COMM

MLAW
 I. INSURANCE
A. BASIC CONCEPTS
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.

CONTRACT OF SURETYSHIP – Deemed to be an insurance contract only if made by a surety which is doing an
insurance business – MMDD
(1) Making or proposing to make, as insurer, any insurance contract
(2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety
(3) Doing any kind of business, including a reinsurance business
(4) Doing or proposing to do any business in substance equivalent to any of the foregoing

NOTES:
• If the surety is in the Civil Law concept, then the surety does not need a Certificate of Authority from
the Insurance Commission. Check if the surety is doing it as a business for insurance, in such a case,
a Certificate of Authority will be needed.
• Surety bonds remains effective until the action or proceeding is finally decided or terminated,
regardless of whether the applicant fails to renew the bond. Thus, the applicant will be liable to the
surety for any payment the surety makes on the bond, but only up to the amount of this bond.
• The liabilities of an insurer under the surety bonds are not extinguished when the modifications in
the principal contract do not substantially or materially alter the principal’s obligations.
• The fact that no profit is derived from the making of insurance contracts shall not be deemed
conclusive to show that the making thereof does not constitute doing an insurance business. Profit is
irrelevant.

ELEMENTS OF CONTRACT OF INSURANCE IHADP

In addition to the requisites of ordinary contract – Consent, Object, and Consideration.
1. Insurable interest
2. Happening of designated perils
3. Insurer Assumes that risks of loss
4. Distribution of actual losses among a large group of persons bearing a similar risk and
5. Payment of Premium to a general insurance fund.
RISK-SHIFTING DEVICE – If only the first 3 elements are present.
RISK-DISTRIBUTING DEVICE – if all the elements are present.

Test to Determine Whether Insurance Contract or Not

Principal Objects and Purpose Test → whether the assumption of risk and indemnification of loss are the principal
object and purpose of the organization, or whether they are merely incidental to its business.
e.g., a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for malpractice, is one of insurance.

NOTES:
1. 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 or his or her children, or that of her husband.
2. LGBTQ+ member have the right to designate their domestic partners as beneficiaries.
3. Mutual Insurance Company → cooperative enterprise where the members are both the insurer and
insured.

SUBROGATION
Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or
securities.
NOTE: Should the insured, after receiving payment from the insurer, release bv his own act the wrongdoer
or 3rd party responsible for the loss or damage from liability, the insurer loses his rights against the
wrongdoer since the insurer can only be subrogated to only such rights as the insured may have.

Effect of War on Existing Insurance Contracts

Property Insurance Life Insurance
An insurance policy ceases to become valid and The contract is abrogated but the insured is entitled to
enforceable as soon as the insured becomes a public the reserve value of the policy, which is the excess of
enemy. Premiums paid shall be returned by the the premiums paid over the actual risk carried.
insurer.
NOTE: Where the loss occurs after the end of the war, the contract is not revived.
#GETTHATBAR2022
FLORES · TARADJI
INTERPRETATION OF AN INSURANCE CONTRACT
• If the terms are clear, the literal meaning of its stipulations shall control.
• If the terms are ambiguous, or if there are conflicting provisions, they should be interpreted strictly against
the insurer and liberally in favor of the insured (since insurance contracts are contracts of adhesion).

CHARACTERISTICS
1. Consensual → perfected by the meeting of the minds of the parties
2. Voluntary → not compulsory and the parties may incorporate such terms and conditions they may deem
convenient
3. Aleatory → one of the parties or both reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening of an event which is uncertain.
4. Unilateral → it is executed as to the insured after payment of premium, and it is executory as to the insurer
since it is not executed until the payment for a loss.
5. Personal → each party to it takes into account the character, credit and conduct of the other.
6. Conditional → insurer’s liability is based on the happening of the event insured against.
7. Contract of Indemnity
GR: Indemnity is the basis of all property insurance. The insured is only entitled to recover the amount
of actual loss sustained.
EXP: Life and Accident Insurance where the measure of indemnity is the amount fixed in the policy.
8. Uberrimei Fidei → the contract of insurance is one of perfect good faith not for the insured alone, but equally
so for the insurer.
9. Synallagmatic → insurance contract is a highly reciprocal contract where the rights and obligations of the
parties correlate and mutually correspond.

1. What May and May Not Be Insured

WHAT MAY BE INSURED
Any CONTINGENT or UNKNOWN EVENT, whether past or future, which may
1. damnify a person having an insurable interest, or
2. create a liability against him,
may be insured against.

NOTE: Past event is only applicable to marine insurance so long as the event is unknown. For other insurance (e.g.
fire insurance), only future event.

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 insured upon death of the original owner, unless otherwise provided
for in the policy.

CONTRACT OF INSURANCE NOT A WAGERING CONTRACT

A contract of insurance is a contract of indemnity and is NOT a wagering or gambling contract. While it is based
on a contingency, it is not a contract of chance and is not used for profit.

WAGERING CONTRACT INSURANCE CONTRACT

The parties contemplate gain through mere chance The parties seek to distribute possible loss by reason of
mischance
The gambler courts fortune The insured seeks to avoid misfortune
Tends to increase the inequality of fortune Tends to equalize fortune
Whatever one person wins from a wager is lost by the What one insured gains is not at the expense of another
other wagering party. insured
As soon as a party makes a wager, he creates a risk of The purchase of insurance does not create a new and,
loss to himself where no such risk existed previously. therefore, non-existing risk of loss to the purchaser.
In both cases, one party promises to pay a given sum to the other upon the occurrence of a given future event, the
promise being conditioned upon the payment of, or agreement to pay, a stipulated amount by the other party to
the contract

Insurance by Minor
• The contract entered into by the minor is voidable.
• However, the insurer cannot raise the incapacity of the minor as defense, as it is voidable at the option of the
insured, and not the insurer.

#GETTHATBAR2022
FLORES · TARADJI
2. Insurable Interest
INSURABLE INTEREST
That interest which the law requires the owner of an insurance policy to have in the person or thing insured.

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

LIFE AND HEALTH

Every person has an insurable interest in the life and health of:
HSC-DP-L-E
1. Himself, his Spouse and his Children
2. Any person on whom he Depends wholly or in part for education or support, or in whom he has a Pecuniary
interest
3. 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] and
4. Any person upon whose life any Estate or interest vested in him depends.’

INSURABLE INTEREST IN LIFE OF ANOTHER

1. For benefit of insured - A person cannot lawfully procure insurance for his own benefit on the life of another
in whose life he has no insurable interest.
2. For benefit of a third party - When the owner of the policy insures the life of another - the cestui que vie -
designates a third party as beneficiary, both the owner and beneficiary must have an insurable interest in
the life of the cestui que vie.

BENEFICIARY
The person who is named or designated in a contract of life, health, or accident insurance as the one who is to
receive the benefits which become payable, according to the terms of the contract, upon the death of the insured.

GR: When one insures his own life, he can designate any person as beneficiary even if the beneficiary has
no insurable interest in the life of the insured.

EXP: Any person who is forbidden from receiving any donation cannot be named beneficiary of a life
insurance policy.
(1) Between persons who were guilty of adultery or concubinage at the time of the donation
(2) Between persons found guilty of the same criminal offense, in consideration thereof, or
(3) To a public officer or his wife, descendants, and ascendants, by reason of his office.

When is the estate entitled to the proceeds of the insurance?

1. Where the insured has not designated any beneficiary or
2. When the designated beneficiary is disqualified by law to receive proceeds

NOTES:
• The designation of beneficiary is generally revocable.
• Exception: Unless the right to revoke is expressly waived in the policy. This makes him irrevocable
beneficiary.
o If the policy contains no provision authorizing a change of beneficiary without the beneficiary’s
consent, the insured cannot make such change.
• However, despite the waiver, he can still change the beneficiary if he obtains the beneficiary’s consent.
• If the premiums are paid out of the conjugal funds, the proceeds are considered conjugal.
• There is no legal proscription in naming as beneficiaries the children of illicit relationships by the insured.
Died before
IF THE BENEFICIARY PREDECEASED THE INSURED, either of the following will happen:
(1) His rights so vested should pass to his representatives, and on the death of the insured, the proceeds of the
policy should belong, not to estate of the insured, but to the representatives of the beneficiary; or

(2) The estate of the insured should be entitled to the proceeds of the insurance especially where the
designation is subject to the express condition to pay the beneficiary if he survives the insured or “if
surviving.”

#GETTHATBAR2022
FLORES · TARADJI
PROPERTY
INSURABLE INTEREST IN PROPERTY
Must be of such nature that a contemplated peril might directly damnify the insured. PAL
1. Property, real or personal
2. Any relation thereto (e.g. interest of trustee or agent)
3. Liability in respect thereof (e.g. interest of carrier or depository of goods)

NOTE: The expectation of benefit to be derived from the continued existence of property must have a basis of legal
right, although the person insured has no title, either legal or equitable, to the property insured. [The rule is
different in life insurance.]

An insurable interest in property may consist in:

1. An existing interest (either legal title or equitable title)
2. An inchoate interest founded on an existing interest or
3. An expectancy coupled with an existing interest in that out of which the expectancy arises.

INCHOATE INTEREST
A stockholder has neither legal nor equitable title to assets of the corporation. He has an inchoate interest in
the property of the corporation which is founded on an existing interest arising from his ownership of shares.
The stockholder has an interest in the preservation of the corporation’s assets. Likewise, partner of
partnership has insurable interest.

EXPECTANCY
A farmer may insure future crops if they are to be grown on land owned by him at the time of the issuance of
the policy. An owner of a business can insure against a contingency which may cause loss of profits resulting
from cessation of business.

MERE CONTINGENT/EXPECTANT INTEREST NOT INSURABLE

A father cannot insure his son's property nor can a son insure the property that he expects to inherit from
his father as his interest is merely an expectancy.

An unsecured creditor cannot insure specific property of his debtor who is alive. (this is on the property. If
life of debtor, there is insurable interest)
EXCEPT: If deceased debtor since all personal liability ceases with the death of the debtor.

MEASURE OF AN INSURABLE INTEREST

The extent to which the insured might be damnified by loss or injury thereof.

EFFECT OF ABSENCE OF INSURABLE INTEREST IN PROPERTY INSURED

An insurance taken out by a person on property in which he has no insurable interest is VOID. The effect is that the
premium is returned to the insured unless he is in pari delicto with the insurer.

NOTE: Insurable interest in property does not necessarily imply a property interest in, or lien upon, or
possession of, the subject matter, and neither the title or beneficial interest is requisite to the existence of
such interest. 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.

TIME WHEN INSURABLE INTEREST MUST EXIST

PROPERTY LIFE OR HEALTH LIABILITY INSURANCE
Interest must exist when Interest must exist when Questions of insurable interest are
1. the insurance takes effect 1. the insurance takes effect not particularly important. lt
AND necessarily exists when the liability
2. the loss occurs of the insured to a third party
But need not exist thereafter or attaches.
But need not exist in the meantime. when the loss occurs.

OTHERWISE, the policy is VOID.

#GETTHATBAR2022
FLORES · TARADJI
INSURABLE INTEREST IN MARINE INSURANCE
WHO HAS INSURABLE INTEREST IN MARINE INSURANCE?
Shipowner, even if the ship is chartered (insurer shall be liable only that part of the loss which the insured cannot
recover from the charterer)

SHIPOWNER’S LIMITED LIABILITY

The shipowner's liability arising from the operation of a ship is merely co-extensive with his interest in the
vessel such that a total loss thereof results in its extinction.

This limited liability rule is subject to exceptions, namely:

1. whether the injury or death to a passenger is due either to the fault of the shipowner, or to the
concurring negligence of the shipowner and the captain,
2. where the vessel is insured, and
3. in workmen's compensation claims

LOAN OR BOTTOMRY
One which is payable only if the vessel, given as a security for the loan, completes in safety the contemplated voyage.
The insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the
amount secured by bottomry.

Example:
If the value of the vessel of X is P2,000,000.00, and he borrows from Y by way of loan on bottomry,
P800,000.00, then he may effect insurance on it for only Pl,200,000.00, as this difference or excess of its value
is the extent of his insurable interest

On the other hand, Y has an insurable interest in the ship given as security for the loan up to the amount
thereof of P800,000.00, as the happening of the loss by a marine peril exposes him to the danger of not being
able to recover the said amount

NOTE: The contract of loan is similar to a marine insurance except that the money is given in advance.

EXPECTED FREIGHTAGE
GENERAL RULE: The owner of a ship has an insurable interest in expected freightage which he may not earn in case
of the intervention of a peril insured against or other peril incident to the voyage. The rule is the same although
the freight has been paid in advance.

EXCEPTION: However, where the agreement is that the freight is payable in any event, whether the vessel is lost or
is not lost, the shipowner has no insurable interest in such freight. But the shipper who has prepaid the freightage
under such condition, has an insurable interest on the same

WHEN INSURED A CO-INSURER IN MARINE INSURANCE

In every marine insurance, the insured is expected to cover by insurance the full value of the property insured.

If the value of his interest exceeds the amount of insurance, he is considered the co-insurer for an amount
determined by the difference between the insurance taken out and the value of the property. The rule is different in
fire insurance.

FORMULA
(𝑷𝒂𝒓𝒕𝒊𝒂𝒍)𝑳𝒐𝒔𝒔
× 𝑨𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒂𝒏𝒄𝒆 = 𝑨𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝑹𝒆𝒄𝒐𝒗𝒆𝒓𝒚
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝑻𝒉𝒊𝒏𝒈 𝑰𝒏𝒔𝒖𝒓𝒆𝒅

Example:
If a vessel valued at P500,000 is insured for only P400,000 and is damaged to the extent of P250,000, the insurer
will be required to pay P200,000.00; the P50,000.00 being borne by the insured himself

In the example given, we have the following computation:

250,000
× 400,000 = 𝟐𝟎𝟎, 𝟎𝟎𝟎
500,000

#GETTHATBAR2022
FLORES · TARADJI
DIFFERENCE OF INSURABLE INTEREST IN LIFE AND PROPERTY
LIFE PROPERTY
As to extent of Insurable interest in life is unlimited In property, insurable interest is limited to the
insurable actual value of the interest thereon
interest

As to time when It is enough that insurable interest It is necessary that insurable interest must exist
insurable interest exists at the time the policy takes effect when the insurance takes effect AND when the
must exist and need not exist at the time of the loss loss occurs but need not exist in the meantime”

As to expectation The expectation of benefit to be derived An expectation of benefit, to be derived from the
of benefit to be from the continued existence of life continued existence of the property insured,
derived need not have any legal basis however likely and morally certain of realization
whatever it may be, will not afford a sufficient insurable
interest unless that expectation has basis of
legal right.

CHANGE IN INTEREST OF THING

GR: Change of interest in any part of a thing insured suspends the insurance until the interests in the thing and
the interest in the insurance are vested in the same person. (note the contract is not void but merely
suspended)
EXP:
1. A change of interest in the thing insured after the occurrence of an injury which results in a loss.
After a loss has happened, the liability of the insurer becomes fixed. The insured has a right to assign his
claim against the insurer as freely as any other money claim. This right is absolute and cannot be delimited
by agreement.
2. A change in of interest in one or more of several things, separately insured by one policy
3. A change of interest by will or succession on the death of the insured
The insurance on property passes automatically, on the death of the insured, to the heir, legatee or devisee
who acquired interest in the thing insured.
4. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured
to the others
5. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured; and

NOTE: When there is an express prohibition against alienation in the policy, in case of alienation, the contract of
insurance is not merely suspended but is avoided.

#GETTHATBAR2022
FLORES · TARADJI
MORTGAGOR AND MORTGAGEE
The mortgagor and the mortgagee have each an insurable interest in the property mortgaged, and this interest is
separate and distinct from the other. Consequently, insurance taken by one in his own name only and in his favor
alone, does not inure to the benefit of the other.

EXTENT OF INSURABLE INTEREST

MORTGAGOR MORTGAGEE
The mortgagor has an insurable interest therein to the The mortgagee has an insurable interest to the extent of
extent of its value, even though the mortgage debt the debt secured, since he is not insuring the property
equals such value. itself but his interest or lien thereon.

Insurance taken by the mortgagee for his own interest.

1. In order to recover from the insurer, the loss of the property must be before payment of the mortgage debt
by the mortgagor. Otherwise, he can recover nothing since his credit is already paid.
2. Upon payment of the insurer to the mortgagee, the mortgagor remains liable. There will only be a change of
creditor by subrogation.
3. If the proceeds exceed the debt secured, the mortgagor has no right to collect the balance of the proceeds
of the policy after payment of the interest of the mortgagee, unless otherwise stated in the policy.

it
Insurance taken by the mortgagee on behalf of the mortgagor (i.e., the mortgagor pays the premium)
1. Upon destruction of the property, the mortgagee is entitled to receive payment from the insured, but such
payment discharges the debt if equal to it. If greater than the debt, mortgagee holds the excess as trustee.
2. If there is a stipulation that the insurer shall be subrogated to the rights of the mortgagee, the payment of the
policy will not discharge the debt.

Insurance taken by mortgagor for the benefit of mortgagee

1. The contract is 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 (like storing
inflammable materials in the insured house) 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 (like payment of the
premium) 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 and
NOTE: The excess will be held by him in trust (must be given to the mortgagor)
5. Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished.

MORTGAGEE REDEMPTION INSURANCE

A kind of life insurance procured by the mortgagor with the mortgagee as beneficiary up to the extent of the mortgage
indebtedness. In case the mortgagor dies, the proceeds will be applied to the payment of the mortgage debt, relieving
the heirs of the burden to paying the debt.

Open Mortgage Clause or Loss Payable Mortgage Clause

It is a contract which provides that the payment of loss to the mortgagee, if any, will be according to his interest as
stated in the contract. Under such clause, the acts of the mortgagor will affect the mortgagee.

Union Mortgage Clause or Standard Mortgage Clause

This creates a relation of insured and insurer between the mortgagee and the insurance company independent of
the contract with the mortgagor. The acts of the mortgagor do not affect the mortgagee. It makes a separate and
distinct contract of insurance on the interest of the mortgagee.

#GETTHATBAR2022
FLORES · TARADJI
3. Double Insurance and Over Insurance
DOUBLE INSURANCE (CO-INSURANCE) exists where the same person is insured by several insurers separately
in respect to the same subject and interest.

REQUISITES OF DOUBLE INSURANCE (PI-SIR)

(1) The Person insured is the same
(2) Two or more Insurers insuring separately
(3) There is identity of:
a. Subject matter
b. Interest insured and
c. Risk or peril insured against is likewise the same.

OVER INSURANCE exists when the amount of the insurance is beyond the value of the insured’s insurable interest.

OVER INSURANCE DOUBLE INSURANCE

The amount of the insurance is beyond the value of the There may be no over-insurance as when the sum total
insured's insurable interest. of the amounts of the policies issued does not exceed
the insurable interest of the insured.
There may be only one insurer involved. There are always several insurers
If X's insurable interest in a house is P1,000,000.00 and If he insures the same house with Y company for
he insured it with Y company for P1,100,000.00, there is P600,000 and Z company for P400,000.00, there is
over-insurance but there is no double insurance. double insurance but there is no over-insurance.

NOTES:
• Double insurance is not prohibited by law. However, this can be contractually prohibited.
o A policy which contains no stipulation against additional insurance is NOT INVALIDATED by the
procuring of such insurance. Such provision is commonly known as the additional or "other
insurance" clause” → a clause in property insurance which provides that, the insured shall give
notice to the insurance company of any insurance/s already effected, or which may subsequently be
effected covering any of the property insured.
• When there is double insurance and over insurance results, the insured can claim in case of loss only up to
the agreed valuation or up to the full insurable value from any, some or all insurers, without prejudice to the
insurers ratably apportioning the payments.
• The insured can recover, before or after the loss, from the several insurers the excess premium he has paid.
• !!! The concept of over insurance is not applicable to life insurance.

PRINCIPLE OF CONTRIBUTION
Requires each insurer to contribute ratably to the loss or damage considering that the several insurances cover
the same subject matter and interest against the same peril. This applies only where there is over insurance by
double insurance.

SEC. 96. Where the insured is over-insured by double insurance:

(a) The insured, unless the policy otherwise provides, may claim payment, up to the amount for which the
insurers are severally liable under their respective contracts.

ILLUSTRATION:
A owns a house valued at P180,000 and he insures the same with 3 insurance companies as follows:
1. X Company P60,000
2. Y Company P180,000
3. Z Company P240,000
If the house is totally burned, A may claim payment from each of them in such order as he may select, up to the
amount for which each is liable under its contract.

A can claim P60,000 from X and the balance from the other insurance company.
A can also claim P180,000, the amount of insurable interest, from Y alone.

EXCEPTION to this rule is unless the policy otherwise provides –

CONTRIBUTION CLAUSE – which provides that the insurance company shall not be liable to pay or contribute
more than its ratable proportion of the loss or damage.

#GETTHATBAR2022
FLORES · TARADJI
 VALUED POLICY UNVALUED / OPEN POLICY
(b) The insured must give credit as against the (c) The insured must give credit, as against the
valuation for any sum received by him under full insurable value, for any sum received by
any other policy without regard to the actual him under any other policy
value of the subject matter insured

Assuming it was a valued policy (P180,000), in case A recovers P60,000 from X, he must give credit as against the
valuation for the sum received. Thus, A may recover only the difference of P120,000 from either Y or Z.

Assuming it was an open policy, the value of the loss must be ascertained. Assuming the actual loss is estimated
to be P150,000. If A recovers from X P30,000 and from Y P90,000, he must give credit as against the full insurable
value for the sums received. Thus, A may recover the difference of P30,000 from Z to make up the loss of P150,000.

(e) Each INSURER is bound, as between himself and the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract.

The formula may be stated as follows:

𝑨𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝑷𝒐𝒍𝒊𝒄𝒚
× 𝑳𝒐𝒔𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒆𝒓
𝑻𝒐𝒕𝒂𝒍 𝑰𝒏𝒔𝒖𝒓𝒂𝒏𝒄𝒆 𝑻𝒂𝒌𝒆𝒏

NOTE: This governs the liability of the insurers among themselves where the total insurance taken exceeds
the loss.

ILLUSTRATION:
A owns a house valued at P180,000 and he insures the same with 3 insurance companies as follows:
1. X Company P60,000
2. Y Company P180,000
3. Z Company P240,000

THUS, the pro rata contribution of each insurer is as follows:

60,000
𝑋 × 180,000 = 𝑃22,500
480,000

180,000
𝑌 × 180,000 = 𝑃67,500
480,000

240,000
𝑍 × 180,000 = 𝑃90,000
480.000

If A is able to receive the amount of P180,000 from Y company, X and Z are liable to reimburse Y for their respective
shares.

(However, if there is a pro-rata clause or contribution clause, A cannot recover the entire 180,000 from Y because
he may claim only such amount corresponding to his ratable proportion of the loss, i.e., P67,500.)

(d) 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.

Assuming A, after receiving P60,000 from X, succeeds in collecting the sum of P120,000 from Y and P144,000 from
Z.

A must hold the excess of P144,000 in trust for the insurers. He cannot recover more than the full indemnity. Thus,
the excess of P144,000 must be returned to the insurers based on their proportionate share.
60,000
𝑋 × 144,000 = 𝑃18,000
480,000

180,000
𝑌 × 144,000 = 𝑃54,000
480,000

240,000
𝑍 × 144,000 = 𝑃72,000
480.000
#GETTHATBAR2022
FLORES · TARADJI
 X
P60,000 Paid to A
(P18,000) Returned by A
P42,000
(P22,500) Should be share in the loss
P19,500 Amount over paid (to be reimbursed by Y and Z

Y
P120,000 Paid to A
(P54,000) Returned by A
P66,000
(P67,500) Should be share in the loss
P1,500 To be reimbursed to X

Z
P144,000 Paid to A
(P72,000) Returned by A
P72,000
(P90,000) Should be share in the loss
P18,000 To be reimbursed to X

Reinsurance
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.
• It has been referred to simply as "an insurance of an insurance.” Such contracts are sometimes referred to as
"TREATIES."
• RETROCESSION – the reinsurance of a reinsurance.

REINSURANCE DOUBLE INSURANCE

The insurer becomes the insured, insofar as the reinsurer The insurer remains as the insurer of the original
is concerned insured
Subject = Original Insurer's Risk Subject = Property
An insurance of a different interest An insurance of the same interest
The original insured has no interest in the contract of The insured is the party in interest in all the contracts
reinsurance which is independent of the original
contract of insurance
The consent of the original insured (who is hardly even The insured has to give his consent
aware of the reinsurance transaction) is not necessary

VALUE OF REINSURANCE
Every insurance company, in accordance with its financial strength, establishes a limit on the maximum claim it
wishes to pay out of its own resources. This limit is called a "RETENTION" (20%). When such applications are
for a sum over the company's retention, it handles the excess by means of reinsurance.

SEC. 98. Where an insurer obtains reinsurance, except under reinsurance treaties, he must communicate
• all the representations of the original insured, and
• all the knowledge and information he possesses, whether previously or subsequently acquired, which are
material to the risk.

