope and method of the personal information processing;
d. The recipients or classes of recipients to whom they are or may be disclosed;
e. Methods utilized for automated access, if the same is allowed by the data subject,
and the extent to which such access is authorized;
f. The identity and contact details of the personal information controller or its
representative;
g. The period for which the information will be stored; and
h. The existence of their rights, i.e., to access, correction, as well as the right to lodge
a complaint before the Commission.

GR: Any information supplied/ declaration made to the data subject on these matters
shall NOT be amended without prior notification.

XPN: notification under (b-PURPOSE) shall NOT APLLY if the personal information is
needed pursuant to a subpoena or when the collection and processing are for obvious
purposes or when the information is being collected and processed as a result of legal
obligation.

3. Reasonable access of the data subject to the information supplied or declaration made
by the personal information controller, upon demand.
4. Dispute the inaccuracy or error in the personal information and have the personal
information controller correct it immediately and accordingly.
5. Suspend, withdraw, or order the blocking, removal or destruction of his or her
personal information from the personal information controller’s filing system.
6. Be indemnified For any damages sustained due to such inaccurate, incomplete, outdated,
false, unlawfully obtained, or unauthorized use of personal information (Sec. 16).
7. Transmissibility of rights of the Data Subject
The lawful heirs and assigns of the data subject may invoke the rights of the data subject
for which he or she is an heir or assignee.

When they may invoke: (1) At any time after the death of the data subject OR (2) when the
data subject is incapacitated or incapable of exercising the above-enumerated rights (Sec.
17).

8. Right to Data Portability

Where personal information is processed by electronic means and in a structured and
commonly used format:

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 The data subject shall have the right to obtain from the personal information controller a
copy of data undergoing processing in an electronic or structured format, which is
commonly used and allows for further use by the data subject (Sec. 18).

Exceptions and Non-Applicability

These rights are not applicable if the processed personal information are used/ gathered only:
1. For the needs of scientific and statistical research and, on the basis of such, no activities
are carried out and no decisions are taken regarding the data subject.

In such case, however, the personal information shall be held under strict confidentiality
and shall be used only for the declared purpose.

2. For the purpose of investigations in relation to any criminal, administrative, or tax

liabilities of a data subject (Sec. 19).

5. DUTIES AND RESPONSIBILITIES OF PERSONAL

INFORMATION CONTROLLER
1. The personal information controller must implement reasonable and appropriate
organizational, physical, and technical measures intended for the protection of personal
information against any accidental or unlawful destruction, alteration and disclosure, as
well as against any other unlawful processing.
2. The personal information controller shall implement reasonable and appropriate
measures to protect personal information against natural dangers such as accidental
loss or destruction, and human dangers such as unlawful access, fraudulent misuse,
unlawful destruction, alteration and contamination.
3. The personal information controller must further ensure that third parties processing
personal information on its behalf shall implement the security measures required by this
provision.

The determination of the appropriate level of security under this section must take into account the
nature of the personal information to be protected, the risks represented by the processing, the size
of the organization and complexity of its operations, current data privacy best practices and the
cost of security implementation.

4. The personal information controller shall promptly notify the Commission and affected
data subjects when sensitive personal information or other information that may, under
the circumstances, be used to enable identity fraud are reasonably believed to have been
acquired by an unauthorized person, and the personal information controller or the
Commission believes that such unauthorized acquisition is likely to give rise to a real risk
of serious harm to any affected data subject.

NOTE: The employees, agents or representatives of a personal information controller who are
involved in the processing of personal information shall operate and hold personal information
under strict confidentiality if the personal information are not intended for public disclosure. This
obligation shall continue even after leaving the public service, transfer to another position or upon
termination of employment or contractual relations (Sec. 20).

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G. PHILIPPINE COMPETITION ACT (RA No. 10667)
It is based on the premise that efficient market competition is an effective mechanism for
allocating goods and services, and that safeguards are needed to maintain competitive conditions.