DUTY OF REINSURED TO DISCLOSE ALL MATERIAL FACTS

A policy may be avoided where the reinsured conceals the fact that a loss has taken place or that the property is
over-insured where he has knowledge thereof.

SEC. 99. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage.
In reinsurance, it is not necessary that the insurer shall first have paid a loss accruing, as a condition precedent to
his demanding payment of the reinsurer.

SEC. 100.
The original insured has NO interest in a contract of reinsurance, and the reinsurer is not liable to the insured
either as surety or otherwise. There is no privity of contract between the original insured and the reinsurer.
EXCEPTION: Contract of reinsurance with stipulation in favor of original insured
The reinsurer who has promised to pay the losses accruing under the original policy will be liable to
a suit by the original insured under the contract of reinsurance. The original insurer, however, will be
released only when the insured agrees with the insurer and reinsurer to the novation.

#GETTHATBAR2022
FLORES · TARADJI
4. No Fault, Suicide and Incontestability Clauses
CMVLI – a protection coverage that will answer for legal liability for losses and damages for bodily injuries and/or
property damage that may be sustained by another arising from the use and operation of a motor vehicle by its
owner.

Motor Vehicle → any vehicle propelled by any power other than muscular power using the public highways (except
road rollers, bulldozers, etc.)

Rules on Comprehensive 3rd Party Liability Insurance

• Registration of any vehicle will not be made or renewed without complying with the requirements
• Protection may be complied with using an insurance policy, surety bond, or cash bond
• The purpose is 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.

NO FAULT INDEMNITY CLAUSE → Any claim for death or injury to any passenger or 3rd party pursuant to the CMVLI
shall be paid without the necessity of proving fault or negligence of any kind.

Requisites:
(1) Claim is for the death or injury to any passenger or 3rd party
(2) Total indemnity in respect of any one person shall be not less than P15,000
(3) Necessary proof of loss under oath to substantiate the claim must be submitted.
a. Police report of accident
1. !!! Traffic Accident Investigation Report can be used as an alternative. The
use of this report is only for purposes of insurance claims arising from motor
vehicle accidents. It shall not apply to any claim arising from fire, explosion,
self-ignition or lightning or burglary, housebreaking, theft, malicious act. In
those cases, a police report is necessary.
b. Death certificate
c. Medical report
(4) A claim may be made against 1 motor vehicle only.

From whom should the injured recover?

If the victim is an occupant of a vehicle If the victim is not an occupant
Claim shall lie against the insurer of the vehicle in Claim shall lie against the insurer of the directly
which the occupant is riding, mounting or offending vehicle.
dismounting from.

In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for
the accident shall be maintained.
NOTE: The claimant is not free to choose from which insurer he will claim the no fault indemnity, as the law
makes it mandatory that the claim be made against the insurer of the vehicle in which the occupant is riding,
mounting, or dismounting from..

NOTICE OF CLAIM
Any person having any claim upon the policy shall, without any unnecessary delay, present to the insurance
company concerned a written notice of claim. Notice of claim must be filed WITHIN 6 MONTHS from the date of
accident, otherwise, the claim shall be deemed waived.

COURT ACTION
Action or suit for recovery of damage must be brought with the Commissioner or the courts WITHIN 1 YEAR
from denial of the claim, otherwise, the claimant’s right of action shall prescribe.
NOTE: Prescription starts to run from the first denial of the claim, not from the denial of the request for
reconsideration.

Other Common Clauses in CMVLI

1. Authorized Driver Clause → This stipulation 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.
a. If the jeepney whose operator’s permit had already expired, the driver is considered unauthorized
driver thus the insurer is not liable.
b. If the driver is the owner himself, insurer is liable whether or not he has license.
c. The renewal of an expired license after the accident does not cure the defect.
2. Theft Clause → Where a car is unlawfully and wrongfully taken without the owner's consent or knowledge,
such taking constitutes theft for which the insurer will be liable.

#GETTHATBAR2022
FLORES · TARADJI
NO ACTION CLAUSES IN CASUALTY INSURANCE
Casualty Insurance → It is an insurance covering loss or liability arising from accident or mishap, excluding those
falling under those types of insurance such as fire, suretyship, life or marine.

Accident or Health Insurance → Insurance against specified perils which may affect the person and/or property of
the insured.

Third Party Liability Insurance → Insurance against specified perils which may give rise to liability on the part of
the insured for claims for injuries to or damage to property of others. (e.g., CMVLI)

Right of the injured person to sue insurer of the party at fault

Scenario Effect
Contract provides for indemnity against liability to 3rd persons to whom the insured is liable can sue
3rd persons the insurer
Contract is for indemnity against actual loss or 3rd persons cannot sure the insurer.
payment
NOTE: The injured person may sue the insurer and the person at fault, notwithstanding the stipulation
against suing the insurer in the policy (no action clause).

RULE AS TO DEATH OR INJURY RESULTING FROM "ACCIDENT" OR "ACCIDENTAL MEANS”.

GR: There is no accident when a deliberate act is performed
EXP: Some additional, unexpected, independent, and unforeseen happening occurs which produces or brings
about the result of injury or death.

EXAMPLE:
In a case where the participation of the insured in a boxing contest was voluntary, but the injury was
sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the
ropes of the ring and without this unfortunate incident, that is, the intentional slipping of the deceased,
perhaps he could not have died, the court held that his death may be regarded as accidental although boxing
is attended with some risk of external injuries.

EFFECT OF "NO ACTION" CLAUSE IN POLICY OF LIABILITY INSURANCE.

"No action" clause in the policy cannot prevail over the Rules of Court provisions aimed at avoiding multiplicity of
suits. The rules on "joinder of causes of action" and "permissive joinder of causes of parties" cannot be superseded,
at least with respect to third persons not a party to the contract by a "no action" clause on the contract of
insurance.

SUICIDE CLAUSE
The insurer in a life insurance contract shall be liable in case of suicide only when it is committed AFTER the policy
has been in force for a period of 2 years from the date of its issue or of its last reinstatement.
• Unless the policy provides a shorter (not longer) period. Any stipulation extending the 2-year period is void.
• Suicide committed in the state of insanity shall be compensable regardless of the date of commission.

Summary Rules in case of Suicide

Insurer is Liable Insurer is NOT Liable
1. Suicide was committed after the policy has 1. Suicide is not by reason of insanity, and it is
been in force for a period of 2 years from the committed within the 2-year period
date of its issue or its last reinstatement 2. Suicide is by reason of insanity but it is not
2. Suicide committed in a state of insanity among the risks assumed by the insurer
regardless of the date of the commission of the 3. Insurer can show that the policy was obtained
suicide with the intention to commit suicide even in the
3. If committed after the lapse of a shorter period absence of any suicide exclusion in the policy
in the policy

Burden of Proof
It is incumbent upon a party alleging suicide as a defense, especially in actions involving insurance policies to prove
it by clear and convincing proof.

Killing by the Beneficiary

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.
If no other beneficiaries, the proceeds shall be paid in accordance with the policy contract.
If policy contract is silent, the proceeds shall be paid to the estate of the insured.

#GETTHATBAR2022
FLORES · TARADJI
EXP:
(1) Accidental killing
(2) Self-defense
(3) Insanity of the beneficiary at the time he killed the insured

INCONTESTABILITY CLAUSE
An agreement by which the insurance company limits the period of time within which it will interpose objections to
the validity of the policy or set up any defense.
• After a 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 date of its issue or last reinstatement, the insurer
cannot prove that the policy is void ab initio or is rescindable by reason of fraudulent concealment
or misrepresentation of the insured or his agent.

NOTE: If the policy lapses, and it is subsequently reinstated, the 2-year period should start from the date of
last reinstatement because a reinstated policy should be viewed as a new contract.

Requisites:
(1) It must be a life insurance policy.
(2) It must be payable on the death of the insured.
(3) It must have been in force during the lifetime of the insured for a period of 2 years.
The 2-year period may be shortened but it cannot be extended by stipulation.

Effect:
When all the requisites are present, the insurer can no longer escape liability nor be allowed to prove that the
policy is void ab initio or rescindable. The insurer is precluded from contesting the policy on any ground.
(Whether or not death was caused by the risk insured against)

Period of Incontestability:
The insurer must rescind the life insurance contract on the ground of concealment or misrepresentation within
2 years from the time the policy was issued provided the insured is still alive at that time.

If the insured is already dead, the life insurance policy is already incontestable even if less than 2 years had
elapsed at that time.

Defenses NOT barred by Incontestability Clause

(1) Premiums were not paid
(2) Insured violated the condition in the policy relating to military or naval service in times of war
(3) Insured has no insurable interest in the subject matter of insurance
(4) Cause of death is excepted risk
(5) Fraud committed was of a particular vicious type such as:
a. Policy was taken in furtherance of a scheme to murder the insured
b. Insured substituted another person for the medical examination
c. Beneficiary feloniously killed the insured
(6) Necessary notice or proof of insured’s death was not given

NOTE:
• The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written
application does not give the insured absolute right to such reinstatement by the mere filing of an application.
The insurer has the right to deny the reinstatement if it is not satisfied as to the insurability of the insured
and if the latter does not pay all overdue premium and all other indebtedness to the insurer.

#GETTHATBAR2022
FLORES · TARADJI
B. PERFECTION OF THE INSURANCE CONTRACT
CONSENSUAL NATURE
• A contract of insurance must be assented to by both parties, either in person or thru their agents.
o 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.
• So long as an application for insurance has not been either accepted or rejected, it is merely a proposal or
an offer to make a contract.
o Submission of application, even with premium payment is a mere offer on the part of the applicant
o The contract is not perfected where the applicant dies before the approval of his application
o The contract is not perfected where the applicant dies and it does not appear that the acceptance of
the application ever came to the knowledge of the applicant
o An acceptance made by letter shall not bind the person making the offer except from the time it came
to his knowledge.
• Delivery of a policy is not a prerequisite to a valid contract of insurance. However, the policy may contain a
provision that states that the insurance is not effective until the delivery of the policy.
• Delivery is the best evidence that a contract has been entered into between the insurer and the insured.

NECESSARY FOR PERFECTION:

1. Acceptance of application
• If the insurance has not been accepted or rejected, there is no contract yet as it is merely an offer or
proposal.
• Reception and retention of the policy without objection beyond a reasonable time may be deemed
to be an acceptance especially where the insurer was guilty of negligent delay in acting on the
application.

2. Compliance with conditions precedent

• The parties may impose additional conditions precedent to the validity of the policy as a contract as
they see fit.
3. Cover Notes
• COVER NOTES (aka binder) are short-term insurance policies that may be issued to afford an
immediate provisional protection to the insured
1. until the insurer can inspect or evaluate the risk in question and issue the proper policy or
2. until the risk is declined and notice thereof given.

Rules on Cover Notes

• A cover note shall be deemed to be a contract of insurance
• A cover note shall be valid and binding for a period not exceeding 60 days from the date of
its issuance, whether or not the premium therefor has been paid, but such cover note may be
cancelled by either party upon at least seven (7) days notice to the other party.
• The non-payment of premium on the Cover Note is no cause for the petitioner to lose what is
due it as if there had been payment of premium..
• If a cover note is not so cancelled, a policy of insurance shall, within sixty (60) days after the
issuance of such cover note, be issued in lieu thereof.
• A cover note may be extended or renewed beyond the aforementioned period of sixty (60)
days with the written approval of the Insurance Commission
• Insurance companies may impose on cover notes a deposit premium equivalent to at least
25% of the estimated premium of the intended insurance coverage but in no case less than
P500.00.

WHEN IS THERE AN OFFER AND ACCEPTANCE

PROPERTY & LIABILITY INSURANCE LIFE & HEALTH INSURANCE
It is the insured who technically makes an offer to the Depends upon whether the insured pays the premium
insurer, who accepts the offer, rejects it, or makes a at the time he applies for insurance.
counter-offer.
DOES NOT PAY PREMIUM
The offer is usually accepted by an insurance agent on The application is considered an invitation to the
behalf of the insurer. insurer to make an offer.

PAYS PREMIUM
The application will be considered an offer.

#GETTHATBAR2022
FLORES · TARADJI
INSURANCE POLICY – the written instrument in which a contract of insurance is set forth. It is the written
document embodying the terms and stipulations of the contract of insurance between the insured and the insurer.

NOTE: The Policy is not necessary for the perfection of the contract. It is only the formal written instrument
evidencing the contract.

Formal Requirements of Policy

1. Printed form which may contain blank spaces
2. Any word, phrase, clause, mark, sign, symbol, signature, number or word necessary to complete the contract
of insurance shall be written in the blank spaces provided therein.

In case of conflict between the written and printed portions of a policy, the written portion prevails.

NOTE: Form is not required to perfect a contract of insurance.

Is a Marine Risk Note an Insurance Policy?

NO. A marine risk note is only an acknowledgment or declaration of the insurer confirming the specific shipment
covered by its marine open policy, the evaluation of the cargo and the chargeable premium. It is the marine open
policy which is the main insurance contract.

Signatures
The policy of insurance is signed only by the insurer or his duly authorized agent. It need not be signed by the
insured
EXCEPT where express warranties are contained in a separate instrument forming part of the policy.

CONTRACT OF ADHESION
Adhesion Contract – a contract in which one of the contracting parties imposes a ready-made form of contract which
the other party may accept or reject, but cannot modify.

KINDS OF POLICIES

OPEN POLICY One in which the value of the thing insured is not agreed upon and the
amount of insurance merely represents the insurer’s maximum
liability. The value of such thing insured shall be ascertained at the time of
the loss.

FMV > Maximum

Pay the maximum amount

FMV < Maximum

Pay the FMV

VALUED POLICY One which expresses on its face an agreement that the thing insured shall
be valued at a specified sum.
Life Insurance is a Valued Policy.

RUNNING POLICY 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.

REINSTATEMENT OF LAPSED POLICY

A provision that the policyholder shall be entitled to have the policy reinstated at any time within 3 years from the
date of default of premium payment, unless the cash surrender value has been duly paid or the extension period has
expired,
• upon production of evidence of insurability satisfactory to the company and
• upon payment of all overdue premiums and any indebtedness to the company upon said policy,
with interest

RULE ON EXCLUSIVITY OF INSURANCE PROCEEDS

The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose
benefit it is made unless otherwise specified in the policy.

#GETTHATBAR2022
FLORES · TARADJI
Any Rider, Clause, Warranty, or Endorsement purporting to be part of the contract of insurance and which is pasted
or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause,
warranty or endorsement is also mentioned and written on the blank spaces provided in the policy.
EXCEPT: When RCWE is requested by, or at the initiative of, the insured.

÷
RIDER – a small printed or typed stipulation contained on a slip of paper attached to the policy and forming an
integral part of the policy.

CLAUSE – an agreement between the insurer and the insured on certain matter relating to the liability of the insurer
in case of loss.
"Three-fourths Clause," the liability of the insurer shall not exceed 3/ 4 of the loss of or damage to the insured.

"Loss Payable Clause" states that the loss, if any, is payable to a named party or parties, as their interest may appear

"Change of Ownership Clause" providing that it will inure to the benefit of whomsoever, during the continuance of the
risk, may become the owner of the interest insured the insurer gives its written consent to the assignment of the thing
insured.

WARRANTY – are inserted or attached to a policy to eliminate specific potential increases of hazard during the policy
term owing to
1) actions of the insured or
2) condition of the property.
"Hazardous Trades Warranty" which stipulates that none of the enumerated trades considered as hazardous will be
carried on the building insured.

ENDORSEMENT – any provision added to an insurance contract altering its scope or application.
Those which may be in the nature of a Permit such as one authorizing the removal of the insured property and providing
for coverage in another location.

IN CASE OF CONLICT
In case of conflict between RCWE and the printed stipulations in the policy, the RCWE prevails, as being a more
deliberate expression of the agreement of the contracting parties.

REQUIREMENTS FOR RCWE TO BE BINDING

1. The descriptive title or name of the RCWE is also mentioned and written on the blank spaces provided in
the policy.
2. Unless applied for by the insured or owner, any RCWE issued after the original policy shall be countersigned
by the insured or owner, which countersignature shall be taken as his agreement to the contents of such
RCWE.
3. Approved by the Insurance Commissioner.

EFFECT OF LACK OF SIGNATURE

The fact that it is without the signature of the insurer or of the insured will not prevent its inclusion and
construction as a part of the insurance contract.

#GETTHATBAR2022
FLORES · TARADJI
C. RIGHTS AND OBLIGATIONS OF PARTIES
PARTIES TO THE CONTRACT
INSURER INSURED ASSURED
The party who assumes or accepts The owner of the property insured or The person for whose benefit
the risk of loss and undertakes for a the person whose life is the subject of the insurance is granted. Also
consideration to indemnify the the contract of insurance. used sometimes as a synonym
insured or to pay him a certain sum of “beneficiary.”
on the happening of a specified The insured must:
contingency or event. 1. Be competent to enter into a
contract
2. Possess an insurable interest in
the subject of the insurance
3. Not be a public enemy

Every Corporation, Partnership, or Anyone except a public enemy may be Note that the beneficiary is not
Association duly authorized to INSURED. a party to the contract of
transact insurance business may be insurance unless he is also the
an insurer. PUBLIC ENEMY – A public enemy insured.
designates a nation with whom the
NOTE: An individual is NO Philippines is at war, and it includes
longer allowed to be an every citizen or subject of such nation.
insurer. The term may be taken to mean "alien
enemy."
Mutual benefit associations are not
insurers. Can an HIV+ person be insured?
HMOs cannot decline an application by
an HIV+ on the sole basis of his/her
HIV status.

Pirates are considered public enemies

because they are hosti humani generis,
i.e., enemies of mankind.

HMO is not engaged in the business of

insurance.
!!! HOWEVER, as of November 12,
2015, HMO is now considered as
engaged in the insurance business.
Jurisdiction is transferred from DOH to
Insurance Commission. A health care
agreement is in the nature of a non-life
insurance which is primarily a contract
of indemnity.

An insurer has the right to receive The insured is obliged to make payment Beneficiary is entitled to the
premiums to be paid by the insured. of premium as soon as the thing insured proceeds of the policy on the
is exposed to the peril insured against. occurrence of the event
designated.

AGENT OR TRUSTEE PARTNER OR CO=OWNER ASSIGNEE

Insurance agents are the legal representatives A partner has an insurable interest An assignee merely
of the insurers, the principals. in the property of the partnership acquires the rights of the
which will support a separate insured.
Agreement between applicant and agent policy for his benefit.
In an agreement between the applicant and the Thus, if the insured
agent, there is no liability until the principal When a partner takes a policy on procured the policy by
approves the risk and receipt is given by the partnership property in his own fraud or
agent. The acceptance is conditional and is name, it includes his separate misrepresentation, then
subordinated to the act of the company interest alone, unless the terms of the assignee of the policy
approving or rejecting the application. the policy should be such as are cannot be entitled to the
applicable to the common interest. proceeds as well.
An agent must exercise the required degree of
diligence in performing his duties so as to avoid

#GETTHATBAR2022
FLORES · TARADJI
 committing an act of negligence. This entails the
timely collection of premiums.

Insurer is not liable for a loss caused by the

willful act or thru the connivance of the insured,
but he is not exonerated by the negligence of the
insured, or of the insurance agents or others.

NOTES:
• There can be no solidary liability between the insurer and the insured in relation to the liability of the latter
to 3rd person. The liability of the insurer is based on contract, whereas the liability of the insured is based on
torts.
• The license or authority issued by the Insurance Commission cannot be used to sell insurance products
beyond Philippine shores (overseas). It is limited to Philippine territory.

DUTY OF THE INSURED TO TIMELY & REGULARLY PAY PREMIUM

Premium → the consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.

NOTES:
• An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against.
• No policy or contract of insurance is valid and binding unless and until the premium thereof has been paid.
• Premium payment is paramount because the risk-distributing mechanism operates under a system where
by prompt payment of premiums, the insurer is able to meet its legal obligation to maintain a legal reserve
fund needed to meet its contingent obligations to the public.
• Payment by check → if the check bears a date prior to the loss, assuming an availability of funds thereof,
would be sufficient even if it remains uncashed at the time of the loss.
• War is not a valid reason not to pay premium.
• Government employees may pay the premiums by salary deduction.

Effect of Non-Payment of Premium

FIRST PREMIUM SUBSEQUENT PREMIUM
Nonpayment of the first premium unless waived, Nonpayment of subsequent premiums does not
prevents the contract from becoming binding affect the validity of the contracts unless, by
notwithstanding the acceptance of the application nor
←
express stipulation, it is provided that the policy
the issuance of the policy. shall in that event be suspended or shall lapse.

BUT, nonpayment of the balance of the premium due

does not produce the cancellation of the contract.

When the Policy Remains Valid and Binding Despite Non-Payment of Premium
(1) In the case of a life or an industrial policy, whenever the grace period provision applies

Individual Life or Endowment Insurance and Group Life Insurance → Grace period of 30 days or 1
month within which the payment of any premium after the first may be made.

Industrial Life Insurance → Grace period is 4 weeks and where premium is payable monthly, 30 days
or 1 month.

(2) When there is an acknowledgement in a policy or contract of insurance of receipt of premium

even if there is a stipulation therein that it shall not be binding until the premium is actually paid

(3) When there is agreement allowing the insured to pay the premium in installments and partial
payment has been made at the time of loss

NOTE: Where the policy provides for payment in full before the policy shall be deemed valid and
binding, the partial payment shall be treated as deposit and does not make the policy binding.

(4) Where a credit term was agreed upon (credit extensions)

(5) Where the parties are barred by estoppel.

#GETTHATBAR2022
FLORES · TARADJI
Acknowledgement of Receipt of Premium
It is conclusive evidence of its payment, in so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is actually paid. The conclusive presumption extends only to
the question of the binding effect of the policy. As far as the payment of premium itself is concerned, the
acknowledgment is only a prima facie evidence of the fact of such payment.

Authority of Agent to Receive Premium

Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have
authorized said agent to receive the premium in its behalf. The insurer is also bound by its agent’s acknowledgement
of receipt of payment of premium.

RIGHT TO RETURN OF PREMIUMS PAID

1. WHOLE/FULL PREMIUM FRIED
a. If the contract is annulled due to Fraud or misrepresentation of the insurer (not insured) or his
agents
b. When Rescission is granted due to the insurer’s breach of contract
c. If no part of the Interest of the thing insured is exposed to any of the perils insured against
d. If contract is voidable on account of facts or the Existence of which, the insured was ignorant without
his fault
e. When by any Default of the insured other than actual fraud, the insurer never incurred liability.

2. PRO RATA DO
a. When the insurance is for a Definite period and the insured surrenders his policy before the
termination thereof.
EXCEPT: Surrender of life insurance policy before loss of life insured because life insurance is not a
divisible contract. HOWEVER, he is entitled to receive the cash surrender value of his policy after 3
full annual premiums shall have been paid.
b. When there is Over insurance by several insurers.

DUTY OF INSURED IN MARINE INSURANCE

To maintain the implied warranty of seaworthiness.

Generally, a ship to be seaworthy, must be:

1. Adequately equipped for the voyage and
2. Adequately manned with a sufficient number of competent officers and crew.

GENERAL RULE: The warranty of seaworthiness is complied with if the ship be seaworthy at the time of the
commencement of the risk..

EXCEPTIONS:
1. In case of time policy, the ship must be seaworthy at the commencement of every voyage she may
undertake.
2. In case of cargo policy, each vessel upon which the cargo is shipped or transshipped, must be seaworthy
at the commencement of each particular voyage.
In case of voyage policy contemplating a voyage in different stages, the ship must be seaworthy at the
commencement of each portion.

What does the warranty of seaworthiness cover?

Seaworthiness requires that the vessel must have:
1. equipment and appliances appropriate to the voyage in which it is engaged and the cargo it carries
2. sufficient fuel, stores and provisions to last for the entire voyage
3. sufficient number of competent officers and men, and
4. if the insurance is on cargo, the same must be properly loaded, stowed, dunnaged, and secured so as not to
imperil the navigation of the vessel or to cause injury to the vessel or cargo.

In marine cases, the risk insured against are perils of the sea.
PERILS OF THE SEA PERILS OF THE SHIP
Include only such losses as are of extraordinary nature A loss which, in the ordinary course of events, results
or arise from some overwhelming power which cannot (a) from the natural and inevitable action of the
be guarded against by the ordinary exertion of human sea,
skill or prudence (b) from the ordinary wear and tear of the ship, or
(c) from the negligent failure of the ship's owner
NOTE: The rusting of steel pipes can be covered by a to provide the vessel with proper equipment to
marine insurance because it is a peril of the sea in view convey the cargo under ordinary conditions
of the toll on the cargo of wind, water and salt
conditions.

#GETTHATBAR2022
FLORES · TARADJI
BARRATRY → any willful misconduct on the part of master or crew in pursuance of some unlawful or fraudulent
purpose without the consent of the owners, and to the prejudice of the owner’s interest. It necessarily requires a
willful and intentional act in its commission. This is not insurable.

Unreasonable Delay in Repair → when the ship 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.

DEVIATION is a departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage
or the commencement of an entirely different voyage.