1. DEFINITION AND SCOPE OF APPLICATION

Agreement – Any type or form of contract, arrangement, understanding, collective
recommendation, or concerted action, whether formal or informal, explicit or tacit, written or oral.
(Sec. 4(b)).

Confidential business information – Information which concerns or relates to the operations,

production, sales, shipments, purchases, transfers, identification of customers, inventories, or
amount or source of any income, profits, losses, expenditures (Sec. 4(e)).

Control – The ability to substantially influence or direct the actions or decisions of an entity,
whether by contract, agency, or otherwise (Sec. 4(f)).

Dominant position – A position of economic strength that an entity or entities hold which makes
it capable of controlling the relevant market independently from any or a combination of the
following: competitors, customers, suppliers, or consumers (Sec. 4(g)).

Market – The group of goods or services that are sufficiently interchangeable or substitutable
and the object of competition, and the geographic area where said goods or services are offered.
(Sec. 4(i)).

Scope
This Act shall:
1. Be enforceable against any person or entity engaged in any trade, industry, and commerce
in the Republic of the Philippines.
2. Be applicable to international trade having direct, substantial, and reasonably foreseeable
effects in trade, industry, or commerce in the Republic of the Philippines, including those
that result from acts done outside the Republic of the Philippines.

This Act shall NOT apply to:

1. The combinations or activities of workers or employees;
2. Agreements or arrangements with their employers

When such combinations, activities, agreements, or arrangements are designed solely to facilitate
collective bargaining in respect of conditions of employment (Sec. 3).

2. POWERS AND FUNCTIONS OF THE PHILIPPINE

COMPETITION COMMISSION
The Commission shall have original and primary jurisdiction over the enforcement and
implementation of PCA. The Commission shall exercise the following powers and functions:

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1. Conduct inquiry, investigate, and hear and decide on cases involving any violation of this
Act and other existing competition laws motu proprio or upon receipt of a verified
complaint
2. Review proposed mergers and acquisitions, and upon exercise of its powers to review,
prohibit mergers and acquisitions that will substantially prevent, restrict, or lessen
competition in the relevant market;
3. Monitor and undertake consultation with stakeholders and affected agencies
4. Stop or redress any anti-competitive agreement
5. Conduct administrative proceedings, impose sanctions, fines or penalties for any
noncompliance with or breach of this Act and its implementing rules and regulations (IRR)
and punish for contempt;
6. Issue subpoena duces tecum and subpoena ad testificandum to require the production of
books, records, or other documents or data which relate to any matter relevant to the
investigation
7. Upon order of the court, undertake inspections of business premises and other offices, land
and vehicles, as used by the entity
8. Issue adjustment or divestiture orders including orders for corporate reorganization or
divestment which are structural remedies, should only be imposed:
a. Where there is no equally effective behavioral remedy; or
b. Where any equally effective behavioral remedy would be more burdensome for the
enterprise concerned than the structural remedy;
9. Deputize any and all enforcement agencies of the government or enlist the aid and support
of any private institution, corporation, entity or association, in the implementation of its
powers and functions;
10. Monitor compliance by the person or entities concerned with the cease and desist order or
consent judgment;
11. Issue advisory opinions and guidelines on competition matters and submit annual and
special reports to Congress, including proposed legislation;
12. Monitor and analyze the practice of competition in markets that affect the Philippine
economy;
13. Conduct, publish, and disseminate studies and reports on anti-competitive conduct and
agreements to inform and guide the industry and consumers;
14. Intervene or participate in administrative and regulatory proceedings requiring
consideration of the provisions of this Act that are initiated by government agencies;
15. Assist the National Economic and Development Authority, in consultation with relevant
agencies and sectors, in the preparation and formulation of a national competition policy;
16. Act as the official representative of the Philippine government in international competition
matters;
17. Promote capacity building and the sharing of best practices with other competition- related
bodies;
18. Advocate pro-competitive policies of the government by:
a. Reviewing economic and administrative regulations, motu proprio or upon request;
and
b. Advising the Executive Branch on the competitive implications of government
actions, policies and programs; and

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 19. Charging reasonable fees to defray the administrative cost of the services rendered.
(Sec.12).

3. PROHIBITIVE ACTS
a. ANTI-COMPETITIVE AGREEMENTS (P R L)
Those that substantially prevent, restrict, or lessen competition.

It is illegal for business rivals to act together in ways that can limit competition, lead to higher
prices, or hinder other businesses from entering the market.

NOTE: Agreements between or among competitors are also called horizontal agreements.

i. PER SE VIOLATIONS
The following agreements, between or among competitors, are per se prohibited:
1. Restricting competition as to price, or components, or other terms of trade;
2. Fixing price at an auction or in any form of bidding including cover bidding, bid
suppression, bid rotation and market allocation and other analogous practices.

ii. NOT PER SE VIOLATIONS

The following agreements, between or among competitors which have the object or effect of
substantially preventing, restricting or lessening competition shall be prohibited:
1. Setting, limiting, or controlling production, markets, technical development, or investment;
2. Dividing or sharing the market, whether by volume of sales or purchases, territory, type of
goods or services, buyers or sellers or any other means.

Agreements other than those specified in (1) and (2) which have the object or effect of substantially
preventing, restricting or lessening competition shall also be prohibited (Sec. 14).

b. ABUSE OF DOMINANT POSITION

Markets that are dominated by a single or handful of large companies are particularly vulnerable
to anticompetitive practices.

In the conduct of their business, dominant companies (considering their size, scope, and position
of economic strength) may have a disproportionately severe effect on the market and its
companies.

Prohibited Acts
1. Predatory Pricing - selling goods or services below cost with the object of driving
competition out of the relevant market;
2. Imposing barriers to entry or committing acts that prevent competitors from growing
within the market in an anti-competitive manner;

XPN: Those that develop in the market as a result of or arising from a superior product
or process, business acumen, or legal rights or laws.

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3. Making a transaction subject to acceptance by the other parties of other obligations
which have no connection with the transaction;
4. Discriminatory behavior - Setting prices or other terms or conditions that
discriminate unreasonably between customers or sellers of the same goods or services,
where the effect may be to lessen competition substantially:

XPN: That the following shall be considered permissible price differentials:

a. Socialized pricing for the less fortunate sector of the economy;
b. Price differential which reasonably or approximately reflect differences in the cost
of manufacture, sale, or delivery resulting from differing methods, technical
conditions, or quantities in which the goods or services are sold or delivered to the
buyers or sellers;
c. Price differential or terms of sale offered in response to the competitive price of
payments, services or changes in the facilities furnished by a competitor; and
d. Price changes in response to changing market conditions, marketability of goods or
services, or volume;

5. Imposing restrictions on the lease or contract for sale or trade of goods or services,
such as fixing prices, giving preferential discounts or rebate upon such price, or
imposing conditions not to deal with competing entities, the object or effect of the
restrictions is to prevent, restrict or lessen competition substantially:

XPN:
a. Permissible franchising, licensing, exclusive merchandising, or exclusive
distributorship agreements; or
b. Agreements protecting intellectual property rights, confidential information, or
trade secrets;

6. Making supply of particular goods or services dependent upon the purchase of other
goods or services from the supplier which have no direct connection with the main
goods or services to be supplied;

7. Directly or indirectly imposing unfairly low purchase prices for the goods or
services of, among others, marginalized agricultural producers, fisherfolk, micro-,
small-, medium-scale enterprises, and other marginalized service providers and
producers;

8. Exploitative behavior towards consumers, customers, and/or competitors - Directly

or indirectly imposing unfair purchase or selling price on their competitors, customers,
suppliers or consumers;

XPN: Prices that develop in the market as a result of or due to a superior product or
process, business acumen, or legal rights or laws

9. Limiting production, markets or technical development, to the detriment of consumers

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 XPN: Prices that develop in the market as a result of or due to a superior product or
process, business acumen or legal rights or laws

c. PROHIBITED MERGERS AND ACQUISITIONS

Mergers and acquisitions that substantially prevent, restrict, or lessen competition in the relevant
market or in the market for goods or services are prohibited (Sec. 20).