INSTANCES OF DEVIATION
1. Deviation from the agreed voyage
2. Departure of the vessel from the course of sailing fixed by mercantile usage
3. Departure of the vessel from the most natural, direct and advantageous route is not fixed by
mercantile usage
4. Unreasonable delay in pursuing voyage
5. Commencement of an entirely different voyage

EFFECT OF PROPER DEVIATION: The insurer is not exonerated from liability for loss happening after
proper deviation.

EFFECT OF IMPROPER DEVIATION

An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation.

Is the presentation of the marine insurance policy essential before an insurance company, in the exercise
of its subrogatory right, can go after the vessel owner who was adjudicated as liable for the loss off the
cargo shipped with it?
NO. The presentation of the marine insurance policy is not indispensable before the insurer may recover from the
common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The right of subrogation
accrues simply upon payment by the insurance company of the insurance claim.

NOTE: The 1-year prescriptive period in COGSA applies to the insurer of the goods (by reason of subrogation).

KINDS OF AVERAGE
GROSS / GENERAL AVERAGES SIMPLE / PARTICULAR AVERAGES
Include damages and expenses which are deliberately Include all damages and expenses caused to the vessel
caused by the master of the vessel or upon his or to her cargo which have not inured to the common
authority, in order to save the vessel, her cargo, or both benefit and profit of all the persons interested in the
at the same time from a real and known risk. vessel and her cargo.

Loss must be borne equally by all of the interests Loss is suffered by and borne alone by the owner of the
concerned in the venture. cargo or of the vessel, as the case may be.

#GETTHATBAR2022
FLORES · TARADJI
D. RESCISSION OF INSURANCE CONTRACTS
Primary Concerns of the Insurer
1. Correct estimation of risk which enables insurer to determine if he will approve the policy application and if
so, at what premium rate
2. Delimitation of the risk
3. Control of risk to guard against increase in risk
4. Determine if loss occurs and if so, the amount thereof

DEVICES FOR ASCERTAINING AND CONTROLLING RISK AND LOSS

1. Concealment
2. Representations
3. Warranties
Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference,
the untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in
fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer.
4. Conditions
5. Exceptions
Stipulations excluding certain specified risks that otherwise would be included under the general language
describing the risks assumed.

If the proposed insured merely signed the application form for life insurance coverage and allowed his agent
to fill up the form on his behalf, will the false answers of the agent be reflected as concealment on the part of
the proposed insured?
YES. By doing so, the insured made the agent of the insurer his own agent and he was responsible for his acts for
that purpose. If he delegated to the agent the filling up of the application, then the agent acted on the insured’s
instruction, not on the insurer’s instruction.

#GETTHATBAR2022
FLORES · TARADJI
 TITLE 4 TITLE 5 TITLE 7
CONCEALMENT (MIS)REPRESENTATION WARRANTIES
A neglect to communicate that which a party knows and A statement made by the insured at the time of, or prior to, A statement or promise by the insured contained
ought to communicate. the issuance of the policy to give information to the insurer in the policy or by reference incorporated therein, , the
and otherwise induce him to enter into the insurance falsity or non-fulfillment of which and regardless
MATTERS THAT MUST BE COMMUNICATED contract. of whether or not the insurer was in fact prejudiced by such
All facts within his knowledge only when: falsity or non-fulfillment, renders the policy VOIDABLE
(a) they are material to the contract A representation may be oral or written, made at the time at the election of the insurer.
of, or before, issuance of the policy.
Test of Materiality WARRANTIES REPRESENTATIONS
Was the insurer misled or deceived into entering a CONCEALMENT MISREPRESENTATION Part of the contract Collateral inducement.
contract obligation or in fixing the premium The insured withholds The insured makes Always written on the Need not be written.
insurance by withholding of material information? information of material erroneous statements of face of the policy
facts from the insurer facts with the intent of must be strictly complied substantial truth only is
(b) the other has not the means of ascertaining the said inducing the insurer to enter with required
facts and into the insurance contract. The falsity or The falsity of a
(c) as to which the party with the duty to communicate nonfulfillment of a representation renders the
makes no warranty. When the insured makes a representation, it is incumbent warranty operates as a policy voidable on the
on them to assure themselves that a representation on a breach of contract ground of fraud
material fact is not false, and if it is false, that it is not a
fraudulent misrepresentation of a material fact.

REQUISITES: REQUISITES FOR (MIS)REPRESENTATION: KINDS OF WARRANTY:

1. A party knows the fact which he neglects to 1. Insured stated a fact which is untrue 1. Express Warranty
communicate or disclose to the other 2. Such fact was stated with knowledge that it is An agreement contained in the policy or clearly
2. Such party concealing is duty bound to disclose untrue and with intent to deceive or which he states incorporated therein where the insured stipulates
such fact to the other positively as true without knowing it to be true and certain facts relating to the risk are true or certain
3. Such party concealing makes no warranty of the which has a tendency to mislead acts have been done.
fact concealed 3. Such fact in either case is material to the risk 2. Implied Warranty
4. The other party has not the means of Warranties that are deemed included in the
ascertaining the fact concealed. KINDS OF REPRESENTATION: contract. (e.g. warranty of seaworthiness)
1. Affirmative Representation 3. Affirmative Warranty
Any allegation as to the existence or non-existence One which asserts the existence of a fact or
of a fact when the contract begins. condition at the time it is made.
4. Promissory Warranty
2. Promissory Representation One where the insured stipulates that certain facts
Any statement concerning what is to happen during or conditions shall exist or that certain things shall
the existence of the insurance. be done or omitted.

#GETTHATBAR2022
FLORES · TARADJI
 TITLE 4 TITLE 5 TITLE 7
CONCEALMENT (MIS)REPRESENTATION WARRANTIES
EFFECT: EFFECT: EFFECT:
The contract may be RESCINDED at the insurer’s option If a representation is false in a material point, whether GR: A violation of a material warranty gives the insurer
because contracts of insurance are contracts uberrimae affirmative or promissory, the injured party is entitled to the right to RESCIND the insurance policy.
fidae. [contract of utmost good faith] RESCIND the contract from the time when the
representation becomes false. EXP:
GR: A concealment whether intentional or unintentional 1. When loss occurs before time for performance
entitles the injured party to RESCIND a contract of Test of Materiality 2. When performance becomes unlawful
insurance without need to prove fraud. The same with concealment. 3. When performance becomes impossible

EXP: Consciousness in defraudation is imperative and it is for the With respect to immaterial provisions
1. Incontestability Clause insurer to show this. GR: It does not avoid the policy.
2. Concealment made after the contract has become EXP: When the parties expressly stipulate that violation
effective Representation of the expectation, intention, belief, opinion of a particular provision, though immaterial, in the
3. Waiver or estoppel or judgment of the insured: policy shall avoid it.
4. In marine insurance, in situations where 1. NOT AVOID – if in good faith
concealment does not vitiate the entire contract, but 2. AVOID – if in bad faith There is NO need that there is causal connection between the
merely exonerates the insurer from a loss resulting violation of the warranty or facts concealed, and the cause of
from the risk concealed. the loss.
NOTE: In marine insurance, information of the belief or
Fraud is NOT essential in order that the insured may expectation of a 3rd person, in reference to a material fact, is Fraud is not essential to entitle the insurer to rescind.
be guilty of concealment. The presence or absence of material.
an intent to deceive is immaterial. Without Fraud - the policy is avoided only from the time of
EFFECT OF REPRESENTATION ON EXPRESS breach and the insured is entitled
PROVISIONS OF POLICY (1) to the return of premium paid at a pro rata rate from
A representation cannot qualify an express provision or an the time of breach if it occurs after the inception of
express warranty in a contract of insurance. This is so the contract or
because a representation is not a part of the contract but (2) to all the premiums if it is broken during the
only a collateral inducement to it. A representation, inception of the contract
however, may qualify an implied warranty.
With Fraud - the policy is avoided ab initio, and the insured
is not entitled to the return of the premium paid.

Other Insurance Clause

This is 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.

#GETTHATBAR2022
FLORES · TARADJI
 TITLE 4 TITLE 5 TITLE 7
CONCEALMENT (MIS)REPRESENTATION WARRANTIES
NEED NOT BE COMMUNICATED WAIVER.
1. Those which the other knows The right to material information can be waived either:
2. Those which the other ought to know in the exercise 1. By the terms of insurance or
of ordinary care 2. By neglect to make inquiry as to such facts
3. Those of which the other waives communication
4. Those which prove or tend to prove the existence of
a risk excluded by a warranty and which are not
otherwise material
5. Those which relate to a risk excepted from the
policy and which are not otherwise material
6. Information of the nature or amount of the interest
of one insured
EXCEPT: The interest of the insured in the property
insured must be disclosed if he is not the absolute
owner thereof.
7. Mere opinion, speculation, intention or expectation

Materiality in Medical Examinations

GR: Non-disclosure is concealment.
Where the applicant concealed the fact that he had
pneumonia, diabetes or syphilis, the policy is
avoided although the cause of the death be totally
unconnected with the material fact concealed or
misrepresented (e.g., plane crash).

EXP: Imprecise description of information is not

concealment.
Where the insured lacked sufficient medical
knowledge as to enable him to distinguish between
peptic ulcer and tumor, the insure cannot claim
that he was deceived into entering into the contract.

#GETTHATBAR2022
FLORES · TARADJI
EXERCISE OF THE RIGHT TO RESCIND
Non-Life Policy Life Policy
The right to rescind must be exercised prior to the The right to rescind must be exercised before the
commencement of an action on the contract. incontestability clause sets in.

LOSS IDL
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.

EXTENT OF LOSS
1. TOTAL
a. Actual
b. Constructive (Technical)
2. PARTIAL

An agreement not to transfer the claim of the insured against the insurer AFTER the loss has happened, is VOID
if made BEFORE the loss except as otherwise provided in the case of life insurance.

CLAIM
A demand for the satisfaction of a loss suffered within the purview of an insured's policy.

BEFORE LOSS AFTER LOSS

An insurance policy, except life insurance, is not The insured has an absolute right to transfer or assign
assignable without the consent of the insurer on the his claim against the insurer. A stipulation which
theory that the policy is a personal contract between attempts to prohibit such transfer is void.
the insured and insurer.
It is not the personal contract which is being assigned,
but a money claim under or a right of action on the
policy.

EXCEPTION TO THE RULE:

FIRE INSURANCE – Section 175 prohibits the transfer of policy of fire insurance to any person or company. Such
transfer is void insofar as it may affect other creditors of the insured.

SEC. 86. Unless otherwise provided by the policy, an INSURER is liable for a loss of which a peril insured against
was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the
loss; but he is not liable for a loss of which the peril insured against was only a remote cause.

LIABLE NOT LIABLE

Proximate Cause Proximate Cause
Peril insured Peril not insured

Remote Cause Remote Cause

Peril not insured Peril insured

Proximate Cause Proximate Cause

Peril not insured Peril Excepted

Immediate Cause Immediate Cause

Peril insured Peril insured

Examples:
1. Fire causes an explosion which results in a loss
a. Fire is the proximate cause
b. Explosion is the immediate cause
c. Insurer is liable
2. House is insured against fire and it is damaged by the falling of a wall of a neighboring building which is on
fire
a. Fire is the proximate cause, although no part of the insured house is actually on fire
3. Even if the fire results only after the fall of the building and as a consequence of such, nevertheless, the
damage, so far as it is attributable to the fire and not merely to the falling of the building is a loss by fire.
a. Fire is the immediate cause of the loss.
4. If, however, the fall of the building, although it occurs after a fire, is not the result of the fire, the loss is not
covered by the policy.
a. Fire is just the remote cause of the loss for which an insurer is not liable.
#GETTHATBAR2022
FLORES · TARADJI
 5. An accidental injury resulting in hernia which forced the insured, as a last resort, to submit to a surgical
operation which turns out to be unsuccessful, is the proximate cause of the death and not the surgical
operation.

SUMMARY OF RULES WHEN AN INSURER LIABLE

LIABLE NOT LIABLE
1. Loss the proximate cause of which is the peril 1. Loss by the insured’s willful act or gross
insured against negligence
2. Loss due to a peril not insured against where the 2. Loss due to the connivance of the insured
thing insured is rescued from a peril insured 3. Loss where the excepted peril is the proximate
against cause, although the immediate cause of the loss
3. Loss caused by efforts to rescue the thing from was a peril which was not excepted
a peril insured against 4. Loss where the peril insured against was only a
4. Loss, the immediate cause of which, is the peril remote cause
insured against
EXCEPT: Where the proximate cause is
an excepted peril.
5. Loss through the negligence of the insured, or of
the insurance agents or others

DUTY TO GIVE NOTICE OF LOSS

What kind of preliminary proof of loss is acceptable?
The insured is not bound to give such proof as would be necessary in a court of justice, but it is sufficient for him to
give the best evidence which he has in his power at the time.

All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer
omits to specify to him, without unnecessary delay, as grounds of objection, are waived.

CANCELLATION OF NON-LIFE INSURANCE

Grounds for Cancellation Non-Life Policy
1. Non-payment of premium
2. Conviction of a crime out of acts increasing the hazard insured against
3. Fraud or material misrepresentation
4. Willful or reckless acts or omissions increasing the risk insured against
5. Physical changes in the property insured making it uninsurable
6. Determination by the Insurance Commissioner that the policy would violate the Insurance Code.

Requisites for Cancellation of Non-Life Insurance Contracts

1. Prior notice of cancellation to insured
2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds
mentioned
3. Notice must be in writing, mailed, or delivered to the insured at the address shown in the policy
4. Notice must state the grounds relied upon and upon request of insured, to furnish facts on which
cancellation is based. (So, if humingi pa ng explanation si insured, the insurance is not yet cancelled. The
insurer must respond first to the request for explanation)

RENEWAL OF CONTRACT
GENERAL RULE: A renewal of insurance by the payment of a new premium and the issuance of a receipt therefor
is a new contract.

EXCEPTION: Where the renewal is in pursuance of a provision to that effect, it is not a new contract but an
extension of the old one.

At least 45 days before expiration, notice of its intention not to renew the policy must be given.

Mandatory Requirements for Insurer to be Liable

1. Notice of loss
2. Proof of loss
NOTE: In case of fire insurance, the law requires written notice. For other kinds of insurance, notice or proof may
be given orally or in writing.

#GETTHATBAR2022
FLORES · TARADJI
PERIODS FOR FILING OF ACTIONS
GR: A clause in an insurance policy to the effect that an action upon the policy by the insured must be brought
within a certain period is VALID.

EXP: If the period fixed for commencing action in a policy of insurance is fixed to a period of less than 1 year
from the time the cause of action accrues, such condition, stipulation or agreement would be void.

In the case, however, of a policy of industrial life insurance, the period cannot be less than six (6) years
after the cause of action accrues.

NOTES:
• Not from the time when the loss actually occurs but from the time of the denial of claim.
• Prescription starts to run from the first denial of the claim, not from the denial of the request for
reconsideration.
• Can the parties stipulate that the time for commencing an action be less than 1 year from the
accrual of the action? NO. A condition, stipulation or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a period less than 1 year from the time
the cause of action accrues, is VOID.

PAYMENT OF PROCEEDS
Life Insurance Property Insurance
Immediately upon maturity of policy (survival Within 30 days after proof of loss is received by the
benefits). insurer and ascertainment of the loss or damage is
made either by agreement or by arbitration.
Within 60 days after presentation of claim and filing of If no ascertainment is made within 60 days after
the proof of death of the insured. receipt of proof of loss, the loss shall be paid within 90
days.

#GETTHATBAR2022
FLORES · TARADJI
 II. TRANSPORTATION LAW
A. COMMON CARRIERS
1. Concept
Contract of Carriage – one whereby a certain person or association of persons obligate themselves to transport
persons, things, or goods from 1 place to another for a fixed price.

Common Carrier – 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.

NOTES:
• It can be the PRINCIPAL BUSINESS, or ANCILLIARY ACTIVITY.
• It can be offering SERVICES ON REGULAR/SCHEDULED BASIS or OCCASIONAL/UNSCHEDULED BASIS.
• It can be offering to the GENERAL PUBLIC or to NARROW SEGMENT OF THE GENERAL POPULATION.
• Certificate of Public Convenience is NOT a requisite for the incurring of liability under the Civil Code.

ELEMENTS:
1. Any Person, corporation, firm or association
2. Such PCFA must be Engaged in the business of carrying or transporting passengers or goods or both
3. The Means of carriage or transporting passengers, goods or both is by land, water or air
4. The carrying or transporting of passengers, or goods or both is for a fee or Compensation
5. The services are offered to the Public without distinction

TEST OF COMMON CARRIER

c

The test to determine whether a party is a common carrier of goods – whether the person or entity, for some business
purpose and with general or limited clientele, offers the service of carrying, transporting passengers or goods or both
for compensation.

SAMPLE COMMON CARRIERS

1. PIPELINE OPERATORS (The law does not distinguish as to the means of transportation, as long as it is by land,
air or water.)
2. ELECTRICITY DISTRIBUTORS PRIVATE
3. BAREBOAT OR DEMISE CHARTER where the charterer mans the vessel with his own people and become,
in effect, the owner 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.

CHARTER PARTY – a maritime contract by which the charterer, a party other than the shipowner, obtains
the use and service of all or some part of a ship for a period of time or a voyage(s).

4. CUSTOMS BROKER AND WAREHOUSEMAN – the transportation of goods being an integral part of its
business. While the principal business is the preparation of correct customs declaration and proper shipping
documents, it also undertakes to deliver the good for its customers.
5. Even with LIMITED CLIENTELE.
6. Even when the carrying of goods are done on an IRREGULAR BASIS RATHER THAN SCHEDULED manner
7. FERRY SERVICES ARE SO INTERTWINED WITH ITS MAIN BUSINESS. (The tour packages including the
ferry services may be availed of by anyone, thus available to the public.)

NOT COMMON CARRIERS (ordinary diligence only)

1. TRAVEL AGENCY
This a mere contract of service because the contractual relation of a person who purchases a ticket is only
the agency’s service of arranging and facilitating the booking.
2. TOWAGE OPERATORS
Services rendered to a vessel by towing for the mere purpose of expediting her voyage without reference to
any circumstances of danger.
3. STEVEDORING SERVICES
This is a contract for the unloading of goods from a vessel.
4. FREIGHT FORWARDER
It merely chooses or selects the common carrier
5. ARRATRE OPERATOR
The function involves the handling of cargo deposited on the wharf or between the establishment of the
consignee and the ship’s tackle. The obligation is akin to a warehouseman.

#GETTHATBAR2022
FLORES · TARADJI
JREGISTERED OWNER RULE
The person who is the registered owner of the vehicle is liable for any damage 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.
(this does not apply when vehicle is stolen)

KABIT SYSTEM
An arrangement whereby a person who has been granted a certificate of convenience allows another person who
owns motor vehicles to operate under such franchise for a fee.

Although not outrightly penalized as a criminal offense, the “kabit system” is invariably recognized as being contrary
to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code.

The registered owner or operator of record is the one liable for damages caused by a vehicle regardless of any
alleged sale or lease made thereon. The public has the right to assume or presume that the registered owner is the
actual owner thereof. The registered owner can recover reimbursement from the actual and present owner by way
of its cross-claim.

BOUNDARY SYSTEM
The boundary system is a scheme by an owner/operator engaged in transporting passengers as a common carrier
to primarily govern the compensation of the driver, that is, the latter’s daily earnings are remitted to the
owner/operator less the excess of the boundary which represents the driver’s compensation.

EMPLOYER-EMPLOYEE RELATIONSHIP
The jeepney owner/operator-driver relationship under the boundary system is that of employer-employee and
not lessor-lessee.

GOVERNING LAWS
Common carriers shall be governed by the following:
1. Coastwise Shipping
a. NCC – P
b. Code of Commerce – S

2. Carriage from Foreign Ports to Philippine Ports

a. NCC – P
b. Code of Commerce – S
c. Carriage of Goods by Sea Act – S

3. Carriage from Philippine Ports to Foreign Ports

a. The laws of the country to which the goods are to be transported (Art. 1753)

4. Overland Transportation
a. NCC – P
b. Code of Commerce – S

5. Air Transportation
a. NCC – P
b. Code of Commerce – S
c. For international carriage –
Convention for the Unification of Certain Rules Relating to the International Carriage by Air or
Warsaw Convention

Classification of Transportation Network Companies (TNCs)

TNCs are companies which use online-enabled platforms to connect passengers with drivers using their personal
and non-commercial vehicles.

TNCs, like Grab and Uber, are not common carriers because TNCs are technology companies that do not provide
transportation services, and they are not transportation providers. They merely link customers with 3rd party drivers
and are not parties to the transportation contract. [Divina’s View] [Aquino’s View is that TNC is a common carrier by
implication]

Classification of Transportation Network Vehicle Service (TNVS)

A TNC-accredited private vehicle owner, which is a common carrier, using the internet-based technology application
or digital platform technology transporting passengers from one point to another, for compensation. The fact that
the drivers are not physically hailed on the street does not automatically render them private carriers. When the
drivers go online, they indiscriminately offer their services to the public.

#GETTHATBAR2022
FLORES · TARADJI
2. Common Carrier vs. Private Carrier
The distinction lies in the character of the business, such that if the undertaking is a single transaction, not a part
of a general business or occupation, although involving the carriage of goods for a fee, the person or corporation
offering such service is a private carrier.

COMMON PRIVATE
DILIGENCE REQUIRED
EXTRAORDINARY DILIGENCE DILIGENE OF A GOOD FATHER OF A FAMILY (ART.
Bound by law to carry passengers as far as human care 1173 NCC)
and foresight can provide using the utmost diligence of Reasonable care consistent with that which an
very cautious persons and with due regard for all the ordinarily prudent person would have observed when
circumstances. confronted with a similar situation.

NATURE
Holds himself out in common, i.e., to all persons who Agrees in some special case with some private
choose to employ him, ready to carry for hire individual to carry for hire.

OBLIGATION
Bound to carry for all who offer such goods as it is Not bound to carry for any reason, unless it enters a
accustomed to carry and tender reasonable special agreement to do so.
compensation for carrying them.

REGULATION
Subject to regulation as it is a public service. Not.

STIPULATION TO LIMIT LIABILITY

Cannot stipulate that it is exempt from liability for the Parties may freely stipulate their duties and obligations.
negligence of its agents or employees because it is (Rights may be waived except when it is contrary to
void as it is against public policy. LaMoCPuP)

BUT, stipulation is valid if:

1. If for the loss, destruction or deterioration of
goods (Art. 1744)
2. If for the delay due to strikes or riot (Art. 1748)

PRESUMPTION OF NEGLIGENCE
Prima facie presumption of negligence is on the Burden of proof is on the plaintiff to prove that the
common carrier. carrier was negligent or unseaworthy.

PUBLIC POLICY CONSIDERATION

Imbued with public policy considerations. Not imbued with public policy considerations for the
general public or 3rd persons are not affected thereby.

3. Diligence Required
Common carriers,
1. from the nature of their business and
2. for reasons of public policy,
are bound to observe EXTRAORDINARY DILIGENCE
1. in the vigilance over the goods and
2. for the safety of the passengers transported by them, according to all the circumstances of each case.

NOTES:
• Failure to observe this high degree of care and extraordinary diligence renders it liable for any damage that
may be sustained by its passengers.
• NON-OWNERSHIP of the vessel or vehicle use by the carrier does not render ineffective observance of
extraordinary diligence.
• The extraordinary diligence must be observed not only in the transportation of goods and services, but also
in the issuance of the contract of carriage, including its ticketing operations. The obligation of the airline
commences upon the issuance of the contract of carriage. Ticketing, as the act of issuing the contract of
carriage, is necessarily included in the exercise of extraordinary diligence.
• When a common carrier becomes a private carrier (such as when a bus is chartered by a company for its
exclusive use, and the driver will be under its control, and will bear all the gasoline consumed), the diligence
required becomes ordinary diligence. Thus, a stipulation exempting owner from liability for acts of its
employees is valid and not against public policy.

#GETTHATBAR2022
FLORES · TARADJI
B. OBLIGATIONS AND LIABILITIES
1. Vigilance over Goods
GENERAL RULE: Extraordinary diligence
EXCEPTIONS: When the loss, destruction or deterioration is due to: FWOCO
1. Natural disaster or calamity (Force majeure)
2. Act of public enemy in War
3. Act or Omission of the shipper or owner of the goods
4. The Character of the goods or defects in the packing or in the containers

ART. 1742. Even if the loss, destruction, or deterioration of the goods should be caused by the character of
the goods, or the faulty nature of the packing or of the containers, the common carrier must exercise due
diligence to forestall or lessen the loss.

NOTE: If the improper packing or defects in the container are known to the carrier or his employees or
apparent upon ordinary observation, but he nevertheless accepts the same without protest or exception
notwithstanding such condition, he is not relieved of liability for damage resulting therefrom.

5. Order or act of competent public authority

ART. 1743.
If through the order of public authority, the goods are seized or destroyed, the common carrier is not
responsible, provided said public authority had power to issue the order.