If the PCC determines that the agreement results in a prohibited merger or acquisition, it may
1. Prohibit the implementation of the agreement;
2. Prohibit the implementation of the agreement unless and until it is modified by changes
specified by the Commission;
3. Prohibit the implementation of the agreement unless and until the pertinent party or parties
enter into legally enforceable agreements specified by the Commission (Sec. 18).

d. EXCEPTIONS

Anti-Competitive Agreements
Prohibited agreements that contribute to improving the production or distribution of goods
and services or to promoting technical or economic progress, while allowing consumers a fair
share of the resulting benefits, may not necessarily be deemed a violation (Sec. 14).

Abuse of Dominant Position

The ff. may not necessarily be considered an abuse of dominant position:
1. Having a dominant position in a relevant market that does NOT substantially prevent,
restrict or lessen competition; or
2. Any conduct which contributes to improving production or distribution of goods or
services within the relevant market, or promoting technical and economic progress while
allowing consumers a fair share of the resulting benefit. [Sec. 15]

Prohibited Mergers and Acquisitions

Prohibited mergers and acquisitions may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:
1. The concentration has brought about or is likely to bring about gains in efficiencies that
are greater than the effects of any limitation on competition that result or likely to result
from the merger or acquisition agreement; or
2. A party to the merger or acquisition agreement is faced with actual or imminent financial
failure, and the agreement represents the least anti-competitive arrangement among the
known alternative uses for the failing entity’s assets:
3. Provided, That an entity shall not be prohibited from continuing to own and hold the stock
or other share capital or assets of another corporation which it acquired prior to the approval
of this Act or acquiring or maintaining its market share in a relevant market through such
means without violating the provisions of this Act
4. Provided further that the acquisition of the stock or other share capital of one or more
corporations solely for investment and not used for voting or exercising control and not to

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 otherwise bring about, or attempt to bring about the prevention, restriction, or lessening of
competition in the relevant market shall not be prohibited (Sec. 21).

4. COVERED TRANSACTIONS
The Commission shall have the power to review mergers and acquisitions based on factors deemed
relevant by the Commission (Sec. 16).

a. THRESHOLD FOR COMPULSORY NOTIFICATION

Parties to a merger or acquisition are required to provide notification when:
1. SIZE OF PARTY THRESHOLD: The aggregate annual gross revenues in, into or from
the Philippines, or value of the assets in the Philippines of the ultimate parent entity of
at least one of the acquiring or acquired entities, including that of all entities that the
ultimate parent entity controls, directly or indirectly, exceeds PhP5,600,000,000.00
(P5.6B); AND
2. SIZE OF TRANSACTION THRESHOLD: The value of the transaction exceeds
PhP2,200,000,000.00 (P2.2B).

b. NOTIFYING ENTITY
Parties to the merger or acquisition agreement wherein the value of the transaction exceeds
P2,200,000,000.00 (P2.2B) are prohibited from consummating their agreement until 30 days
after providing notification to the Commission in the form and containing the information specified
in the regulations issued by the Commission (Sec. 17).

If notice to the Commission is required for a merger or acquisition, then either of the ff. must each
submit a Notification Form and comply with the procedure set forth:
1. All acquiring and acquired pre-acquisition ultimate parent entities; or
2. Any entity authorized by the ultimate parent entity to file notification on its behalf.