Common carrier is not bound to obey illegal order.

NOTE: The exceptions are exclusive. Even if it appears to constitute a force majeure, but not within the list, then it is
not exempted.

ART. 1735.
GENERAL RULE: In all cases other than the exceptions above, if the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted negligently

EXCEPTION: When they prove that they observed extraordinary diligence as required in Article 1733.

BURDEN OF PROOF: Common Carrier

NOTE: Although a Charter Party may transform a common carrier into a private one, the same however is not true
in a Contract of Affreightment (it is when the possession, command and navigation of the vessel still remains with the
shipowner).

ART. 1736.
The extraordinary responsibility of the common carrier lasts
• FROM the time the goods are
o unconditionally placed in the possession of, and
o received (either actual or constructive) by the carrier for transportation
• UNTIL the same are delivered, actually or constructively, by the carrier
o to the consignee, or
o to the person who has a right to receive them, without prejudice to the provisions of Article 1738.

NOTES:
• There is no obligation on the part of the common carrier to accept the cargo. The required diligence only
starts upon acceptance.
• The stipulation in the bill of lading exempting the carrier from liability for loss of goods not in its actual
custody, i.e., after their discharge from the ship is a VALID stipulation.
• The contract of carriage remains in full force and effect even after the delivery of the goods to the port
authorities, the only delivery that releases it from their obligation to observe extraordinary care is the
delivery to the consignee or his agents.
• The relationship ends when the passenger, after reaching his destination, safely alighted and had the
reasonable opportunity to leave the common carrier’s premises, which includes the time to look for his
baggage and claim them.

#GETTHATBAR2022
FLORES · TARADJI
ART. 1737.
GENERAL RULE: The common carrier's duty to observe extraordinary diligence over the goods remains in full
force and effect even when they are temporarily unloaded or stored in transit.

EXCEPTION: The shipper or owner has made use of the right of stoppage in transitu.

RIGHT OF STOPPAGE IN TRANSITU –

This is one of the rights of the unpaid seller when he has part with the goods and the buyer is or becomes insolvent.
The effect is that the unpaid seller is entitled to the possession of the goods as if he had never parted with it.
Hence, the obligation of the carrier is reduced to ordinary diligence

ART. 1738.
The extraordinary liability of the common carrier continues to be operative even during the time the goods are
stored in a warehouse of the carrier at the place of destination, until the consignee AR
• has been Advised of the arrival of the goods and
• has had Reasonable opportunity thereafter to remove them or otherwise dispose of them.

BILL OF LADING
A BILL OF LADING is a written acknowledgement of the receipt of goods and an agreement to transport and to
deliver them at a specified place to a person named or on his or her order.

3-FOLD FUNCTION
1. Receipt for the goods shipped
2. Contract by which 3 parties (shipper, carrier, and consignee) undertake specific responsibilities and assume
stipulated obligations
3. Document of Title

KINDS OF BILL OF LADING

ON-BOARD BILL OF LADING RECEIVED FOR SHIPMENT BILL OF LADING
Issued when the goods have been actually placed aboard the ship One in which it is stated that the goods have been received
with every reasonable expectation that the shipment is as good for shipment with or without specifying the vessel by
as on its way. which the goods are to be shipped.

CARRIAGE OF GOODS BY SEA

COGSA applies if the transportation is:
1. For carriage of goods
2. By sea, and
3. To and from Philippine ports in foreign trade.

Amount of Carrier’s Liability

Neither the carrier nor the shipowner shall in any event be or become liable for any loss or damage to or in
connection with transportation of goods in an amount exceeding $500 per package, or in case of goods not shipped
in package, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value
of such goods have been declared by the shipper before shipment and inserted in the bill of lading.

Notice of Damage
1. In case of patent damage → shipper should file a claim with the carrier immediately upon delivery
2. In case of latent damage → shipper should file a claim with the carrier within 3 days from delivery

Prescriptive Period
Action for loss or damage to the cargo should be brought within 1 year after:
1. Delivery of the goods (delivered but damaged) or
2. The date when the goods should have been delivered (non-delivery)

NOTE: If a notice of loss or damage is not given, that fact shall not affect or prejudice the right of the shipper to bring
suit within 1 year after the delivery of the goods or the date when the goods should have been delivered.

“Loss” as applied to COGSA contemplates a situation where no delivery at all was made by the shipper of the goods
because the same had perished, gone out of commerce, or disappeared in such a way that their existence is unknown.
It does not include a situation:
1. Where there was indeed a delivery, but delivery to the wrong person or a misdelivery
2. Where there has been damage arising from delay or late delivery
In such instance, the Civil Code rules on prescription will apply.

#GETTHATBAR2022
FLORES · TARADJI
The 1-Year Prescriptive Period is Suspended by:
1. The express agreement of the parties
2. The filing of an action in court until it is dismissed

The insurer, filing a claim against the carrier, in the exercise of its right of subrogation, is bound by the 1-year
prescriptive period. However, it does not apply to the claim of the shipper against the insurer for the insurance
proceeds since it is based on contract, ,it expires in 10 years.

2. Safety of Passengers
Passenger → One who travels in a public conveyance by virtue of contract, express or implied, with the carrier as
to the payment of fare or that which is accepted as an equivalent thereof.

ART. 1755
A common carrier is bound to carry the passengers safely
1. as far as human care and foresight can provide,
2. using the utmost diligence of very cautious persons,
3. with a due regard for all the circumstances.

NOTES:
• Hazards of modern transportation demand extraordinary diligence.
• Once a passenger in the course of travel is injured, or does not reach his destination safely, the carrier and
driver are presumed to be at fault.
• The duty of a common carrier to provide safety to its passengers so obligates it not only during the course of
the trip but for so long as the passengers are within its premises and where they ought to be in pursuance to
the contract of carriage.

CONTINUING OFFER RULE

• A public utility bus when it stops, is in effect making a continuous offer to bus riders.
o When not in motion, there is no necessity for a person to signal his intention to board.
o It has the duty to do no act that would increase the peril to a passenger while he is attempting to
board the same.
• A public utility which is moving slowly
o It is not negligence per se for one to attempt to board a public utility which is moving slowly because
an ordinarily prudent person would have made the attempt to board under the same circumstances.

WHEN IS ONE CONSIDERED TO BE A PASSENGER?

Liability of the common carrier to ensure safety of passengers
1. STARTS upon waiting or boarding of carrier (by stepping and standing on the platform),
2. SUBSISTS even at the moment the passenger alights from the vehicle at the point of destination, and
3. ENDS after the passenger had a reasonable time or opportunity to leave the carrier’s premises.

The carrier-passenger relation does not cease at the moment the passenger alights from the vehicle at a place
selected by the carrier at the point of destination but continues until the passenger has had reasonable time or
opportunity* to leave the carrier’s premises.

*what is reasonable time or opportunity depends on the circumstances such as

• the kind of common carrier,
• nature of its business,
• customs of the place.

Time per se is not considered. The primary factor is the existence of a reasonable cause as will justify the presence of the
victim.
Requisites:
1. The passenger has landed at the point of destination AND
2. The passenger has left the carrier’s premises.

Railroad Companies (PNR) owes to the public a duty of exercising a reasonable degree of care to avoid injury to
persons and property at railroad crossings, which both pertains to the
• Operation of trains and
• Maintenance of the crossings.

#GETTHATBAR2022
FLORES · TARADJI
Failure of the common carrier to maintain in seaworthy condition its vessel involved in the contract of carriage is a
clear breach of its duty.
• To be seaworthy:
o Must be adequately equipped for the voyage and
o Must be manned with sufficient number of competent officers and crew

EXEMPTING CAUSE
Common Carriers are NOT insurer of ALL RISKS.
• They are not absolutely responsible for all injuries or damages, such as when there is a valid defense of force
majeure.
o BUT, the air carrier still has the obligation to make the necessary arrangements to transport
passengers on the next available flight.

The power to admit or not an alien into the country is a sovereign act, which cannot be interfered with by an
airline.

TWIN REQUIREMENTS REQUIRED OF A PLAINTIFF:

1. To prove the existence of the contract of carriage and
2. To prove its non-performance by the carrier through the latter’s failure to carry the passenger safely to his
destination.

ART. 1756
In case of death of or injuries to passengers, common carriers are presumed
1. to have been at fault or
2. to have acted negligently,
unless they prove that they observed extraordinary diligence.

CIRCUMSTANCES INDICATIVE OF NEGLIGENCE ON THE PART OF THE DRIVER / EMPLOYEE:

1. Having faulty speedometer, the carrier is remiss in the supervision of its employees and in the proper care
of its vehicles.
2. ARTICLE 2185 The presumption that the driver of the motor vehicle is negligent if at the time of the mishap,
he was violating a traffic regulation.
3. Drivers of vehicles who bump the rear of another vehicle are presumed to be the cause of the accident,
unless contradicted by other evidence.
a. Rationale: The driver of the rear vehicle has full control of the situation as he is in the position to
observe the vehicle in front of him. (last clear chance)

ART. 1757
The responsibility of a common carrier for the safety of passengers cannot be dispensed with or lessened
SPS
1. by Stipulation,
2. by Posting of notices,
3. by Statements on tickets, or otherwise.

ART. 1758
When a passenger is carried gratuitously,
1. a stipulation limiting the common carrier’s liability for negligence is VALID,
2. but not for willful acts or gross negligence (INVALID).

The reduction of fare does NOT justify any limitation of the common carrier’s liability.

NOTE:
• Carrier is liable for the injury of a non-paying passenger if he is accompanied by a paying passenger.
• Cargadores (not passengers), with consent and knowledge of the owner of the vessel
o Despite the absence of a passenger-carrier relationship, carrier is liable.

#GETTHATBAR2022
FLORES · TARADJI
LIABILITY FOR ACTS OF OTHERS
1. Employees
To be liable, it is enough that the assault happens within the course of the employee's duty. It is not a defense
for the carrier that the act was done in excess of authority or in disobedience of its orders.

2. Other passengers or Strangers

A tort committed by a stranger which causes injury to a passenger does not accord the latter a cause of action
against the carrier.

The negligence for which a common carrier is held responsible is the negligent omission by the carrier's
employees to prevent the tort from being committed. However, in these cases, the common carrier only
needs to exercise ordinary diligence. [Diligence of a Good Father of a Family]

EMPLOYEES STRANGERS OR OTHER PASSENGERS

ART. 1759 ART. 1761
Common carriers are liable for the death of or injuries The PASSENGER must observe the diligence of a good
to passengers through the negligence or willful acts of father of a family to avoid injury to himself.
the former’s EMPLOYEES, although such employees
may have acted ART. 1762
• beyond the scope of their authority or The contributory negligence of the passenger does
• in violation of the orders of the common NOT bar recovery of damages for his death or
carriers. injuries, if the proximate cause thereof is the
negligence of the common carrier, but the amount of
NOTE: The liability of the common carriers does not damages shall be equitably reduced.
cease upon proof that they exercised all the diligence of
a good father of a family in the selection and supervision DOCTRINE OF PROXIMATE CAUSE
of their employees. This is applicable only in actions for quasi-
delict, not in actions involving breach of
ART. 1760 contract. The doctrine is a device for imputing
The common carrier’s responsibility prescribed in the liability to a person where there is no relation
preceding article cannot be eliminated or limited between him and another party. In such a case,
1. by stipulation, the obligation is created by law itself.
2. by the posting of notices,
3. by statements on the tickets or otherwise. DOCTRINE OF RES IPSA LOQUITUR
NOT applicable in cases of breach of contract
Q: Taxicab passenger was deliberately killed by the of carriage.
driver. Is the operator liable?
DOCTRINE OF LAST CLEAR CHANCE
A: Yes, the taxicab operator is civilly liable on the basis Similarly, the principle of last clear chance is
of breach of the contract of carriage. This liability does inapplicable in cases of breach of contract of
not cease upon proof that the common carrier exercised carriage, as it only applies in a suit between the
all the diligence of a good father of a family in the owners and drivers of two colliding vehicles.
selection and supervision of their employees.
ART. 1763
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
common carrier’s employees through the exercise of
the diligence of a good father of a family could have
prevented or stopped the act or omission.

NOTE: A common carrier can be held liable for failing to

prevent a hijacking by frisking passengers and
inspecting their baggage. Simple precautionary
measures to protect the safety of passengers, such as
frisking passengers and inspecting their baggage,
preferably with non-intrusive gadgets such as metal
detectors, before allowing them on board could have
been employed without violating the passenger’s
constitutional rights.

#GETTHATBAR2022
FLORES · TARADJI
C. DEFENSES AVAILABLE TO A COMMON CARRIER
1. Proof of negligence
• In an action based on breach of contract of carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All he has to prove is the existence of the contract and the
fact of its non-performance by the carrier.
• Mere proof of delivery of goods in good order to a common carrier, and of their arrival in bad order at their
destination, constitutes a prima facie case of fault or negligence against the carrier.
• Intent is immaterial in negligence cases because where negligence exists and is proven, it automatically
gives the injured a right to reparation for the damage caused.
• Gross Negligence → implies a want or absence of or failure to exercise even slight care of diligence, or the
entire absence of care. It evinces a thoughtless disregard of consequences without exerting any effort to
avoid them.
• When the source of an obligation is derived from contract, the mere breach or non-fulfillment of the
prestation gives rise to the presumption of fault on the part of the obligor.
• Presumption of negligence is not only applicable in case of death or injury to passengers or loss or damage
to goods. It also applies in case of any breach in the contract such as when the passenger was not able to
board despite being given a boarding pass, or when the passenger’s accommodation is ddowngraded from
first class to economy.
• Res ipsa loquitor → it is the rule that the fact of the occurrence of an injury, taken with the surrounding
circumstances may permit an inference or raise a presumption of negligence, or make out a plaintiff’s
prima facie case, and present a question of fact for defendant to meet with an explanation.

2. Due diligence in the selection and supervision of employees

• If the cause of action is premised on quasi-delict, there must be an independent showing that the carrier
was at fault or negligent or has contributed to the negligence or tortuous conduct.
• If the passenger’s cause of action is based on contractual breach, it is not necessary that there be evidence
of fault or negligence.
• In tort cases, the proper defense is due diligence in the selection and supervision of the employee by the
employer.
• The defense of due diligence in the selection and supervision of an employee is not available to a common
carrier because the Civil Code expressly requires a common carrier to exercise extraordinary diligence, and
not just due diligence in the carriage of passengers.
• Due Diligence in Selection → employers are required to examine them as to their qualifications,
experience, and service records.
• Due Diligence in Supervision → Includes the formulation of suitable rules and regulations for the
guidance of employees, issuance of proper instructions and the imposition of necessary disciplinary
measures upon employees in case of breach or as may be warranted, and the actual implementation and
monitoring of consistent compliance with said rules.
• Passengers do not contract merely for transportation. They have a right to be treated by the carrier’s
employees with kindness, respect, courtesy and due consideration. Any discourteous conduct on the part of
employees towards a passenger gives the latter an action for damages against the carrier.
• A common carrier is liable to a stevedore who was hired by a shipper to help load cargo, even if such
stevedore was not himself a passenger.
• Mere formulation of various company policies on safety without showing that they were being complied
with is not sufficient to exempt the carrier from liability arising from negligence of its employees.

3. Fortuitous event
ART. 1739. In order that the common carrier may be exempted from responsibility, the natural disastermust
have been the proximate and only cause of the loss.

However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after
the occurrence of flood, storm or other natural disaster in order that the common carrier may be exempted from
liability for the loss, destruction, or deterioration of the goods. The same duty is incumbent upon the common
carrier in case of an act of the public enemy referred to in Article 1734, No. 2.

REQUIREMENTS TO BE EXEMPTED AS A RESULT OF NATURAL DISASTER:

1. The natural disaster must have been the proximate and only cause of the loss
2. The common carrier must have exercised due diligence to prevent or minimize loss before, during, and after
the occurrence of the natural disaster
3. The common carrier has not negligently incurred in delay in transporting the goods.
a. ART. 1740. If the common carrier negligently incurs in delay in transporting the goods, a natural
disaster shall not free such carrier from responsibility.
b. DELAY – from the time the obligee judicially or extrajudicially demands the fulfillment of the
obligation.

#GETTHATBAR2022
FLORES · TARADJI
NOTES:
• Fire may not be considered a natural calamity since it is not always a natural accident (it arises almost
invariably from some act of man or by human means).
• Engine trouble is not fortuitous event. Thus, there can be delay by reason of such engine trouble, and the
common carrier will not be excused.
• When the effect is found to be in part the result of the participation of man, whether due to his active
intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the
rules applicable to the acts of God.
• A common carrier may be relieved of any liability arising from fortuitous event pursuant to Article 1174 of
the Civil Code.

Requisites to be exempted under fortuitous event under Article 1174: CURF

1. The Cause of the breach of the obligation must be independent of the will of the debtor
2. The event must be Unforeseen or unavoidable
3. The event must be such as to Render it impossible for the debtor to fulfill his obligation in a normal
manner
4. The debtor must be Free from any participation in, or aggravation of the injury to the creditor.

• A common carrier is not liable for loss by fire of the goods stored in a government (customs) warehouse,
awaiting pickup by the consignee, the loss being due to fortuitous event.
• Explosion of a new tire may not be considered a fortuitous event if there are human factors involved in the
situation. A mechanical defect or fault in its equipment is easily discoverable if the bus had been subjected to
a thorough or rigid checkup before it took to the road.
• Hijacking is not a fortuitous event unless proof is presented by the carrier that the hijackers acted with
irresistible force, threat or violence.

4. Contributory negligence
ART. 1741. 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 in
damages, which however, shall be equitably reduced.
• NEGLIGENCE – Conduct that creates undue risk of harm to another. It is the failure to observe that
degree of care, precaution and vigilance that the circumstances justly demand, whereby that other
person suffers injury
• CONTRIBUTORY NEGLIGENCE – Conduct on the part of the injured party, contributing as a legal
cause to the harm he has suffered, which falls below the standard to which he is required to conform
for his own protection. This is a mitigating circumstance on the part of the common carrier. Thus,
damages must be equitably reduced.
• PROXIMATE CAUSE – That cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have
occurred.
NOTES:
• If a passenger commits contributory negligence, such contributory negligence, while not exempting the
common carrier from liability, does not entitle the passenger to recover moral and exemplary damages.
• Contributory negligence is a conduct on the part of the injured party, contributing as a legal cause to the
harm he has suffered, which falls below the standard to which he is required to conform for his own
protection.
• The defense of contributory negligence does not apply in criminal cases committed thru reckless
imprudence, since one cannot allege the negligence off another to ecade the effects of his own negligence.

5. Doctrine of last clear chance

This doctrine states that where both parties are negligent, but the negligent act of one is appreciably later than that
of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the
last clear opportunity to avoid the loss but failed to do so, is chargeable with the loss.
• This does not apply where the party charged is required to act instantaneously, and the injury cannot be
avoided by the application of all means at hand after the peril is or should have been discovered.

#GETTHATBAR2022
FLORES · TARADJI
D. Extent of liability
In case of injuries, the cases to be filed are:
1. Civil case for breach of contract against the common carrier (not against the driver because the contract of carriage is
between the carrier and passenger).

Quantum of proof:
PREPONDERANCE OF EVIDENCE. All that the passenger has to prove is:
1. his contract of carriage between him and the common carrier and
2. that he did not reach his destination unhurt.

Due diligence in the selection and supervision of employee, though may mitigate liability, is not a complete
defense in culpa contractual or breach of contract.

Common carrier has the burden of proof that it exercised extraordinary diligence.

2. Criminal case for reckless imprudence resulting in physical injuries against the driver.

Quantum of proof:
PROOF BEYOND REASONABLE DOUBT.

Who shall be liable for the civil damages?

a. The liability of driver is direct and primary. (Art 100, RPC)
b. The liability of the common carrier is subsidiary. (Art 103, RPC)

If the driver-employee is insolvent, the common carrier will be liable. The liability can be obtained in the
same criminal case against the driver during execution proceedings after proper motion and due notice and
hearing against the common carrier. All that is required is to show that the driver is insolvent per sheriff’s
return of judgment in execution.

3. Civil case for culpa aquiliana or quasi-delict against the common carrier.

Even if there is a pre-existing contractual relationship between them, the injured party may file a quasi-delict
case, if the act that breaks the contract resulted in tort.

Due diligence in the selection and supervision of employee is a complete defense of the common carrier to
avoid civil liability.

Unlike in breach of contract, here, the injured party has the burden of proving the negligence of the
common carrier and his driver.

A contractual obligation can be breached by tort and when the same act or omission causes the injury, one resulting
in culpa contractual and the other in culpa aquiliana, Article 2194 of the Civil Code can well apply.

In fine, a liability for tort may arise even under a contract, where tort is that which breaches the contract.

Extent of Damages in case of Death or Injury

1. Indemnity for Death
2. Indemnity for loss of earning capacity
3. Moral damages

#GETTHATBAR2022
FLORES · TARADJI
1. Recoverable damages
ATTORNEY’S GENERAL RULE: In the absence of stipulation, attorney’s fees cannot be recovered.
FEES EXCEPTIONS:
1. When exemplary damages are awarded
2. When the defendant’s act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest
3. In criminal cases of malicious prosecution against the plaintiff
4. In case of a clearly unfounded civil action or proceeding against the plaintiff
5. Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just and demandable claim
6. In actions for legal support
7. In actions for the recovery of wages of household helpers, laborers and skilled
workers
8. In actions for indemnity under workmen’s compensation and employer’s liability
laws
9. In a separate civil action to recover civil liability arising from a crime
10. When at least double judicial costs are awarded
11. In any other case where the court deems it just and equitable that attorney’s fees
and expenses of litigation should be recovered.

In all cases, the attorney’s fees and expenses of litigation must be reasonable. (Art. 2208)

When are attorney’s fees recoverable?

Under Article 2208, these are recoverable only in the concept of actual damages, not as
moral or judicial costs. The amount must be proven and must be specifically prayed for.

Award for Attorney’s Fees demands factual, legal and equitable justification to avoid
speculations and conjecture surrounding the grant thereof.

NOTE: Where the award of moral and exemplary damages is eliminated, so must the award of
attorney’s fees be deleted.

MORAL Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
DAMAGES reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though
To enable the injured incapable of pecuniary computation, moral damages may be recovered if they are the
party to obtain means, proximate result of the defendant’s wrongful act or omission. (Art. 2217)
diversion or
amusement that will
alleviate the moral Moral damages may be recovered in the following and analogous cases:
suffering he has 1. A criminal offense resulting in physical injuries
undergone 2. Quasi-delicts causing physical injuries
3. Seduction, abduction, rape, or other lascivious acts
4. Adultery or concubinage
5. Illegal or arbitrary detention or arrest
6. Illegal search
7. Libel, slander or any other form of defamation
8. Malicious prosecution
9. Acts mentioned in Article 309
10. Acts and actions referred to in Articles 21,26,27,28,29,30, 32, 34, and 35.

GENERAL RULE: Moral damages are NOT recoverable in actions for damages predicated
on a breach of contract for it is not one of the enumerations in Article 2219.

EXCEPTION: Moral damages are recoverable

1. In cases of death of passengers
2. In cases where the carrier is guilty of fraud or bad faith.

NOTE: The person claiming moral damages must prove the existence of bad faith by clear
and convincing evidence for the law always presumes good faith.

#GETTHATBAR2022
FLORES · TARADJI
EXEMPLARY OR Exemplary or corrective damages are imposed, by way of example or correction for the public
CORRECTIVE good, in addition to the moral, temperate, liquidated or compensatory damages. (Art. 2229)
DAMAGES
To serve as a In criminal offenses, exemplary damages as a part of the civil liability may be imposed when
deterrent to serious the crime was committed with one or more aggravating circumstances. Such damages are
wrongdoings.
separate and distinct from fines and shall be paid to the offended party. (Art. 2230)

In quasi-delicts, exemplary damages may be granted if the defendant acted with gross
negligence. (Art. 2231)

In contracts [of carriage], the court may award exemplary damages if the defendant acted
in a wanton, fraudulent, reckless, oppressive, or malevolent manner. (Art. 2232).

Exemplary damages cannot be recovered as a matter of right; the court will decide whether
or not they should be adjudicated. (Art. 2233)

NOMINAL Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated
DAMAGES or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
Vindicating or indemnifying the plaintiff for any loss suffered by him.
recognizing the
injured party’s right to
a property that has It is an established rule that nominal damages cannot co-exist with compensatory
been violated or damages.
invaded.

ACTUAL OR Not only the value of the loss suffered, but also that of the profits which the obligee failed to
COMPENSATORY obtain.
DAMAGES
Simply make good or • The amount of damages for death caused by a crime or quasi-delict shall be at least
replace the loss caused
P50,000 (now, P70,000), ans even though there may have been mitigating
by the wrong.
circumstances. In addition:
o The defendant shall be liable for the loss of the earning capacity of the
deceased, and the indemnity shall be paid to the heirs
(NOTE: This includes pension to be received if he did not die)
o If the deceased was obliged to give support, the recipient may demand
support from the person causing the death, for a period not exceeding 5 years
o The spouse, legitimate and illegitimate descendants and ascendants of the
deceased may demand moral damages for mental anguish by reason of the
death of the deceased. (Art. 2206)

Loss of earning capacity

𝑵𝒆𝒕 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 =
𝐿𝑖𝑓𝑒 𝐸𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦 × (𝐺𝑟𝑜𝑠𝑠 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑁𝑒𝑐𝑒𝑠𝑠𝑎𝑟𝑦 𝐿𝑖𝑣𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠)

𝑳𝒊𝒇𝒆 𝑬𝒙𝒑𝒆𝒄𝒕𝒂𝒏𝒄𝒚 =
2
× (80 − 𝐴𝑔𝑒 𝑜𝑓 𝐷𝑒𝑐𝑒𝑎𝑠𝑒𝑑)
3

𝑵𝒆𝒄𝒆𝒔𝒔𝒂𝒓𝒚 𝑳𝒊𝒗𝒊𝒏𝒈 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔 =

𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑖𝑣𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝑎𝑠 𝐸𝑠𝑡𝑎𝑏𝑙𝑖𝑠ℎ𝑒𝑑

In the absence of proof,

𝑵𝒆𝒄𝒆𝒔𝒔𝒂𝒓𝒚 𝑳𝒊𝒗𝒊𝒏𝒈 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔 =
1
𝑥 𝐺𝑟𝑜𝑠𝑠 𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
2

Q: May the Court award indemnity for the victims of accident for loss of earning capacity
when the latter is not employed or no history of earnings?

A: Yes. Common carrier’s negligence did not only cost the life of the passenger, his right to
work and earn money but also deprived the parents of their right to his presence and services.
It will be computed based on the prevailing minimum wage.

Case in point – Pareja v. Zarate and PNR

The only exception is “unless the deceased on account of permanent physical disability not caused by the
defendant, had no earning capacity at the time of his death.”

#GETTHATBAR2022
FLORES · TARADJI
 TEMPERATE More than nominal but less than compensatory damages.
DAMAGES This may be recovered when the court finds that some pecuniary loss has been suffered but
its amount cannot, from the nature of the case, be provided with certainty.

NOTE: This cannot co-exist with actual damages

LIQUIDATED Those agreed by the parties to a contract, to be paid in case of breach thereof.
DAMAGES
Ordinarily, the court cannot change the amount of liquidated damages agreed upon by the
parties. However, Art. 2227 of the Civil Code provides that liquidated damages, whether
intended as an indemnity or a penalty, shall be equitably reduced if they were iniquitous or
unconscionable.

NOTE: Compromise agreement / Release of Claims discharging the common carrier from any and all liability is
VALID.

2. Stipulations limiting liability

STIPULATIONS LIMITING LIABILITY
ART. 1744.
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: WSR
(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.

*but not less than ordinary diligence.

NOTE:
• Any substitute writing material
• Consideration can be lesser fare or freightage or discounts

ART. 1745.
Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public
policy: RNN-LET-D
(1) That the goods are transported at the Risk of the owner or shipper

(2) That the common carrier will Not be liable for any loss, destruction, or deterioration of the goods

(3) That the common carrier need Not observe any diligence in the custody of the goods

(4) That the common carrier shall exercise a degree of diligence Less than that of a good father of a family, or
of a man of ordinary prudence in the vigilance over the movables transported

(5) That the common carrier shall not be responsible for the acts or omission of his or its Employees

(6) 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

(7) 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. 1746.
An agreement 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 former agreed to such stipulation*.

*this constitutes intimidation or undue influence exerted by the common carrier or his agents. Thus, the contract is
merely voidable, not void.

#GETTHATBAR2022
FLORES · TARADJI
ART. 1747.
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. 1748.
An agreement limiting the common carrier's liability for delay on account of strikes* or riots is VALID.

*may refer to legal and illegal strikes, since there is no universal acceptance that riots are legal.

ART. 1749.
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, is BINDING.

ART. 1750.
A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration
of the goods is VALID, if it
• is reasonable and just under the circumstances, and
• has been fairly and freely agreed upon.

ART. 1751.
The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the
contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common
carrier's liability is reasonable, just and in consonance with public policy.

NOTE: This is logical inasmuch as lack of competition may lead to undue influence.

ART. 1752.
Even when there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the
common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration.

NOTE: The presumption of negligence is not relaxed even if there is a stipulation limiting liability.

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.

ART. 1754.
CHECKED-IN BAGGAGES
The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which is not
• in his personal custody or
• in that of his employee.

BAGGAGES IN POSSESSION OF PASSENGERS

As to other baggage, the rules in Articles 1998 and 2000 to 2003 concerning the responsibility of hotelkeepers
shall be applicable.

ART. 1998. The deposit effects made by travelers in hotels and inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for
them as depositories, provided
1. that notice was given to them, or to their employees, of the effects brought by the guests and
2. that, on the part of the latter, they take the precautions which said hotelkeepers or their substitutes advised relative to the care and vigilance of
their effects.
NOTE: The actual delivery of the goods to the innkeepers or their employees is unnecessary before liability could attach. Accordingly, actual notification was
not necessary to render the common carrier liable for the lost personal belongings of the passenger. By allowing him to board the vessel with his belongings
without any protest, the common carrier became sufficiently notified of such belongings.

ART. 2000. The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused
1. by the servants or employees of the keepers of hotels or inns as well as
2. by strangers;
but not that which may proceed from any force majeure.

The fact that travelers are constrained to rely on the vigilance of the keeper of the hotel or inn shall be considered in determining the degree of care required of
him.

ART. 2001. The act of a thief or robber, who has entered the hotel, is not deemed force majeure, unless it is done with the use of arms or through an
irresistible force.

#GETTHATBAR2022
FLORES · TARADJI
ART. 2002. The hotelkeeper is not liable for compensation if the loss is due to
1. the acts of the guest, his family, servants, or visitors, or
2. if the loss arises from the character of the things brought into the hotel.

ART. 2003. The hotelkeeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest.

Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished
shall be VOID.

3. Limitations under the Montreal Convention

WARSAW CONVENTION
Convention for the Unification of Certain Rules Relating to International Transportation by Air

Under Article 28(1) of the Warsaw Convention, the plaintiff may bring the action for damages before —
1. The court where the carrier is domiciled
2. The court where the carrier has its principal place of business
3. The court where the carrier has an establishment by which the contract has been made or
4. The court of the place of destination (ultimate destination, not an agreed stopover).

NOTE: Warsaw convention does not “exclusively regulate” the relationship between passenger and carrier on an
international flight.
e.g. Damage to passenger’s baggage is covered by Warsaw Convention which prescribes in 2 years, whereas,
humiliation he suffered at the hands of the airline’s employees is covered by the Civil Code on torts, which
prescribes in 4 years.

APPLICABILITY
The Warsaw Convention applies to all international carriage of persons, luggage or goods performed by aircraft
for hire. It applies equally to gratuitous carriage by aircraft performed by an airport transport undertaking.

Categories of International Carriage

1. That where the place of departure and the place of destination are situated within the territories of 2 High
Contracting Parties regardless of whether or not there be a break in the transportation or transshipment.

2. That where the place of departure and the place of destination are within the territory of a single High
Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate,
authority of another power, even though the power is not a party to the convention.

High Contracting Parties –

1. signatories to the Convention
2. those who subsequently adhered to it

NOTE: Although the Warsaw Convention has the force and effect of law in the Philippines (being a treaty
commitment), it does not operate as an exclusive enumeration of the instances for declaring a carrier liable for
breach. It does not preclude the operation of the Civil Code and other pertinent laws.

Roundtrip Plane Ticket was itself a complete written contract between the carrier and the passenger.
• Consent
o Manifested by the fact that the passenger agreed to be transported by the carrier to and from a
destination, and the carrier’s acceptance to bring him to his destination and then back home
• Cause or Consideration
o The fare paid by the passenger
• Object
o The transportation of the passenger from the place of departure to the place of destination and back

Liabilities for Air Carrier

1. Death or injury to passengers
2. Loss, destruction and damage to baggage during the carriage
3. Delay in flight

Prescription
The action against the carrier will prescribe if it is not brought within 2 years from date of arrival of the air carrier
at the destination or it should have arrived or from the date on which the transportation stopped.

#GETTHATBAR2022
FLORES · TARADJI
Limitation on Liability of Air Carrier

Under the WARSAW CONVENTION:

Loss or Damage to Goods Death or Injury to Passengers
US$ 20 or 9.07 pounds per kilo, unless the shipper The liability does not exceed US$25,000.
declares a higher valuation.

For unchecked baggage, it is US$400.

Under the MONTREAL CONVENTION:

Loss or Damage to Goods Death or Injury to Passengers
1,288 Special Drawing Rights (SDRs) for each Two-Tier Liability
passenger as of December 31, 2019.
FIRST TIER: The carrier cannot limit or exclude its
SDR is a type of foreign exchange reserve asset created by liability provided the damages sustained does not
the International Monetary Fund. exceed 128,821 Special Drawing Rights (SDRs) as of
December 31, 2019.
The passenger may only claim above the limit of 1,288
SDR if Strict liability where an airline carrier shall be made
1. he has made a special declaration of interest at liable for damage sustained on the condition that the
the time of check-in and accident took place on board or in the course of any
2. has paid a supplementary sum if the case so operations of embarking or disembarking. Thus, the
requires. carrier can be held liable even if it is not negligent or at
fault.

SECOND TIER: For all damages higher than 128,821

SDRs, the carrier shall be liable unless it can show that
the damage was not due to its negligence or wrongful act
or omission, or that the damage was solely due to the
negligence or wrongful act or omission of a 3rd party.

Cargo Loss, Damage or Delay Passenger Delay

22 SDRs per kilogram 5,346 SDRs

The Warsaw Convention (as supplanted by the Montreal Convention) to which the Republic of the Philippines is a
party, and which has the force and effect of law in this country applies to all international transportation of persons,
baggage or goods performed by an aircraft gratuitously or for hire.

The Warsaw Convention should be deemed a limit of liability only in those cases where the cause of death or injury
to person, or destruction, loss or damage to property or delay in its transport is NOT attributable to or attended
by any willful misconduct, bad faith, recklessness, or otherwise improper conduct on the part of any official
or employee for which the carrier is responsible, and there is otherwise no special or extraordinary form of
resulting injury.

#GETTHATBAR2022
FLORES · TARADJI
 III. CORPORATION LAW
A. GENERAL PRINCIPLES
A corporation is
i. an artificial being
ii. created by operation of law
iii. having the right of succession, and
iv. the powers, attributes, and properties
expressly authorized by law or incidental to its existence

ATTRIBUTES OF A CORPORATION
1. It is an artificial being with separate and distinct personality
The personality of the corporation is separate and distinct from its stockholders, members, directors,
trustees, and officers. As a consequence, it is entitled to own properties in its own name, it can incur
obligations, rights belonging to the corporation cannot be invoked by the stockholders, directors, or
officers, and it can be held liable for tort when the act was committed by the officer or agent under express
direction or authority from the stockholder or members

The separateness of its personality is present even if a corporation is a One Person Corporation

2. It is created by operation of law

Concession theory – a corporation is an artificial creature without any existence until it has received the
imprimatur of the State acting according to law, through the SEC. The life of the corporation is a concession
made by the State

3. It has the right of succession

Capacity to have continuity of existence despite the changes on the persons who compose it. The personality
continues despite the change of stockholders, members, board member or officers

What happens to the shares of a stockholder who dies without assigning his share prior to his death?
It forms part of his estate. It does not go automatically to his heirs

4. It has powers, attributes, and properties expressly authorized by law or incident to its existence
No corporation shall possess or exercise any corporate powers except
i. those conferred by law, its Articles of Incorporation
ii. those implied from express powers, and
iii. those as are necessary or incidental to the exercise of the powers so conferred

If the act of the corporation is not one of those express, implied, or incidental powers, the act is ultra vires

SOLE PROPRIETORSHIP VS. CORPORATION

SOLE PROPRIETORSHIP CORPORATION
A person who personally conducts business under his An artificial being created by operation of law, having
name or a business name the right of succession, and the powers, attributes, and
properties expressly authorized by law or incidental to
its existence
It does not possess a juridical personality separate It possesses a legal personality separate and distinct
and distinct from the personality of the owner of the from its stockholders, members, directors, trustees, and
enterprise officers

The individual, as a rule, operates a small business,

usually with the limited capital, and is responsible alone
for its success or failure

The essence of sole proprietorship is that it has no

separate juridical personality as he owner and business
are considered as one
A proprietor is required to register with the Bureau of It commences to have corporate existence and juridical
Trade Regulation and Consumer Protection of the existence and is deemed incorporated from the date the
Department of Trade and Industry SEC issues a certificate of incorporation. The life of the
corporation commences only from the issuance of said
certificate

NOTE: Corporations can be partners in a partnership. It has the power to enter into a partnership, joint venture,
merger, consolidation, or any other commercial agreement with natural and juridical persons.
PARTNERSHIP V. CORPORATION
PARTNERSHIP CORPORATION
By the contract of partnership, 2 or more persons bind An artificial being created by operation of law, having
themselves to contribute money, property or industry the right of succession, and the powers, attributes, and
to a common fund with the intention of dividing the properties expressly authorized by law or incidental to
profits among themselves its existence
Created by mere agreement Created by operation of law
At least 2 persons are required There may be only 1 incorporator
Acquires juridical personality from the moment 2 or Commences to have corporate existence and juridical
more persons agree to from a partnership – personality only from the issuance of COI by the SEC
registration of the AOI with the SEC is not a condition
sine qua non for the acquisition of legal personality, but
it is only necessary for administrative convenience
General partners may be held liable beyond their The liability of stockholders, who are not directors,
contribution officers, and agents is limited to their subscription
Powers are subject only to what may be agreed upon More restricted in its powers because of its limited
by the partners personality
Each general partner can represent and bind the Stockholders are not agents of the corporation
partnership
Interest cannot be transferred without the consent of Corporate shares are freely transferrable
the other partners
There is no right of succession There is right of succession
Can be a stockholder/incorporator Can be a partner in a partnership and a joint venture

CLASSES OF CORPORATION
1. As to existence of shares of stock
a. Stock Corporations – those which have capital stock divided into shares, and are authorized to
distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of
shares held

b. Non-Stock Corporations – all other corporations (residual definition)

i. There must be members
ii. Has no capital stock (its capital is derived from contributions and donations)
iii. The corporation must not distribute any part of their income to members

2. As to number of components
a. Aggregate Corporation – which consists of more than 1 member
b. Corporation Sole – a non-stock corporation consisting only of 1 person or member formed by an elder
of a religious denomination
c. One Person Corporation – a stock corporation with a single stockholder and declares dividends

3. As to legal status
a. De Jure Corporation – one organized in accordance with the requirements of law
b. De Facto Corporation – one formed where there exists a flaw in its incorporation but there exists a
colourable compliance with the requirements of the law. It has a juridical personality
c. Corporation by Estoppel – one which does not have a juridical personality. It is merely a group of
persons which holds itself out as a corporation. The individual persons will be held solidarily liable

4. As to manner of creation
a. By special law – directly enacted by the Congress. Under Sec. 4, GOCCs shall be governed
i. primarily by the provisions of the special law or charter created them, and
ii. supplemented by the provisions of the RCCP
b. By general law – corporations created under the RCCP
c. By prescription – corporations not formally organized as such but recognized by immemorial usage as
a corporation, such as the Roman Catholic Church. It has a juridical personality

5. As to functions
a. Public Corporation – corporation organized for the government of a portion of a state serving general
good and welfare, such as LGUs in cities, municipalities, or provinces
b. Private Corporation – corporation formed for some private purpose, benefit, aim or end

6. As to laws of incorporation
a. Domestic Corporation – corporation formed, organized or existing under PH laws
b. Foreign Corporation – corporation
i. formed, organized, or existing under laws other than those of the PH, and
ii. whose laws allows Filipino citizens and corporations to do business in its own country
 7. As to relationship
a. Parent – a corporation that has control over another corporation directly or indirectly
b. Subsidiary – a corporation more than 50% of the voting stock is owned and controlled by another, the
parent company
c. Affiliate – a corporation that is directly or indirectly controlled by or is under the control of another
corporation

8. Ecclesiastical and Lay Corporations

a. Ecclesiastical – corporations comprising entirely of spiritual persons like bishops and the like
established for the furtherance of religion
b. Lay – all corporations other than ecclesiastical

9. Eleemosynary and Civil Corporations

a. Eleemosynary – corporations established for charitable purposes for the administration of charitable
trust
b. Civil – corporation not for charity but for the benefit of its members

PUBLIC CORPORATIONS VS. QUASI-PUBLIC CORPORATIONS VS. PUBLIC COMPANY

PUBLIC CORPORATIONS QUASI-PUBLIC CORPORATIONS PUBLIC COMPANY
Corporation organized for the Corporations that are engaged in Under the Securities Regulation
government or a portion of a state business affected with public Code, it is any corporation:
(city, municipality, province) interest 1. With a class of equity
serving the general good and securities listed on an
welfare These corporations usually pertain Exchange, OR
to public utilities and public service 2. With assets in excess of
Thus, in corporate law, GSIS, DBP, companies P50M and having 200 or
NPC, among others, are still more stockholders, at
considered private corporations least 200 of which are
holding at least 100 shares
of stocks

GOCCS VS. GOVERNMENT INSTRUMENTALITY VS. CORPORATIONS VESTED WITH PUBLIC INTEREST
GOCC GI CO. VESTED WITH PUBLIC
INTEREST
1. Must be organized as a Instrumentalities or agencies of the RCCP does not contain any
stock or non-stock government, which are neither definition of the term “corporations
corporation corporations nor agencies within vested with public interest”
2. Must be vested with the departmental framework, but
functions relating to public 1. vested by law with special Sec. 22, of RCCP enumerates the
needs whether functions or jurisdiction following as corporations vested
governmental or proprietary 2. endowed with some, but with public interest:
in nature not all corporate powers 1. Corporations covered by the
3. Must be owned by the 3. administering special SRC
Government either wholly funds a. Those whose securities
or to the extent of at least 4. enjoying operational are registered with the
51% of its capital stock authority through a charter SEC
including b. Corporations listed
with an exchange or
with assets of at least
50M, and having 200 or
more shareholders,
each holding at least
100 shares of a class of
its equity shares
2. Banks and quasi-banks,
non-stock savings and loan
associations, pawnshops,
corporations engaged in
money service business,
preneed, trust, and
insurance companies, and
other financial
intermediaries
3. Other businesses similar
above, as the SEC may
determine
 GOCC GI CO. VESTED WITH PUBLIC
INTEREST
GOCCs are private corporations. GIs are not stock, non-stock, public
This is the only exception on the nor private corporations because
prohibition that private they are not corporations in the
corporations cannot be created first place
through a special law or charter

GOCCs QUASI-PUBLIC
CORPORATION
Both private corporations
Owned and/or Owned by
controlled by private
the stockholders
government

GOCCs are not always created

through special laws. GOCCs may
either be:
a. Chartered GOCCs –
governed primarily by their
respective charters and are
not within the jurisdiction of
SEC
b. Non-chartered GOCCs –
governed by the RCCP and
are within the jurisdiction of
SEC

1. Nationality of corporation
In order to determine the nationality of a corporation, the following steps should apply:
1st Step: The nationality of a corporation is determined by the country under whose laws it is incorporated
(Place of Incorporation Test – primary test)

2nd Step: If the corporation is applying for a franchise for public utility which requires a certain percentage
of control of stock, the Control Test would be applied

3rd Step: If there is doubt as to the domestic control of the percentage of stock in a corporation with corporate
stockholders, Grandfather Rule would be applied

Place of incorporation test a. Control test b. Grandfather rule

The nationality of the Mode of determining the nationality The method by which the percentage
corporation is determined by of a corporation engaged in of Filipino equity in a corporation
the state of incorporation, nationalized areas of activities, engaged in nationalized and/or partly
regardless of the nationality of provided for under the Constitution nationalized areas of activities is
the stockholders. and other applicable laws, where accurately computed in cases where
corporate shareholders with foreign corporate shareholders with foreign
It is applied if the corporation is shareholdings are present, by shareholdings are present by
not engaged in areas of ascertaining the nationality of the attributing the nationality of the
activities reserved, in whole or controlling stockholder of the second or even subsequent tier of
in part, for Filipinos corporation ownership to determine the nationality
of the corporate shareholder

In control test, we look at the In grandfather rule, we do not stop with

controlling stockholders the nationality of the investor
corporation. We look deeper on the
If a corporation is at least 60% nationality of the investors of the
owned by Philippine nationals, then investor corporation
it is a 100% Philippine national. The
40% alien ownership fades away. When we apply the grandfather rule, we
determine both:
Mere legal title is not enough. Full 1. Direct foreign ownership and
beneficial ownership of 60% of the 2. Indirect foreign ownership
OCS, coupled with 60% of voting This is determined by
rights, is constitutionally required multiplying the foreign
ownership of a corporate
 Place of incorporation test a. Control test b. Grandfather rule
for the State’s grant of authority to stockholder with the ownership
operate a public utility. of the corporate stockholder in
the investee corporation
If the Filipino has the voting power
of the specific stock, i.e., he can vote Thus, 40% x 60% = 24%
the stock or direct another to vote for
him, or the Filipino has the
investment power over the specific
stock, i.e., he can dispose of that
specific stock, then such Filipino is the
beneficial owner of that specific stock.

The control test is the prevailing The grandfather rule does not eschew,
mode of determining the nationality but in fact supplements the control
of corporations engaged in test, as the latter implements
nationalized activities. However, Filipinization provisions of the
when in the mind of the court there is Constitution
doubt as to where beneficial
ownership and control reside,
based on the attendant facts and
circumstances, then it may apply the
grandfather rule

NARRA NICKEL VS. REDMONT

i. It is only when the Control Test is first applied, that Grandfather Rule may be applied
ii. THUS,
1. If the subject corporation’s Filipino equity falls below the 60% threshold, the corporation is
immediately considered foreign-owned. Grandfather Rule need not be applied
2. If the corporation complied with the 60-40 Filipino to foreign equity requirement:
a. It is considered as Filipino corporation if there is no doubt in the control or beneficial ownership
of the corporation
b. Grandfather Rule is applied if doubt as to control and beneficial ownership exists.

iii. The indicators that control does not reside to Filipino (meaning, there is doubt) include:
1. foreign investors provide practically all the funds
2. foreign investors provide practically all the technological support
3. foreign investors manage the company and prepare all economic viability studies

OTHER TESTS
1. WAR-TIME TEST
In times of war, nationality of corporation is determined by the character or citizenship of its controlling
stockholders

2. PLACE OF PRINCIPAL BUSINESS TEST

Residence of a corporation is the place where its principal office is located, as stated in its Articles of
Incorporation
2. Doctrine of separate juridical personality
GR: A corporation has a personality separate and distinct from the persons composing it

EXP: When the corporation is used as a cloak for fraud, illegality, or in other certain circumstances, the courts may
disregard the separate and distinct personality of the corporation and treat the corporation as a mere
collection of individuals undertaking business as a group.

CONSEQUENCES OF THE SEPARATE PERSONALITY

1. PROPERTY → the corporation is entitled to own properties in its own name and its properties are not the
properties of its stockholders, directors and officers. The interest of stockholders over the properties of the
corporation is merely inchoate.
a. The stockholders are not themselves the real parties in interest to claim and recover compensation
for the damages arising from the wrongful attachment of corporate assets. Only the corporation is
the real party in interest for that purpose.

2. OBLIGATIONS → the corporation can incur obligations and its obligations are not the obligations of its
stockholders, directors and officers.
a. LIMITED LIABILITY
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
b. Is the doctrine of limited liability applicable to OPC?
Yes. However, a sole shareholder claiming limited liability has the burden of affirmatively showing
that the corporation was adequately financed. Otherwise, the sole stockholder will be severally
liable

3. RIGHTS → rights belonging to the corporation cannot be invoked by the stockholders even if the latter owns
substantial majority of the shares in that corporation, and rights of the stockholders cannot be invoked by
the corporation.
a. Constitutional rights applicable to a corporation:
i. Due process
ii. Equal protection of the law
iii. Unreasonable searches and seizures
b. The right against self-incrimination has no application to juridical persons.
c. Tax privileges enjoyed by a corporation do not extend to its stockholders.

4. TORTS → 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.
a. A corporation an be held liable for the tortious acts of a corporate officer, in the absence of a prior
express direction from the BOD, if such was connected to the business of the corporation.
b. The remedy of the corporation is to recover damages against the acting corporate officer responsible
for the tortious act.