The parties shall not consummate the transaction before the expiration of the relevant periods
provided in this Rule (Rule 4, Sec.2(b), IRR).

c. EXCEPTIONS
The Commission shall, from time to time, adopt and publish regulations stipulating exceptions or
exemptions from the notification requirement (Sec. 19).

An internal restructuring within a group of companies is exempt from notification if the

acquiring and acquired entities have the same ultimate parent entity.

Mergers or acquisitions are not considered purely internal and, therefore, do not qualify for the
exemption, if the restructuring leads to a change in control.

Such exemption shall not prevent the Commission from commencing a motu proprio review of
mergers and acquisitions under the IRR.

5. DETERMINING THE RELEVANT MARKET

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The Relevant Market refers to the market in which a particular good or service is sold and which
is a combination of the relevant product market and the relevant geographic market, defined as
follows:
1. A relevant product market comprises all those goods and/or services which are regarded
as interchangeable or substitutable by the consumer or the customer, by reason of the goods
and/or services’ characteristics, their prices and their intended use; and
2. The relevant geographic market comprises the area in which the entity concerned is
involved in the supply and demand of goods and services, in which the conditions of
competition are sufficiently homogenous and which can be distinguished from
neighboring areas because the conditions of competition are different in those areas.

6. DETERMINING THE CONTROL OR DOMINANCE OF

MARKET
In determining whether an entity has market dominant position, the Commission shall consider the
following:
1. The share of the entity in the relevant market and whether it is able to fix prices
unilaterally or to restrict supply in the relevant market;
2. The existence of barriers to entry and the elements which could foreseeably alter both
said barriers and the supply from competitors;
3. The existence and power of its competitors;
4. The possibility of access by its competitors or other entities to its sources of inputs;
5. The power of its customers to switch to other goods or services;
6. Its recent conducts; and
7. Other criteria established by the regulations (Sec. 27).

Presumption
Presumption of market dominant position if the market share of an entity in the relevant market
is at least 50%, unless a new market share threshold is determined by the Commission for that
particular sector (Sec. 27).

7. DETERMINING EXISTENCE OF ANTI-COMPETITIVE

CONDUCT
In determining whether anti-competitive agreement or conduct has been committed, the
Commission shall:
1. Define the relevant market allegedly affected by the anti-competitive agreement or conduct
2. Determine if there is actual or potential adverse impact on competition in the relevant
market caused by the alleged agreement or conduct, and if such impact is substantial and
outweighs the actual or potential efficiency gains that result from the agreement or conduct;
3. Adopt a broad and forward-looking perspective, recognizing future market developments,
any overriding need to make the goods or services available to consumers, the requirements
of large investments in infrastructure, the requirements of law, and the need of our
economy to respond to international competition, but also taking account of past behavior
of the parties involved and prevailing market conditions;

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 4. Balance the need to ensure that competition is not prevented or substantially restricted and
the risk that competition efficiency, productivity, innovation, or development of priority
areas or industries in the general interest of the country may be deterred by overzealous or
undue intervention; and
5. Assess the totality of evidence on whether it is more likely than not that the entity has
engaged in anti-competitive agreement or conduct including whether the entity’s conduct
was done with a reasonable commercial purpose such as but not limited to phasing out of
a product or closure of a business, or as a reasonable commercial response to the market
entry or conduct of a competitor.

8. FORBEARANCE BY THE PHILIPPINE COMPETITION

COMMISSION
The Commission may forbear from applying the provisions of this Act, for a limited time, in whole
or in part, in all or specific cases, on an entity or group of entities, if in its determination:
1. Enforcement is not necessary to the attainment of the policy objectives of this Act;
2. Forbearance will neither impede competition in the market where the entity or group of
entities seeking exemption operates nor in related markets; and
3. Forbearance is consistent with public interest and the benefit and welfare of the consumers
(Sec.28).

A public hearing shall be held to assist the Commission in making this determination.

In the event that the basis for the issuance of the exemption order ceases to be valid, the order
may be withdrawn by the Commission (Sec. 28).

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