5. CRIMES → Generally, corporations cannot commit felonies under the RPC for it is incapable of the requisite
intent to commit these crimes. A corporation cannot be arrested and imprisoned.
a. As an exception, if the crime is committed by a corporation, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime.
b. The RCC provides situations where corporations are criminally liable:
i. Violation of duty to maintain records, to allow their inspection or reproduction (Sec. 161)
ii. Fraudulent conduct of business (Sec. 165)
iii. Acting as intermediaries for graft and corrupt practices (Sec. 166)
iv. Engaging intermediaries for graft and corrupt practices (Sec. 167)

6. MORAL DAMAGES → Generally, a corporation cannot recover moral damages as it cannot suffer physical
suffering and mental anguish.
a. As an exception, a corporation with a good reputation, if besmirched, is allowed to recover moral
damages upon proof of existence of factual basis of damage and its causal relation.
b. In case of libel, slander or any other form of defamation under Art. 2219(7), moral damages can be
awarded whether the plaintiff is a natural or a juridical person.
3. Doctrine of piercing of the corporate veil
It allows the State to disregard the notion or fiction that the corporation has a separate legal personality from
those composing it if the corporate entity is being used
i. as a cloak for fraud or illegality
ii. to defeat public convenience
iii. to justify wrong
iv. to protect fraud
v. to defend crime
vi. for ends subversive of the policy and purpose behind its creation, or
vii. an alter ego, adjunct, or business conduit for the sole benefit of the shareholders

If the fiction is misused or abused, the State shall pierce the corporate veil and treat the corporation and the persons
composing it as one and the same entity

The doctrine of piercing the corporate veil applies in 3 basic areas:

1. Defeat of public convenience
2. Fraud cases
3. Alter ego cases

EFFECT
Liability will attach personally or directly to the officers and stockholders, or where there are two corporations,
they will be merged into one, the one being merely regarded as the instrumentality, agency, conduit, or adjunct of
the other

Being merely an equitable remedy, employment of the piercing doctrine can only be for the protection of the interests
of innocent 3rd persons dealing with the corporate entity. The corporate character, however, is not necessarily
abrogated. The corporation continues for other legitimate objectives. The purpose of piercing the veil is merely to
remedy a wrong.

Is the doctrine applicable to OPC?

Yes. An OPC is still a corporation. As an exception, under the doctrine of limited liability for OPC, the sole stockholder
must prove the separate personality of the corporation. Otherwise, the stockholder is automatically jointly and
severally liable (without need of piercing the veil)

QUANTUM OF PROOF
Clear and convincing evidence, not mere preponderance of evidence

HEIRS OF TAN UY V. INT’L EXCHANGE BANK

There are 2 ways to hold stockholders for personal liability notwithstanding separateness of juridical personality of
corporations:
i. Piercing the veil of corporate fiction, and
ii. Contract (e.g., surety agreement)

GENERAL RULE: In alter ego cases, fraud is required in order to pierce the corporate veil
EXCEPTION: Co-mingling of assets of both corporations, in additions to other circumstances (both are
family corporations, same office, and same president and CEO). The SC applied the alter ego
doctrine notwithstanding the absence of fraud

SOLIDBANK CORP. V MINDANAO FERROALLOY CORP.

The 2 VPs cannot be held personally liable by reason of a contract (alleged as co-makers) because they did not sign
as co-makers but as duly authorized representatives of the corporation. They signed on the space for “Maker” and
not on the space for “Co-Maker”

ZAMBRANO, ET. AL. V. PHILIPPINE CARPET MANUFACTURING CORPORATION

The doctrine of separateness of juridical personality of corporations applies not only against the individual
stockholders, directors, and officers, but also to all other legal entities that may be related to the corporation
(Pacific Carpet is a legal entity related to Philippine Carpet)

The subsidiary is not liable to absorb the employees of its parent company when the latter closed its business,
particularly, if the subsidiary was set up long before the termination of employment such that it could not be said
that the subsidiary was set up to evade the parent company’s liabilities.
 ELEMENTS FOR ALTER EGO TEST
a. CONTROL TEST – not mere majority or complete stock control, but complete domination such that the
corporate entity has no separate mind, will, or existence of its own (with respect to finances, policy and
business practices)
b. FRAUD TEST – such control must be used to commit fraud or wrong (generally)
c. HARM TEST – there must be harm or damage caused to the plaintiff by the fraudulent act

RUBEN MARTINEZ V. CA AND BPI INTERNATIONAL FINANCE

The doctrine of piercing the veil will not apply if there is no showing of control, i.e., complete domination
i. Close business relationship of the two corporations does not warrant a finding that one corporation
was but a conduit of another
ii. The mere fact that the majority stockholder of a corporation is another corporation does not constitute
sufficient evidence that the latter had complete domination over the former
iii. The mere fact that a stockholder owned 42% of the capital stocks of a corporation does not constitute
sufficient evidence that such stockholder had complete domination

KUKAN INTERNATIONAL CORPORATION V. REYES

The doctrine of piercing the veil of corporate fiction is applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in
a case (the party was declared in default and no longer participated in the trial). The doctrine comes to play only
during the trial of the case after the court has already acquired jurisdiction over the corporation

Is the doctrine applicable to a nonstock non-profit corporation and natural persons?

Yes. While it may appear to be impossible for a person to exercise ownership control over a nonstock non-profit
corporation, a person can be held personally liable under the alter ego theory if the evidence shows that the person
controlling the corporation did in fact exercise control even though there was no stock ownership.

TRADITIONAL VS. REVERSE PIERCING

TRADITIONAL VEIL-PIERCING REVERSE PIERCING
The court disregards the existence of The plaintiff seeks to reach the assets of the corporation to satisfy claims
the corporate entity so a claimant can against the corporate insider. This flows in the opposite direction and
reach the assets of the corporate makes the corporation liable for the debt of the shareholders or members
insider (directors, stockholders, and
officers) INT’L ACADEMY OF MANAGEMENT AND ECONMICS V. LITTON & CO.
The sheriff levied a parcel of land in the name of petitioner, a non-stock
corporation, in order to execute the judgment against the lawyer-lessee
(failure to pay rentals). The SC ruled that the corporation is an alter ego of
the lawyer-lessee, and the lessee (natural person) is the alter ego of the
corporation when the lessee falsely represented himself as the president
of the corporation in the Deed of Sale when the bought the property at the
time when the corporation had not yet existed

OUTSIDER REVERSE PIERCING INSIDER REVERSE PIERCING

Occurs when a party with a claim The controlling members will
against an individual or attempt to ignore the corporate
corporation attempts to be repaid fiction in order to take advantage
with assets of a corporation of a benefit available to the
owned or substantially controlled corporation, such as an interest in
by the defendant a lawsuit or protection of personal
assets.
.

Factors to Consider in cases of Parent and Subsidiary Corporations in Alter-Ego Piercing

1. Parent corporation owns all or most of the capital of the subsidiary.
2. Parent and subsidiary corporations have common directors or officers
3. Parent company finances the subsidiary
4. Parent company subscribed to all the capital stock of the subsidiary or otherwise caused its incorporation
5. Subsidiary has grossly inadequate capital
6. Parent corporation pays the salaries and other expenses or losses of the subsidiary
7. Subsidiary has substantially no business except with the parent corporation
8. Parent corporation uses the property of the subsidiary as its own
9. Directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take
their orders from the parent corporation

!!! NOTE: Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital
stock of the corporation does not justify the application of the doctrine.
B. DE FACTO CORPORATION VS. CORPORATION BY ESTOPPEL
DE FACTO CORPORATION CORPORATION BY ESTOPPEL
It has juridical capacity Does not have juridical capacity
One formed where there exists a flaw in its One that exists when 2 or more persons assume to act
incorporation but there exists a colourable as a corporation knowing it to be without authority to
compliance with the requirements of the law. do so.

REQUISITES: NOTES:
1. Existence of a valid law under which it may be 1. The doctrine of corporation by estoppel is
incorporated founded on principles of equity and is
2. Attempt in good faith to incorporate designed to prevent injustice and unjust
!!! Certificate of Incorporation is indispensable. enrichment.
There can be no claim of good faith if there is no 2. The doctrine does not apply against a person
certificate of incorporation who takes no part except to subscribe for stock
3. Actual use or exercise in good faith of corporate (cannot be liable as a partner). However, a
powers (assumption of powers) passive subscriber who obtained benefit is
deemed to be a part of the association
De Jure De Facto 3. A corporation by estoppel may be sued and
It has a right to It has a right to impleaded as a party-defendant considering
that it possesses the attributes of a juridical
corporate existence corporate existence
person, otherwise it cannot be held liable for
even against the until the State damages and injuries it may inflict to other
State. questions its existence persons

Its existence may not Its existence can be

be inquired into by the inquired into by the
State. State through the
SolGen in a direct
attack (quo warranto
proceeding).

.
Liable in the same way as stockholders of a de jure Liable as general partners for all debts, liabilities, and
corporation, that is liable only to the extent of their damages (the individual persons will be held solidarily
subscription. liable)

Examples: RULES
a. Treasurer’s affidavit on the amount of i. An unincorporated association shall not be
subscription and payment is false allowed to use lack of corporate personality
b. The required percentage of Filipino ownership as a defense when it is sued on:
in nationalized activities is not complied with 1. Any transaction entered by it as a
c. Natural persons incorporated misrepresented corporation, or
their age 2. Any tort committed by it as such

ii. As to 3rd persons:

1. The doctrine applies if he knows that
there is no corporation, but nonetheless
treated it as such, and received
benefits from it, the 3rd person is
barred from denying its corporate
existence
2. The doctrine does not apply if the 3rd
person is not trying to escape liability
but rather, he is the one enforcing the
liability or claiming from the contract
C. CORPORATE POWERS
CORPORATE POWERS

1. SECTION 35 – Corporate Powers and Capacity

a. KINDS OF POWERS
i. EXPRESS - Powers expressly provided in the RCCP, applicable special laws, administrative
regulations, and the AOI of the corporation.
1. GENERAL POWERS (Section 35)
a. To Sue and be sued in its corporate name;
b. To have Perpetual existence unless the COI provides otherwise;
c. To Adopt and use a corporate seal;
d. To Amend its AOI
e. To Adopt, amend or repeal bylaws
f. In case of stock corporations, to Issue or sell stocks and to sell treasury
stocks
g. In case of non-stock corporations, to admit members to the corporation
h. To purchase, Receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property
i. To Enter into a partnership, joint venture, merger, consolidation, or any
other commercial agreement with natural and juridical persons;
j. To Make reasonable donations
i. Provided, That no foreign corporation shall give donations in aid of
any political party or candidate or for purposes of partisan political
activity;
k. To Establish pension, retirement, and other plans for the benefit of its
Directors, Trustees, Officers, and Employees; and

2. SPECIFIC POWERS
a. Section 9 (acquire own shares)
b. Section 15 (amendment of AOI)
c. Extend or shorted corporate term (Section 36)
d. Increase or decrease capital stock (Section 37)
e. Incur, create or increase bonded indebtedness (Section 37)
f. Deny pre-emptive right (Section 38)
g. Sell, Dispose, Lease, Encumber all or substantially all Property and Assets
(Section 39)
h. Purchase or Acquire own shares (Section 40)
i. Invest in Another Corporation, Business or for Any Other Purpose (Section
41)
j. Declare Dividends (Section 42)
k. Enter into Management Contracts (Section 43)

ii. IMPLIED – Those that can be inferred from or necessary for the exercise of the express
powers. Implied powers have reference to the exercise of the purpose of the corporation.
1. Test to determine if implied –
a. Whether the act in question is:
i. in direct and immediate furtherance of the corporation's business,
ii. fairly incident to the express powers and
iii. reasonably necessary to their exercise.
If so, the corporation has the power to do it; otherwise, not.

iii. INCIDENTAL - Powers that are deemed conferred on the corporation because they are
incidental to the existence of the corporation. Incidental powers have reference to the
existence of the corporation.

2. SECTION 36 – Power to Extend or Shorten Corporate Term

a. REQUIREMENTS
i. Approved by a majority vote of the BOD or BOT
ii. Ratified at a meeting by the stockholders or members representing at least 2/3 of the OCS or
of its members
iii. Written notice of the proposed action and the time and place of the meeting shall be sent to
the stockholders
iv. In case of extension (or even shortening) of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in this Code.
3. SECTION 37 – Power to Increase or Decrease Capital Stock and Power to Incur, Create or Increase
Bonded Indebtedness
a. Any (1) increase or decrease in the capital stock or (2) the incurring, creating or increasing of
any bonded indebtedness shall require prior approval of the SEC, and where appropriate, of the
Philippine Competition Commission.
i. REQUIREMNTS
1. Approved by a majority vote of the BOD and
2. 2/3 of the OCS at a stockholders’ meeting
3. Written notice of the time and place of the meeting and the purpose for said meeting
must be sent to the stockholders
4. A certificate signed by majority of the directors and countersigned by the
chairperson and secretary of the stockholders’ meeting setting forth:
a. That the requirements of Section 37 have been complied with
b. That amount of the increase or decrease of the capital stock
c. In case of increase of capital stock,
i. The amount of capital stock or number of shares of no par stock
thereof actually subscribed
ii. Names, nationalities and addresses of the persons subscribing
iii. The amount of capital stock or number of no-par stock subscribed by
each
iv. Amount paid by each on the subscription
d. Any bonded indebtedness to be incurred, created or increased
e. The amount of stock represented at the meeting
f. The vote authorizing the increase or decrease of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
ii. Additional Requirement for increase of capital stock
1. a sworn statement of the treasurer of the corporation, showing that:
a. at least 25% of the increase in capital stock has been subscribed and
b. at least 25% of the amount subscribed has been paid in actual cash or
that property, the valuation of which is equal to 25% of the subscription,
has been transferred to the corporation:
b. Sec. 37 does NOT apply to DECREASE of bonded indebtedness.
c. Bonded Indebtedness - secured indebtedness or indebtedness secured by real or personal property
i. The requirement of stockholders’ approval only pertains to incurring, creating, or increasing
bonded indebtedness and does not include paying thereof.

4. SECTION 38 – Power to Deny Pre-emptive Right

a. All stockholders of a stock corporation shall enjoy PREEMPTIVE RIGHT—to subscribe to all issues
or disposition of shares of any class, in proportion to their respective shareholdings.

b. PURPOSE: To maintain relative and proportion voting strength and control of the stockholder

c. Pre-emptive right is NOT available:

i. When such right is denied by the AOI.
ii. When shares are issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or
iii. When shares are issued in good faith with the approval of the stockholders representing 2/3
of the OCS in exchange for property needed for corporate purposes or in payment of
previously contracted debt.
iv. When shares are issued in good faith with the approval of the stockholders representing 2/3
of the OCS in payment of previously contracted debt.

d. Stockholders may choose not to exercise this right. But stockholders must be given a reasonable
time to exercise their preemptive right and failure to exercise the same within such period is deemed
a waiver thereof.

e. Pre-emptive right covers all issues and disposition:

i. Issuance of the unsubscribed shares that are part of the original CS and
ii. Increase of CS
iii. Disposal of its treasury shares.
5. SECTION 39 – Sale or Other Disposition of Assets
a. Sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets
i. Requires MAJORITY vote of the Board (not only of those who are present)
b. Sell, lease, exchange, mortgage, pledge, or otherwise dispose of ALL or SUBSTANTIALLY ALL of the
corporation’s properties and assets
i. Requires MAJORITY vote of the Board + 2/3 of stockholders
ii. If non-stock corporation where there are no members with voting rights, at least a majority
of the trustees in office will be sufficient.
c. Meaning of Substantially All
i. If the corporations would thereby be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated. The test is not the amount
involved but the nature of the transaction.
d. Transfer in the regular course of business requires Board approval ONLY.
e. Any dissenting stockholder may exercise the right of appraisal under the conditions provided in
this Code.
i. It is the right of the stockholder to withdraw from the corporation and demand payment of
the fair value of his or her shares.
f. After such authorization or approval by the stockholders/members, the Board may, nevertheless, in
its discretion, ABANDON such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the rights of third parties under any contract relating thereto.
g. EFFECT ON CREDITORS
i. GENERAL RULE: The transferee-corporation of all or substantially all of the assets of the
transferor-corporation will not be liable for the debts of transferor-corporation
ii. EXCEPTIONS: NELL DOCTRINE The transferee-corporation is liable:
1. If there is an express or implied assumption of liabilities
2. The transaction amounts to a consolidation or merger
3. If the transaction is entered into fraudulently in order to escape liability from debtors
or the purchase was in fraud of creditors.
4. If the purchaser becomes a continuation of the seller [Business Enterprise
Transfer]

6. SECTION 40 – Power to Acquire Own Shares

a. TREASURY SHARES – shares which have been issued and fully paid for, but subsequently reacquired
by the issuing corporation through purchase, redemption, donation or some other lawful means.

b. REQUIREMENTS FOR ISSUANCE OF TREASURY SHARES:

i. The corporation has unrestricted retained earnings
1. There is a need for unrestricted RE because of the Trust Fund Doctrine.
ii. The acquisition is for a legitimate corporate purpose/s such as:
1. To eliminate fractional shares arising out of stock dividends;
2. 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
said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code
c. EXCEPTION FROM THE RQUIREMENT OF UNRESTRICTED RETAINED EARNINGS
i. Redeemable Shares
ii. Donation

7. SECTION 41 – Power to Invest Corporate Funds in Another Corporation or Business for Any Other
Purpose
a. REQUISITES for a corporation to invest its funds in any other corporation, business, or for any
purpose other than the primary purpose (e.g. secondary purpose) for which it was organized,
i. Approved by a MAJORITY of the board of directors or trustees and
ii. Ratified by the stockholders representing at least 2/3 of the OCS, or by at least 2/3 of the
members
b. Where the investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the AOI, the approval of the stockholders or members shall not be necessary.
8. SECTION 42 – Power to Declare Dividends
a. DIVIDENDS – the stockholders’ share in the corporate income
b. APPROVAL REQUIRED:
i. Cash Dividends – BOD only
ii. Property Dividends – BOD only
iii. Stock Dividends – BOD and stockholders representing 2/3 of OCS
1. For stock dividends, it is still the discretion of the BOD whether or not to declare such

c. REQUIREMENTS FOR DECLARATION:

i. Unrestricted retained earnings
ii. Resolution of the Board
iii. If stock dividends, there must be a resolution of the Board with the concurrence of the 2/3 of
OCS

d. NO DIVIDENDS FROM CAPITAL

GR: Dividends cannot be declared out of capital.
(RATIO: The Trust Fund Doctrine will be violated if dividends are declared out of capital)
XCP: (1) liquidating dividends
(2) Wasting assets corporations – corporations solely or principally engaged in the
exploitation of wasting assets.
Trust Fund Doctrine – considers the subscribed capital as a trust fund for the payment of
the debts of the corporation.
NOTE: There are no other exceptions with respect to the normal operations of the
corporation.
e. Even unpaid subscribers are entitled to dividends. However,
i. Any cash dividends shall first be applied to the unpaid balance plus cost and expenses
ii. Any stock dividends shall be withheld from the delinquent shareholder until his unpaid
subscription is fully paid

f. Treasury Shares are not entitled to dividends because only Outstanding Shares (which excludes
Treasury Shares) are entitled to dividends.

g. GENERAL RULE: When there are profits earned by the corporation, BOD has the discretion to
declare dividends.
EXCEPTION: It is not anymore discretionary if retained earnings exceed 100% of the paid-
in capital.
RATIO: It is a safeguard against unjustified accumulation of profits.

XCP to XCP: Even if it exceeds 100%, the corporation may still refuse to declare dividends:
i. when justified by the definite corporate expansion projects or programs
approved by the BOD; or
ii. 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
iii. 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. SECTION 43. Power to Enter into Management Contract. –
a. MANAGEMENT CONTRACT
It is an agreement whereby one undertakes to manage or operate all or substantially all of the
business of another, whether such contracts are called service contracts, operating agreements or
otherwise.

b. APPLICABILITY
Applicable only when it involves 2 corporations. If the other one is a natural person or partnership,
it is appropriately called employment contract rather than management contract.

c. TERM
The maximum term is 5 years for any 1 term. However, this term is subject to renewal.

d. APPROVING AUTHORITY
i. Generally, for BOTH managing and managed corporation
1. Majority of the BOD and
2. Majority of the OCS or of the members

ii. In the following cases, instead of majority of the OCS or of the members, 2/3 of the OCS or of
the members of the managed corporation is required:
1. where stockholder/s representing the same interest of both the managing and
managed corporations own or control more than 1/3 of the total OCS of the
managing corporation; or
2. where a majority of the members of the BOD of the managing corporation also
constitute a majority of the members of the BOD of the managed corporation.
SUMMARY OF VOTING REQUIREMENTS
POWER Board of Directors Outstanding Capital Stock
(or Trustees) (or Members)
Amendment of AOI Majority of the Board 2/3 of OCS
Election of Directors - Majority of OCS
Appointment of Corporate Officers Majority of the Board -
Removal of Corporate Officers Majority of the Board -
Removal of Directors/Trustees - 2/3 of OCS
Filling of Vacancy in the Board Majority of remaining Majority of OCS, if the ground is
directors/trustees, if the ground is not expiration, removal, increase in number of
expiration of the term, removal, increase in directors, or if the ground is not among
number of board seats, and the remaining them but the remaining directors do not
directors constitute quorum constitute quorum
Payment of Compensation to - Majority of OCS
Directors
Appointment of Members of Majority of the Quorum -
Executive Committee
Creation of Special Committees Majority of the Quorum -
Extension or Shortening of Term Majority of the Board 2/3 of OCS
Incurring, Creating, or Increasing Majority of the Board 2/3 of OCS
Bonded Indebtedness

Increasing or Decreasing Capital

Stock
Incurring Debt in the Ordinary Majority of the Quorum -
Course of Business
Sale or Other Disposition of Assets – Majority of the Quorum -
in the ordinary course of business
Sale or Other Disposition of Assets – Majority of the Board 2/3 of OCS
all or substantially all of corporate
assets
Invest Funds in the Primary Majority of the Quorum -
Purpose
Invest Funds to Incidental Purpose Majority of the Quorum -
for which Corporation is Created
Invest Funds in a Secondary Majority of the Board 2/3 of OCS
Purpose or Another Business
Declaration of Cash Dividends Majority of the Quorum
Declaration of Stock Dividends Majority of the Quorum 2/3 of OCS
Enter Into Management Contract Majority of the Quorum for both Majority of OCS of both the
managed and managing managed and managing
corporation corporation

Majority of OCS of managing

corporation and 2/3 of OCS of
managed corporation, in case of
interlocking directors and stockholders,
Adoption of Bylaws - Majority of OCS
Amendment of Bylaws Majority of the Board Majority of OCS
Delegation to the Board of the - 2/3 of OCS
Authority to Amend Bylaws
Revocation of the Delegation made - Majority of OCS
to the Board
Fixing the Issued Value of No Par Majority of the Quorum or Majority of OCS
Value Shares (if not fixed in the
AOI) Pursuant to authority conferred by the AOI
or Bylaws
Merger or Consolidation Majority of the Board 2/3 of OCS
Amendment of AOI of a Close 2/3 of OCS
Corporation
Voluntary Dissolution Where No Majority of the Board Majority of OCS
Creditors are Affected
Voluntary Dissolution Where Majority of the Board 2/3 of OCS
Creditors are Affected
1. How powers are exercised
By the Shareholders
Vote of stockholders representing 2/3 of the outstanding capital stock or 2/3 of members
1. Extension or shortening of corporate term
2. Increase or decrease of capital stock or the creation of bonded indebtedness
3. Power to deny pre-emptive right, in these cases:
a. Shares issued in good faith in exchange for property for corporate purposes
b. Shares in payment of previously contracted debts
4. Sale of all or substantially all corporate assets
5. Investing corporate funds in another corporation or business or for any other purpose other than its primary
purpose
6. Power to enter into management contracts in the following instances:
a. Where stockholders representing the same interest of both the managing and the managed
corporations own more than 1/3 of the total OCS entitled to vote of the managing corporation
b. Where a majority of the members of the BOD of the managing corporation also constitute a majority
of the members of the BOD of the managed corporation
7. Declaration of stock dividend

However, among the powers of corporations, only majority vote is needed in the power to enter into management
contracts, except in instances mentioned in No. 6.

By the Board of Directors

The BOD is the main agency by which all corporate powers and authority are exercised. Majority approval of the
BOD is needed to bind the corporation to any corporate act – whether or not stockholder approval is also required.
1. Extension of shortening of the corporate term
2. Increase or decrease of capital stock or the creation of bonded indebtedness
3. Sale or other disposition of corporate assets
4. Sale or other dispositions of all or substantially all corporate assets (with 2/3 stockholders or members
authorization)
5. Acquisition of its own shares
6. Investment of corporate funds in any corporation or business or for any purpose other than its primary
purpose (with 2/3 stockholders ratification)
7. Declaration of cash, property and stock dividends (if stock dividends, it must be joined with 2/3 vote of
shareholders)
8. Entering into management contracts (accompanied by the approval of the shareholders or members)

By the Officers
The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or as
resolved by the BOD.
Executive Committee
GR: If the bylaws so provide, the board may create an Executive Committee composed of at least 3 directors. The
Executive Committee may act, by majority vote, on specific matters within the competence of the board as
delegated to it.

EXP:
1. Acts where stockholders’ approval is also needed
2. Filling vacancies within the BOD
3. Amending, repealing, or adopting bylaws
4. Amending or repealing resolutions of the Board where the resolution by express terms is not so amenable
or repealable by the Executive Committee
5. Distribution of cash dividends

!!! DOCTRINE OF APPARENT AUTHORITY

The doctrine provides that a corporation will be estopped from denying the agent’s authority if it knowingly permits
one of its officers or any other agent to act within the scope of apparent authority, and it holds him out to the public
as possessing the power to do those acts. This doctrine is determined by the acts of the principal (corporation), and
not by the acts of the agent.
• The doctrine of apparent authority will not apply if the transaction is not part of the function of the officer
within the corporation and/or the transaction is not related to the purpose of the corporation. As a simple
example, the officer of the corporation in charge of the administration of facilities can never bind the
corporation for contracts relating to an investment in securities as the latter transaction is not related to the
function of the office in the corporation.
a. Ultra vires doctrine
Corporate transaction that is outside the objects for which the corporation was created as defined in the law of its
organization, and therefore, beyond the powers conferred upon it by law

Test to determine whether or not an act is within the powers of the corporation
The test is whether or not the act is necessary, relevant or in furtherance of the purpose of the corporation. If yes,
the act is intra vires. If no, the act is ultra vires.

APPLICABILITY OF ULTRA VIRES DOCTRINE

Ultra vires act is not limited to any act which is outside the express and incidental powers of the corporation

3 TYPES OF ULTRA VIRES ACTS

i. Acts done beyond the powers of the corporation as provided in the law or its AOI
ii. Acts entered into on behalf of the corporation by persons who have no corporate authority
or exceeded the scope of their authority
iii. Acts or contracts, which are illegal per se as being contrary to law

ULTRA VIRES ACTS VS. ILLEGAL ACTS

ULTRA VIRES ACTS ILLEGAL ACTS
Voidable Void regardless of performance, ratification, or
estoppel
An ultra vires act is not necessarily an illegal act if it is An illegal act, one that is contrary to law, is necessarily
only one that is outside the conferred powers of the ultra vires
corporation
May be enforced by performance, ratification, and Cannot be validated
estoppel

CONSEQUENCES OF ULTRA VIRES ACTS

i. EXECUTED CONTRACTS
When the contract is fully executed on both sides, the contract is effective and will stand as a foundation
of rights acquired under it

ii. EXECUTORY ON ONE SIDE AND EXECUTED ON THE OTHER

When the contract is executory on one side and has been fully performed on the other, the party who has
received benefits is estopped in claiming that the contract is ultra vires

iii. EXECUTORY CONTRACTS

When both contracts are wholly executory on both sides, neither party can maintain an action. Protection
of stockholders may be a sufficient ground to enjoin the performance of the act

REMEDY AGAINST ULTRA VIRES ACTS

i. ACT YET TO BE DONE
Injunction to enjoin the performance or continued performance of the ultra vires act

ii. ACT HAS ALREADY BEEN PERFORMED

Derivative suit on behalf of the corporation to set aside the ultra vires act

NOTES:
• Acts that do not comply with formalities prescribed in the AOI or bylaws are not necessarily ultra vires acts
of the corporation.
• Unauthorized act of officers → When the act is within the powers of the corporation, but not within the
powers of a particular officer, it is referred as ultra vires act of the officer. The law on agency applies.
o For example, if there is no written authority from the BOD to sell the land in the form of a Board
Resolution, the sale of the land by an officer shall be void.
b. Trust fund doctrine
Subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look
for the satisfaction of their claim. In a sense, they have to be unimpaired for the protection of creditors. There
can be no distribution of assets among the stockholders without first paying corporate creditors. Any disposition of
corporate funds to the prejudice of creditors is null and void

COVERAGE
CORPORATION IS SOLVENT CORPORATION IS INSOLVENT
The subscribed capital stock, including premiums The doctrine is not limited to the subscribed capital
(additional paid-in capital, premium above par value). stock but includes all assets and properties of the
corporation
The corporation may not dissipate the trust fund and
the creditors may sue the stockholders directly for their
unpaid subscription

GENERAL RULE: Stockholders cannot demand the return of his investment

EXCEPTION: (1) Right of appraisal
(2) Redeemable shares
(3) Dissolution and liquidation of the corporation
(4) Acquisition of its own shares (treasury shares)

WHEN IS THE DOCTRINE OF TRUST FUND VIOLATED

1. The corporation has distributed its capital among the stockholders without providing for the payment of
creditors
2. It released the subscribers to the capital stock from their unpaid subscriptions
3. It transferred corporate property in fraud of its creditors
4. It distributed properties to stockholders except by way of dissolution and liquidation, the redemption of
redeemable shares, and reduction of capital stock
5. When it declared dividends without unrestricted retained earnings
6. When it acquires its shares without unrestricted retained earnings

NOTES:
• The rescission of the Subscription Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust Fund Doctrine. Rescission of a
subscription agreement is not one of the instances when the distribution of capital assets and property of
the corporation is allowed.
• The corporation cannot condone subscription receivables due from its shareholders because it will violate
the trust fund doctrine.
• Two (2) instances when the creditor is allowed to maintain an action upon any unpaid subscriptions based
on the trust fund doctrine:
(1) Where the debtor corporation released the subscriber to its capital stock from the obligation of
paying for their shares without a valuable consideration, or fraudulently, to the prejudice of the
creditors (condoned)
(2) Where the debtor corporation is insolvent or has been dissolved without providing for the
payment of its creditors.

!!! Enano-Bote vs. Jose Alvarez and SBMA (J. Caguiao)

SBMA leased a building to lessee-corporation. Lessee did not pay the rentals.
Can SBMA collect the unpaid subscriptions of the subscribers of the lessee-corporation?
No. While the creditor (SBMA) can enforce payment of the unpaid subscriptions of the lessee-corporation under the
Trust Fund Doctrine, it can only do so if the lessee-corporation is already insolvent, or has been dissolved, or has
condoned the unpaid subscriptions. None of those circumstances are present, thus, SBMA cannot go after the unpaid
subscriptions just as yet.
D. BOARD OF DIRECTORS AND TRUSTEES

1. Basic principles
a. Doctrine of centralized management
Corporate powers are vested in a body called BOD or BOT
Unless otherwise provided in the Code, the BOD/BOT shall
i. Exercise the corporate powers
ii. Conduct all business, and
iii. Control all properties of the corporation

The directors or trustees are the executive representatives of the corporation charged with the administration of
its internal affairs and management and use of its assets

RATIONALE
The concentration of powers in the board is necessary for efficiency in any large organization. Stockholders are
too numerous, scattered, and unfamiliar with the business corporation to conducts its business directly

GENERAL RULE: BOD/BOT exercises the corporate powers

EXCEPTION: Unless otherwise provided in the Code. Such as constituent acts or acts which involve
fundamental or major changes in the corporation which require approval of the
stockholders (e.g., amendment of the AOI, investment of corporate funds)
REMEDY
Stockholders cannot reverse the decisions of the board
i. Stockholders are mere investors, and do not control the BOD/BOT
ii. Stockholders already relinquished its right in the management and control to the BOD/BOT upon their
election

BUSINESS JUDGMENT / INTRA VIRES ACTS ULTRA VIRES ACTS

The stockholders can unite for the Derivative suit
i. Removal of the directors, with or
without cause, or
ii. Election of new set of directors

b. Business judgment rule

Questions of policy and management are left to the sound discretion of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for the judgment of the board of
directors
i. 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
ii. Courts are barred from intruding into the business judgments of the corporations when the same are
made in good faith
iii. Stockholders cannot likewise interfere with the board conducting the business affairs of the corporation
iv. Mere error in business judgment, which does not amount to bad faith or negligence, cannot hold the
BOD/BOT liable

COVERAGE
a. Resolutions and transactions entered into by the Board of Directors within the powers of the corporation
cannot be reversed by the courts not even on the behest of the stockholders of the corporation, and
b. Directors and officers acting within such business judgment cannot be held personally liable for the
consequences of such acts

REQUIREMENTS
1. Presence of a business decision
2. Decision is intra vires and must comply with the procedural and substantive requirements of law
3. Good faith
4. Due care in making the decision
5. Director must not have personal interest, not be self-dealing, or not in breach of the duty of loyalty.

RATIONALE
i. If mere good faith errors in judgment are punishable, few will be willing to serve as BOD/BOT
ii. Courts are generally ill-equipped to evaluate business judgments

NOTE: The business judgment rule is not absolute. Corporate acts cannot be justified under the business judgment
rule if they are contrary to law (e.g., declaration of dividends when there is no surplus profit).
HOW DOES THE BOD/BOT ACT
i. The Board must act, not individually, but as a body
ii. The actions of the Board are expressed in Resolutions
iii. Procedure in determining whether there is a valid resolution
First, determine if there is quorum
GENERAL RULE: A majority of the number of directors/trustees as fixed in the AOI shall
constitute quorum
EXCEPTION: When the AOI or bylaws provides a greater but not lesser majority

Second, when there is already quorum, determine whether the required number of votes are attained
Every decision requires majority of the directors/trustees present at the meeting at which there
is a quorum

2. Tenure and qualifications of directors or trustees

Term → the time during which the officer may claim to hold the office as a right and fixes the interval after which
the several incumbents shall succeed one another. This is fixed by statute.
Tenure → represents his actual incumbency. The tenure may be shorter or longer (in case of holdover) than the
term.

TERM OF OFFICE
DIRECTORS (stock) TRUSTEES (non-stock)
Directors shall be elected for a term of 1 year from Trustees shall be elected for a term not exceeding 3
among the holders of stocks registered in the years from among the members of the corporation
corporation’s books
Bylaws cannot provide for a shorter nor a longer term Bylaws can provide for a shorter but not a longer term

RATIONALE
i. To protect the corporation, its creditors, and
the public dealing with it so that if an
improvident or wrongful act is committed
by the current board, the subsequent board
can redress or prevent the wrong
ii. To ensure that the stockholders can
participate in the management of the
corporation and that the management is not
dominated by the same director/s

JURIDICAL PERSONS
i. Can be an incorporator and a stockholder, but cannot be a director (directors must be natural persons
– acts of management can only be performed by a natural person)
ii. While a corporation cannot be elected as a director, it may designate a nominee who is eligible to be
elected as director
1. This is by giving one of its officers or any representative 1 qualifying share
2. The nominee is no longer qualified to be a director the moment his assignment as nominee is
revoked by his principal

HOLD-OVER PRINCIPLE
Directors/Trustees may continue to hold office despite the lapse of 1 year until their successors are elected and
qualified
i. If no election is held for some reason, the incumbent directors shall hold over until their successors are
elected
ii. The power of the directors who are serving in holdover capacity is not diminished

NOTE: Remaining members of the board cannot elect another director to fill in a vacancy caused by the resignation
of a hold-over director. The hold-over period is not part of the term of office of a member of the board. When the
holdover director resigns, the vacancy can only be filled up by the stockholders.
QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES
QUALIFICATIONS DISQUALIFICATIONS
1. If stock corporation, must own at least 1 share 1. When the director ceases to own at least 1
of capital stock in his own name, and if non-stock share of stock or the member ceases to be a
corporation, must be a member member. The disqualification is automatic
2. Must not be disqualified under the RCCP or
special laws 2. If within 5 years prior to the election, the
3. Must be of legal age person was:
4. Must possess other qualifications as may be a. Convicted by final judgment
prescribed in special laws i. Of an offense punishable by
imprisonment for a period
NOTE: Legal title as it appears in the books is sufficient. exceeding 6 years
It is legal title, and not beneficial ownership, which is ii. For violating this Code
material. Legal title is based on the books of the iii. For violating RA 8799 (SRC)
corporation. Thus, a trustee under a voting trust If the case is on appeal, the
agreement can qualify as a director. stockholder can still be elected
as director because there is no
Under the RCCP, directors or trustees need NOT be conviction by final judgment
• Residents yet
• Filipino citizens b. Found administratively liable for any
offense involving fraudulent acts
However, if the corporation is engaged in c. By a foreign court or equivalent foreign
nationalized activities, citizenship becomes a regulatory authority for acts, violations,
qualification. Foreigners can only be appointed or misconduct similar to those
to the board in proportion to their foreign enumerated above
equity as allowed by law.
This list is not exclusive
Example: A mining corporation is 70% Filipino-
owned and 30% foreign-owned. In such a case, EFFECT OF DISQUALIFICATION
only 30% of the directors may be foreigners. PRIOR TO ELECTION AFTER ELECTION
The stockholder cannot The subsequent
run for election as disqualification would
director not render the Board
incapable of transaction
business as long as there
is still a quorum. Such
situation merely gives
rise to a vacancy
.
NOTES:
• A provision in the bylaws which allots a permanent seat in the board to a non-member of the association is
contrary to law. The fact that said seat was held for 15 years cannot give rise to a vested right and estoppel
cannot forestall a challenge against an act that is contrary to law.
• The bylaws may enlarge the share ownership requirement provided that it is not intended to deprive
minority representation.

INDEPENDENT DIRECTOR
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

Corporations vested with public interest shall have independent directors constituting at least 20% of its Board:
1. Public companies covered by Section 17.2 of SRC
a. Those whose securities are registered with SEC
b. Those listed for trading with an exchange
c. Those with assets of at least 50M and having 200 or more stockholders, each holding at least 100
shares
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need,
trust and insurance companies, and other financial intermediaries, and
3. Other corporations engaged in business vested with public interest similar to the above, as may be
determined by the Commission.

SEC MC 9-2009 provides that a regular director who resigns or whose term ends on the day of the election shall only
qualify for nomination and election as independent director only after a 2-year cooling off period.

NOTE: The segregate casting of votes for regular and independent directors is not contrary to the RCCP.
3. Election and removal of directors or trustees
WHO CAN BE “ELECTED” WHO CAN “ELECT”
GENERAL RULE: Any stockholder who possesses all of GENERAL RULE: Any stockholder who is not
the qualifications and none of the disqualifications delinquent can vote (delinquent stocks refer to those
stocks with unpaid subscription)
EXCEPTION: When the exclusive right to be elected as
directors is reserved for holders of founders’ shares EXCEPTION: Even if not delinquent, the stockholder
under Sec. 7. They have the exclusive right to elect cannot vote if there are holders of founders’ shares
and be elected as member of the Board for a period not who have the exclusive right to elect and be elected
exceeding 5 years

MANNER OF ELECTION
1. MEETING
a. Quorum cannot be dispensed with
b. An agreement between stockholders that directors will be designated is not allowed

REQUIREMENTS:
i. Presence of owners majority of the outstanding capital stock, or members entitled to vote
ii. The bylaws cannot set a greater nor lesser majority for purposes of stockholders’ meeting

2. VOTING
a. 3 ways how a stockholder can vote
i. Personally by attending the meeting
ii. Through proxy
iii. Through remote communication or in absentia (e.g., teleconferencing or video conferencing)
Only allowed when authorized by the
1. Bylaws
2. Majority of the BOD
3. Even without provision in the bylaws, in corporations vested with public interest

NUMBER OF VOTES NUMBER OF SHARES

To determine the number of votes a stockholder To determine the number of shares of a
has, multiply his number of shares by the number stockholder, reference must be made in the books
of directors to be elected of the corporation

What is the reckoning date in determining the

number of shares?
GENERAL RULE: At the date of election
EXCEPTION: The record date as provided in the
bylaws

b. Votes required to elect a director/trustee

i. The law requires only the plurality of the votes cast at the election
ii. Majority vote is not necessary
iii. If there are the same number of candidates and number of directors to be elected, as long as the
candidate receives at least 1 vote, he or she is elected in the position.
a. Should there be 11 nominees to the BOT, which is below the required number of trustees to
be elected which is 15 under their AOI, then all the 11 nominees are automatically elected
regardless of the number of votes received by each.
b. An election of less number of directors than the number which the meeting was called to elect
is valid as to those actually elected. Such a situation would merely give rise to a vacancy in
the board, which may be later filled up. The power of the board is not suspended by vacancies
in the board, unless the number is reduced below a quorum..

c. If there is less than majority present in the meeting, there is no valid election
The meeting cannot be indefinitely adjourned
 OPTIONS OF STOCKHOLDERS IN VOTING
STOCK CORPORATION NON-STOCK CORPORATION

STRAIGHT VOTING CUMULATIVE VOTING GENERAL RULE: Members of non-stock

Vote such number of Cumulate said shares corporations may cast as many votes as there are
shares for as many and give 1 candidate as trustees to be elected but may not cast more than
persons as there are many votes as the 1 vote for 1 candidate.
directors to be elected number of directors to
be elected multiplied EXCEPTION: Unless otherwise provided in the
by the number of the AOI or in the Bylaws. The bylaws can identify the
shares owned method of voting or even use the same methods
The stockholder The stockholder can used in stock corporations
cannot vote more than vote as many
his number of shares candidates as he
for each director to be wants, the only
elected limitation is that the
total number of votes
cast does not exceed
the total number of
votes that he has
.

NOTES:
1. The bylaws cannot restrict or specify the method of voting. The 3 options are available to the
stockholder
2. The bylaws cannot provide any other method of voting
3. Rationale of Cumulative Voting:
a. To increase the chances of the minority stockholders to elect a director or to ensure minority
representation in the Board
b. This serves as a safeguard. Directors elected by the minority cannot be removed by the
stockholders without just cause

EMERGENCY QUORUM
a. Within 30 days from the date of the scheduled election, report must be submitted to the SEC which
shall include:
i. The fact of non-holding of the election
ii. The reason for the non-holding of the election
iii. The new date for the election, which shall not be later than 60 days from the scheduled date

b. REMEDY if no new date has been designated, or the rescheduled election is not held:
i. The SEC, upon application (not motu proprio) of a stockholder, member, director or trustee,
shall:
1. Conduct a verification of the unjustified non-holding of the election, and thereafter
2. Summarily order that an election be held

ii. In the election ordered by the SEC, emergency quorum applies

1. The regular majority is no longer necessary for the existence of the quorum
2. The shares represented at such meeting and entitled to vote shall constitute the
quorum. The election will be valid, even if there is no majority
3. The directors to be elected is still determined by plurality of votes
REMOVAL
1. The removal must be by a vote of the stockholders representing 2/3 of the OCS, or of the members
i. If the director is elected by the minority stockholders, he can only be removed with a cause.
Otherwise, directors can be removed with or without cause

2. The removal shall take place either at a regular meeting or at a special meeting called for that purpose
3. After previous notice to the stockholders or members of the intention to propose such removal
4. The regular meeting is called by the officers named in the bylaws or a special meeting is called by the
secretary on order of either the (1) president or (2) written demand of majority stockholders
i. If there is no secretary or the secretary fails or refuses to call the special meeting or give notice
thereof, the stockholder or member of the corporation signing the demand may call for the meeting
directly addressing the stockholders/members (this is the safeguard that there will always be BOD
elected)

5. The SEC shall motu proprio or upon verified complaint, and after due notice and hearing, order the removal
of director or trustee who is:
i. Elected despite the disqualification, or
ii. Whose disqualification arose or is discovered subsequent to an election

!!! The board of directors has no power to remove one of their members. The bylaws cannot provide so. The power
to remove belongs only to the stockholders.

VACANCY
The vacancy must be filled through an election by the The vacancy may be filled by either
stockholders or members: i. vote of at least majority of the remaining
directors, where there is still a quorum or
ii. election by the stockholders or members:
1. Removal of director Other grounds such as death, resignation, or
2. In case of removal, the vacancy may be filled on abandonment, where there is quorum
the same day of the meeting authorizing the
removal, provided: The agenda and notice of
the meeting provide for such election of a
replacement director

3. Expiration of term
4. Other grounds such as death, resignation, or
abandonment, where there is no quorum
5. Increase in the number of directors
NOTE: The vacancy if filled only for the unexpired term of the predecessor in office

WHEN ELECTIONS MAY BE HELD

DUE TO TERM EXPIRATION No later than the day of such expiration at a meeting
called for that purpose
RESULT OF REMOVAL 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
IN ALL OTHER CASES No later than 45 days from the time the vacancy arose

EMERGENCY BOARD
WHEN CREATED
1. When vacancy prevents the remaining directors from having a quorum, and
2. Emergency action is required to prevent grave, substantial and irreparable loss or damage to the
corporation
3. The vacancy is filled by unanimous vote of the remaining directors
4. Can be created when vacancy is due to removal, expiration of term, resignation, death, but not when due to
increase in number of directors

CONDITIONS
1. The action by the designated director shall be limited to the emergency action necessary
2. The term shall cease within a reasonable time from the termination of the emergency or upon
replacement of the director, whichever is earlier and
3. Corporation must notify the SE within 3 days from creation of the emergency board
4. Duties, responsibilities, and liabilities for unlawful acts
THREE-FOLD DUTIES OF DIRECTORS
1. Duty of obedience
To direct the affairs of the corporation only in accordance with the purposes for which it was organized

2. Duty of Loyalty
Directors or trustees shall not acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees

3. Duty of Diligence
Directors and/or trustees shall not willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or act in bad faith or with gross negligence in directing the affairs of the corporation

GR: Obligations incurred as a result of the directors’ and officers’ acts as corporate agents are not their personal
liability, but the direct responsibility of the corporation they represent.

EXP: !!! Only in these 6 instances that the directors, trustees or officers are held personally liable:
(1) Knowingly voting for or assenting to patently unlawful acts of the corporation
(2) Gross negligence or bad faith in directing the affairs of the corporation
(3) Acquiring any personal or pecuniary interest in conflict with his duty as director or trustee or officer
resulting in damage to the corporation
(4) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto
(5) He agrees to hold himself personally liable with the corporation [contractual liability]
(6) He is made, by specific provision of law, to personally answer for his corporate action. [statutory
liability] e.g., Trust Receipts Law

SEC. 30 (liability; jointly and severally SEC. 31 (contract; self-dealings) SEC. 32 (contract; interlocking
liable) directors)
SEC. 30 (1) A contract of the corporation with 1 or [VALID]
1. Directors or trustees who more of the directors, trustees, officers Interlocking directorship, by
willfully and knowingly vote or their spouses and relatives within itself, is not prohibited.
for or assent to patently 4th civil degree of consanguinity or
unlawful acts of the affinity is VOIDABLE, at the option of [VOIDABLE]
corporation the corporation 1. The same is
disallowed by the
Patently unlawful acts – one The remedy of annulment is available bylaws
declared unlawful by law that by filing an action before the courts 2. Where there is fraud
imposes penalties for the within 4 years 3. Where the contract is
commission of such unlawful not fair and
acts The effect of annulment is restitution reasonable
which restores the parties to the
It is not required that the positions they would have had if
director does the act itself. the contract had not been made [VOIDABLE at the instance of
Voting or assenting to the the corporation where the
patently unlawful acts is Once the 4 years have lapsed, the director has nominal interest]
enough to be liable contract becomes perfectly valid If the interest of the
interlocking director in 1
It is not required that the However, within the 4-year period, the corporation is substantial and
director be present and vote. It contract may still become valid in 2 the interest in the other
may be by assenting or instances: corporation/s is merely
consenting after the voting has nominal, the contract shall be
been held 1. By ratification which cleanses subject to the provisions of the
the contract from any defect preceding section insofar as
2. Directors or trustees are guilty [VALID] the latter corporation/s are
of gross negligence or bad REQUIREMENTS concerned.
faith in directing the affairs of i. Ratification is by a vote
the corporation of the stockholders [VALID if:]
representing at least 1. The presence of the
BAD FAITH GROSS 2/3 of the OCS or of the interlocking director in
NEGLIGENCE members the board meeting
Imports a Characterized ii. There is full disclosure where he has nominal
dishonest by the want of of the adverse interest interest is not
purpose, or even slight of the directors or necessary
some moral care. It is not trustees involved
obliquity presumed. It
 and amounts to iii. The contract must be 2. The vote of the
conscious bad faith fair and reasonable interlocking director is
wrongdoing, Fair and reasonable not necessary for
or breach of means that there is approval
a known substantive or intrinsic 3. The contract is fair
duty. It is fairness. It must reflect and reasonable
not an arm’s length market
presumed transaction. If No. 1 or 2 is absent, the
contract remains as
3. Directors or trustees acquire 2. When conditions provided VOIDABLE. Such contract may
any personal or pecuniary under Sec. 31 are met be ratified
interest in conflict with their [VALID] 1. By the vote of 2/3 OCS
duty as such directors or i. The presence of such or members
trustees director or trustee in 2. Full disclosure of
the board meeting in adverse interest
REQUIREMENTS which the contract was 3. Contract is fair and
a. Must be personal or approved was not reasonable
pecuniary interest necessary to constitute
b. Must be related to the a quorum
duty as a director or ii. The vote of such Stockholding exceeding 20%
trustee director or trustee was of the OCS shall be considered
not necessary for the substantial for purposes of
SEC. 30 (2) – secret profits approval of the interlocking directors.
contract
REQUIREMENTS iii. The contract is fair and
i. A director, trustee or officer reasonable under the
attempts to acquire or circumstances
acquires any interest
adverse to the corporation
ii. Adverse interest is on a
matter which has been
reposed in them in
confidence
iii. Equity imposes a disability
upon him or her to deal in
his or her own behalf

LIABILITY
i. The director, trustee or
officer is liable as a trustee
ii. He must account for the
profits which otherwise
would have accrued to the
corporation

For this to apply,

i. No bad faith is required
ii. Damage to the corporation
is also not required

SEC. 33 (Disloyalty/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 OCS.

This provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in the
venture.

SPECIAL FACT DOCTRINE

Makes a director or officer liable when he takes advantage of an information by virtue of his office to the disadvantage
of the corporation.
E. STOCKHOLDERS AND MEMBERS

1. Rights and obligations of stockholders and members

RIGHTS OBLIGATIONS
a. Proprietary rights – these rights pertain to 1. To pay unpaid subscription
certain economic benefits that accrue to his 2. To pay interest on unpaid subscription if so
shares required by the bylaws or in case of default
i. Right to receive dividends 3. Liable to the creditors of the corporation for
ii. Right to participate in the assets of the unpaid subscription based on the trust fund
corporation upon dissolution and doctrine
liquidation 4. Liable for watered stocks
5. Liable to return dividends unlawfully paid
a. Management rights – these refer to 6. Liable for claims against the corporation in
participation in the conduct of the business of cases where the corporate veil is pierced
the corporation
i. Right to vote on all corporate acts
requiring stockholder’s approval
ii. Right to elect the directors of the
corporation

b. Remedial rights – these refer to remedies the

stockholder may pursue depending on the
issues involved
i. Appraisal right
ii. Pre-emptive right
iii. Right to inspect
iv. Right to copy of the financial statements
of the company
v. Right to file derivative suit

a. Doctrine of equality of shares (Sec. 6)

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

All stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences

2. Participation in management
a. Proxy
i. It is a written authorization given by a shareholder to someone else to represent him and vote his shares at
a stockholders’ meeting
ii. It also refers to the person who is so authorized to act or vote in a stockholders’/members’ meeting as
representative

REQUIREMENTS
1. in writing
2. signed and filed, by the stockholder or member
3. in any form authorized in the bylaws, and
4. received by the corporate secretary within a reasonable time before the scheduled meeting
5. unless otherwise provided in the proxy form, it shall be valid only for the meeting for which it is intended
6. no proxy shall be valid and effective for a period longer than 5 years at any one time. While the proxy cannot
exceed 5 years, a new proxy can always be given with another 5-year period.
b. Voting trust
An agreement whereby one or more stockholders of stock corporation confer upon a trustee or trustees the right to
vote and other rights pertaining to the shares for a period not exceeding 5 years at any time

REQUIREMENTS
1. In writing
2. Notarized
3. Specifying the terms and conditions
4. Certified copy must be filed with the corporation and with the SEC
5. Duration is not exceeding 5 years, except if the voting trust was a requirement for a loan agreement, in which
case the period may exceed 5 years but shall automatically expire upon full payment of the loan.

VOTING TRUST AGREEMENT PROXY

Irrevocable Generally revocable
Legal title to the share is transferred to the trustee No transfer of legal title
Certificate of stock shall be cancelled and a new one No cancellation of the certification shall be made
issued in the trustee’s name
Must be notarized Need not be notarized
Trustor-shareholder cannot vote Shareholder retains the right to vote
Trustee can vote by proxy The proxy cannot further delegate his/her authority
and must therefore vote in person
Trustee votes in his/her right as holder of legal title Proxy is the agent of the shareholder
Trustee can be elected as a director Proxy cannot be elected as a director

NOTE: The transferring stockholder parts away with his voting rights but retains equitable or beneficial ownership
over the stock. As such, he retains the right to receive dividends and other rights a stockholder is entitle to. He also
has the right to inspect, concurrent with the trustee.

c. Cases when stockholders’ action is required

i. Majority vote ii. Two-thirds vote (2/3) iii. Cumulative voting
Concurrence of majority of the OCS 1. Extend or shorten corporate CUMULATIVE VOTING
(by majority vote) in concurrence term Cumulate said shares and give 1
with an affirmative vote of a 2. Increase/Decrease candidate as many votes as the
majority of the Board of Directors: Corporate Stock number of directors to be elected
1. To enter into management 3. Incur, Create Bonded multiplied by the number of the
contract if any of the two Indebtedness shares owned
instances stated above are 4. Deny pre-emptive right The stockholder can vote as many
absent 5. Sell, dispose, lease, candidates as he wants, the only
2. To adopt, amend or repeal encumber all or limitation is that the total number
the by-laws substantially all of corporate of votes cast does not exceed the
3. To dissolve the corporation assets total number of votes that he has
voluntarily where no 6. Investing another
creditors are affected corporation, business other
than the primary purpose
7. Declare stock dividends
8. Enter into management
contract if
i. a stockholder or
stockholders
representing the
same interest of
both the managing
and the managed
corporations own or
control more than
1/3 of the total
outstanding capital
entitled to vote of
the managing
corporation, or
ii. 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 the
managed
corporation
9. Amend the Articles of
Incorporation
10. Dissolution where creditors
are affected

WITHOUT BOARD RESOLUTION

1. 2/3 of OCS → delegate to the Board the power to amend the bylaws
2. Majority of OCS → to revoke the power of the Board to amend bylaws
3. 2/3 of OCS → removal of directors

MANNER OF VOTING
1. In person
2. By proxy
3. By remote communication or in absentia only if
a. Authorized in the bylaws or by a majority of the BOD
b. Votes are received before the corporation finishes the tally of votes

Effect: A stockholder or member who participates thru remote communication or in absentia shall be
deemed present for purposes of quorum.

3. Proprietary rights
a. Right to dividends
DIVIDENDS
Stockholders’ share in the corporate income. The right to dividends vests at the time of its declaration by the Board
of Directors

WHOSE APPROVAL IS REQUIRED

Cash dividends BOD only
Property dividends BOD only
Stock dividends BOD and stockholders representing 2/3 of OCS
It is still within the discretion of the BOD whether to
declare dividends

REQUIREMENTS FOR DECLARATION

1. Unrestricted retained earnings
2. Resolution of the Board [Majority of the quorum, and not majority of the entire board]
3. If stock dividends, there must be a resolution of the Board with the concurrence of the 2/3 of OCS

NO DIVIDENDS FROM CAPITAL

GENERAL RULE: Dividends cannot be declared out of capital (Ratio: The Trust Fund Doctrine will be violated)
EXCEPTION: (1) liquidating dividends
(2) Wasting assets corporations – corporations solely or principally engaged in the
exploitation of wasting assets

NOTE: The premium or APIC (Additional Paid-In Capital) and the increase in the value of a fixed asset (revaluation
surplus) are not part of retained earnings, thus, cannot be declared as dividends.

UNPAID SUBSCRIBERS
Even unpaid subscribers are entitled to dividends
However,
i. Any cash dividends shall first be applied to the unpaid balance plus cost and expenses
ii. Any stock dividends shall be withheld from the delinquent shareholder until his unpaid subscription is fully
paid

Cash Dividends → Once declared, irrevocable. A creditor-debtor relationship is established between the
stockholder and corporation.

Stock Dividends → May be revoked even after declaration, but prior to the actual issuance of the shares because
what consummates stock dividend is not the declaration but the share issuance.
TREASURY SHARES
Treasury shares are not entitled to dividends because only Outstanding Shares (which excludes Treasury Shares)
are entitled to dividends

GENERAL RULE: When there are profits earned by the corporation, BOD has the discretion to declare
dividends

EXCEPTION: It is not anymore discretionary if retained earnings exceed 100% of the paid-in capital
Ratio: It is a safeguard against unjustified accumulation of profits.

XCP TO THE XCP: Even if it exceeds 100%, the corporation may still refuse to declare dividends:
i. when justified by the definite corporate expansion projects or programs approved by
the BOD, or
ii. 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
iii. 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

NOTE: The Stock and Transfer Book (STB) is not conclusive evidence to show the outstanding capital stock of the
corporation.

b. Right to inspect
Corporate records, regardless of the form in which they are stored, shall be open to inspection by any director,
trustee, stockholder, or member (DTSM) of the corporation in person or by a representative under the following
conditions:
i. The right must be exercised at reasonable hours on business days
ii. A demand in writing may be made by such DTSM at their expense, for copies of such records or excerpts
from said records, which must be made in good faith and for a legitimate purpose
iii. The inspecting or reproducing DTSM shall remain bound by confidentiality rules
iv. The requesting party who is
a. a controlling stockholder of a competitor, or
b. a stockholder, though not controlling, who represents or acts in the interest of a competitor
shall have no right to inspect
v. The DTSM has not improperly used any information he secured through any previous examination

LIABILITY FOR ABUSE OF RIGHT

Any stockholder who shall abuse the rights shall be penalized to under the Sec. 158 (Administrative Sanctions –
Fine), without prejudice to the provisions of Intellectual Property Code and Data Privacy Act.

CRIMINAL LIABILITY FOR UNLAWFUL DENIAL

Liable for damages, and in addition, shall be guilty of an offense which shall be punishable under Sec. 161 (Fine).

AVAILABLE DEFENSES FOR VALID REFUSAL

1. The person demanding to examine and copy the corporation’s records
a. Has improperly used any information secured thru any prior examination of the records or minutes
of such corporation or of any other corporation
b. Was not acting in good faith or for a legitimate purpose in making the demand to examine or
reproduce corporate records
c. Is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a
competitor.
2. The purpose of inspection is not germane to his interest as a stockholder
3. The right is not being exercised during reasonable hours on a business day
4. Subject matter of inspection is protected information under other applicable laws such as Law on Secrecy of
Bank Deposits.

RIGHT TO FINANCIAL STATEMENTS

A corporation shall furnish a stockholder or member, within 10 days from receipt of their written request, its most
recent financial statement, in the form and substance of the financial reporting required by the Commission

GENERAL RULE: The financial statements shall be audited by an independent CPA

EXCEPTION: If the total assets or total liabilities are less than P600,000 or other amount as the DOF may
determine, the financial statements shall be certified under oath by
1. the corporation’s treasurer or CFO and
2. the president
REMEDIES IF THE RIGHT IS DENIED OR NOT ACTED UPON
1. Summary investigation by SEC
If the corporation denies or does not act on a demand for inspection and/or reproduction, the aggrieved
party may report such denial or inaction 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
2. Mandamus
3. Criminal action under Sec. 161, RCCP
4. Petition for inspection of corporate records under Rule 7, Rules of Procedure for Intra-Corporate
Controversies

NOTES:
i. Sec. 73, while specific in the kinds of records that must be maintained, is not limiting, thus, the inspection
right is applicable to the stock and transfer book
ii. The RTC, and not the Sandiganbayan, has jurisdiction over a stockholder’s suit to enforce its right to inspect
where the case does not involve a sequestration-related incident, but an intra-corporate controversy (Abad
v. PHILCOMSAT)
iii. The right to inspect corporate records subsists during the period of liquidation (3-year period for
dissolution) (Chua v. SEC)
iv. An action for injunction and, consequently, a writ of preliminary injunction filed by a corporation is generally
unavailable to prevent stockholders from exercising their right to inspection. Corporations may raise their
objections to the right of inspection through affirmative defense in an ordinary civil action for specific
performance or damages, or through a comment (if one is required) in a petition for mandamus (Philippine
Associated Smelting and Refining Corp. v. Lim)
v. A criminal action based on violation of a stockholder’s right to examine or inspect the corporate records and
the STB can only be maintained against corporate officers and other persons acting on behalf of such
corporation. It cannot be made against those who are not related to the corporation anymore (such as
outgoing officers).
vi. The Corporation Code granted to all stockholders the right to inspect the corporate books and records, and
in doing so, has not required any specific amount of interest for the exercise of such right (thus, the interest,
even if insignificant, in immaterial, so long as he is a stockholder of record).
vii. A stockholder may exercise his right to inspect even though he is not in the possession of a stock certificate.
While it is evidence of ownership, it is not the only evidence. Besides, a stock certificate is issued only upon
full payment.

c. Pre-emptive right
Right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings,
the purpose being to maintain relative and proportionate voting strength and control of the stockholder. This
right prevents the dilution and impairment of the stockholders’ interest in the corporation.

WHEN NOT AVAILABLE

i. When such right is denied by the AOI or amendment thereto.
!!! The denial cannot be by mere board resolution or amendment to the bylaws.
ii. When shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by
the public
iii. When shares are issued in good faith with the approval of the stockholders representing 2/3 of the OCS in
exchange for property needed for corporate purposes
iv. When shares are issued in good faith with the approval of the stockholders representing 2/3 of the OCS in
payment of previously contracted debt
v. If the shares of a corporation are offered and not subscribed and purchased by the stockholders, and the
shares are being offered again, there is no pre-emptive right with respect to the latter offer of shares (Benito
v. SEC)

Stockholders may choose not to exercise this right. But stockholders must be given a reasonable time to exercise
their preemptive right and failure to exercise the same within such period is deemed a waiver thereof

COVERAGE
Pre-emptive right covers all issues and disposition:
i. Issuance of the unsubscribed shares
ii. Increase of CS
iii. Disposal of its treasury shares.
d. Right of first refusal
The right of first refusal provides that a stockholder who may wish to sell or assign his shares must first offer the
shares to the corporation or to the existing stockholders of the corporation, under terms and conditions which are
reasonable; and that only when the corporation or the other stockholders do not or fail to exercise their option, is
the offering stockholder at liberty to dispose of his shares to third parties

PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

Generally may be exercised, subject to limitations in Arises only by virtue of contractual stipulations or by
Corporation Code law
Covers unissued shares offered for subscriptions Covers shares already issued
May be exercised by mere trustees or conservators Can only be exercised by the owner and not mere
(Republic v. Sandiganbayan) trustee or conservator, since it is an act of ownership
(Republic v. Sandiganbayan)
Right claimed against the Corporation, where the Right exercisable against the seller-stockholder
stockholder must pay
NOTES:
• A corporation has no power to prevent or restrain transfers of its shares, unless such power is expressly
conferred in the AOI or the law.
• A provision in the bylaws granting the right of first refusal (and therefore, restrains trade) is void and does
not bind 3rd parties. Bylaws are intended merely for the protection of the corporation and prescribe relation,
not restriction. They are always subject to the charter of the corporation.

4. Remedial rights
RIGHT OF APPRAISAL
The right of a shareholder to dissent and demand payment of the fair value of his shares after dissenting against a
proposed corporate act in the cases specified by law. In practical terms, it means the right to get out of the
corporation and get back his equity investment.

Rationale
The Code grants the stockholder the right to get out of the corporation even before its dissolution because there has
been a major or fundamental change in his contract of investment with which he does not agree and which the law
presumes he did not foresee when he bought the shares.

When the Right of Appraisal May Be Exercised

Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of the shares
in the following instances:
1. Amendment to the AOI
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, or
c. extending or shortening the term of corporate existence

Examples:
i. Denial of pre-emptive right
ii. Creating shares which are given preferences in payment of dividends or in the distribution of
assets or other preferences as may be indicated in the amendment to AOI
iii. Converting non-voting preferred shares to voting shares
iv. Making non-voting redeemable preferred shares into convertible voting shares in case of
non-redemption of the redeemable shares

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in this Code;
3. In case of merger or consolidation
4. In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.
[this includes investment in any other business]
5. In a close corporation under Section 104 which allows the exercise of appraisal right for any reason
provided only that the corporation has sufficient assets to cover its debts and liabilities, exclusive of capital

These grounds are exclusive because there is no appraisal right in the absence of an express provision.

Does the Right of Appraisal cover unpaid subscriptions?

YES. The stockholder has the right of appraisal even if his subscription is only partially paid. He will be entitled to
the fair value of ALL of the shares subscribed, but the unpaid amount will be offset to the total fair value of the entire
subscription.
REQUISITES:
1. It can only be exercised in cases specified by law
2. The dissenting stockholder must have voted against a proposed corporate action specified by law
3. The stockholder must make a written demand on the corporation for the payment of the fair value of all
shares held within 30 days from the date on which the vote was taken
a. Failure to make the demand within such period shall be deemed a waiver of the appraisal right.
b. It is prohibited to partially dissent as to some of his shares.
4. If the proposed corporation action is implemented, the corporation shall pay the stockholder upon surrender
of the certificate of stock, the fair value thereof as of the day before the vote was taken excluding any
appreciation or depreciation in anticipation of such corporate action.
5. The fair value must be determined as follows:
a. GENERAL RULE: The fair value shall be agreed upon.
b. EXCEPTION: If within 60 days from the approval of the corporation action by the
stockholders, the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares, it shall be determined and appraised by 3
disinterested persons
i. one of whom shall be named by the stockholder,
ii. another by the corporation
iii. and the third by the two (2) thus chosen.
6. Within 10 days after demanding payment for the shares held, a dissenting stockholder shall submit the
certificate of stock representing the shares to the corporation for notation that such shares are dissenting
shares.
a. Failure to do so shall, at the option of the corporation, terminate appraisal right.
7. Availability of unrestricted retained earnings.
!!! There must be available unrestricted retained earnings at the time of written demand (and not at the
time of payment). Otherwise, the exercise of appraisal right is premature, and there is no cause of action.

Dissenting stockholder sells his shares

If shares represented by the certificates bearing such notation are transferred, and the certificates consequently
cancelled,
• the rights of the transferor as a dissenting stockholder shall cease and
• the transferee shall have all the rights of a regular stockholder; and
• all dividend distributions which would have accrued on such shares shall be paid to the transferee.
Note: The dividend right of the transferee is RETROATIVE.

Section 82 Effect of Demand and Termination of Right

From the time of demand for payment of the fair value of a stockholder's shares until either
• the abandonment of the corporate action involved OR
• the purchase of the said shares by the corporation
all rights accruing to such shares, including voting and dividend rights shall be SUSPENDED, except the right of
such stockholder to receive payment of the fair value thereof.

If the dissenting stockholder is NOT paid the value of the said shares within thirty (30) days after the award,
the voting and dividend rights shall immediately be RESTORED.

Section 83 When Right to Payment Ceases

CASES WHEN PAYMENT SHOULD NOT BE MADE:
1. Demand for payment is withdrawn with the consent of the corporation
2. The proposed corporate action is abandoned or rescinded by the corporation
3. Disapproved by the Commission where such approval is necessary
4. Commission determines that such stockholder is not entitled to the appraisal right
5. the dissenting stockholder fails to make a demand within the 30-day period
6. the shares are transferred by the dissenting stockholder
7. the dissenting stockholder failed to submit the stock certificate/s within 10d from his written demand for
payment of the value of his shares

EFFECTS:
• Right of the stockholder to be paid the fair value of the shares shall cease
• Status as the stockholder shall be restored
• All dividend distributions which would have accrued on the shares shall be paid to the stockholder.
DIFFERENCE OF SECTION 82 AND 83
As to the dividends declared between the time of award until the 30th day
The stockholder is NOT entitled to the dividends. The restoration of the right under Section 82 is NOT
RETROACTIVE.

If after the 30th day and the corporation decided to abandon the plan (or any other circumstances under Section 83)
The stockholder is ENTITLED to the dividends declared. The restoration of the right under Section 83 is
RETROACTIVE.

Remedy of stockholder in case of unjustified refusal

File an appropriate action before the RTC to compel the corporation to allow him to exercise appraisal right
REQUISITES:
1. Presence of URE at the time of filing of the complaint. Otherwise, the stockholder has no cause of
action.
2. There must be a prior demand to the corporation as contemplated under Section 81.
3. There must be unjustifiable refusal of the corporation to pay.

5. Intra-corporate disputes (Individual vs. Representative vs. Derivative suits)

THE TESTS TO DETERMINE IF IT IS AN INTRA-CORPORATE CONTROVERSY
(1) Relationship Test
Intra-Corporate Controversy involves the enforcement of corporate rights and obligations as
1. Between the corporation (partnership or association) and the public
2. Between the corporation and its stockholders, partners, members or officers
3. Between the corporation and the State as far as its franchise, permit or license to operate is concerned and
4. Among the stockholders, partners, or associates themselves.

(2) Nature of Controversy Test

Under the nature of controversy test, the disagreement must not only be rooted in the existence of an intra—
corporate relationship but must pertain to the enforcement of the parties’ correlative rights and obligations
under the Corporation Code, and the internal and intra-corporate regulatory rules of the corporation.

If the relationship and its incidents are merely incidental to the controversy, or if there will still be conflict even if
the relationship does not exist, then no intra-corporate controversy exists.

NOTES:
• Intra-Corporate Controversies are now within the jurisdiction of the Regional Trial Courts. However, this
does not preclude the SEC from exercising its administrative and regulatory powers.
• Controversy between the condominium corporation and its members-unit owners for alleged unsound
business practices does not fall within the jurisdiction of HLURB because it is considered an intra-corporate
controversy.
• A complaint for damages filed by a member of the subdivision homeowners’ association for the harm he
suffered when another member maliciously closed a drainage pipe is not an intra-corporate controversy
following the nature of the controversy test.

EXHAUSTION OF INTRACORPORATE REMEDIES

In order that a stockholder may show a right to sue on behalf of the corporation, he must allege that he has
exhausted his remedies within the corporation (even a family corporation) by making a sufficient demand upon the
directors or other officers for appropriate relief with the expressed intent to sue if relief is denied

EXCEPTION: When the corporation is under the complete control of the directors who are alleged wrongdoers,
there is no need of making a demand upon them

Election or Appointment Controversies of Directors, Trustees, Officers or Managers

Requisites for it to be considered an intra-corporate controversy:
1. It is a position created by statute or by the bylaws of the corporation
a. President
b. Treasurer
c. Secretary
d. Compliance Officer
2. The persons holding such positions are appointed by the stockholders/members or directors, as the case
may be.
Otherwise, it is within the jurisdiction of the labor arbiter.
 INDIVIDUAL SUIT REPRESENTATIVE DERIVATIVE SUIT
SUIT

Those brought by the Those brought by the These are suits brought by 1 or more stockholders in the
shareholder in his stockholder on behalf of name and on behalf of the corporation:
own name against the himself and all other 1. To redress wrongs committed against it, or
corporation when a stockholders similarly 2. To protect corporate rights whenever the officials of
wrong is directly situated when a wrong the corporation:
inflicted against him is committed against a i. Refuse to sue
(e.g., violation of the
group of stockholders ii. Are the ones to be sued
right of a stockholder(e.g., where preferred iii. Have control of the corporation
to inspect corporate stockholders' rights are
books) violated) REQUISITES
a. He was a stockholder/member at the time the acts
The cause of action or transactions occurred and at the time the action
pertains to the was filed (bona fide ownership of stocks, regardless
stockholder and the of number of stocks)
action is meant to
protect his interest, NOTE: If the transaction is prior to his becoming a
against the stockholder, he cannot file derivative suit, except
corporation only if the corporate act is continuing in nature.

b. He alleges with some particularity in the complaint

that he has exhausted his remedies available under
AOI, By-Laws, laws/rules to obtain relief desired
[remedy of last resort]

c. No appraisal rights are available for acts

complained of

NOTE: You cannot file a derivative suit in a Close

Corporation because there, appraisal rights are
always available.

d. The suit is not nuisance/harassment suit

e. The action is filed in the name of the corporation

In such actions, the suing stockholder is regarded as a

NOMINAL PARTY, with the corporation as the REAL
PARTY-IN-INTEREST

NOTES:
• A lawyer engaged as counsel for a corporation cannot represent members of the Board in a derivative suit
against them. To do so would be tantamount to conflicting interest between the Board and the corporation
(Hornilla v. Salunat)
• A suit to enforce pre-emptive rights in a corporation is not a derivative suit because it was not filed for the
benefit of the corporation.
• A complaint for nullification of the election is not a derivative suit.
• In derivative suits, the corporation concerned must be impleaded as a party. Otherwise, the complaint must
fail.
SEC vs. Subic Bay Golf and Country Club, Inc. and Universal International Group Development Corporation
• SEC ordered SBGCCI and UIGDC to refund Filart and Villareal the total purchase price of their shares of stock.
CA declared void the Decision of the SEC. The case involved an intracorporate controversy. The SEC acted in
excess of its jurisdiction.
• This involved a dispute between the corporation, SBGCCI, and its shareholders, Villareal and Filart – thus,
an intracorporate controversy. While jurisdiction over intracorporate disputes and all other cases
enumerated in Section 5 of PD 902-A had already been transferred to designated Regional Trial Courts,
it does not necessarily oust the SEC of its regulatory and administrative jurisdiction to determine and
act if there were administrative violations committed. Nothing prevented the SEC from taking cognizance
of it to determine if SBGCCI and UIGDC committed administrative violations and were liable under the SRC.
The SEC may investigate activities of corporations under its jurisdiction to ensure compliance with the law.
• HOWEVER, the SEC's regulatory power does not include the authority to order the refund of the
purchase price of Villareal's and Filart's shares in the golf club. The issue of refund is an intracorporate
dispute, or civil in nature, that requires the court to determine and adjudicate the parties' rights based on
law or contract.

SEC vs. Universal Rightfield Property Holdings, Inc.

• URPHI failed to timely file its annual and quarterly reports with the SEC in violation of Section 17 of the SRC.
Such failure happened multiple times. After hearing, SEC suspended URPHI’s Registration of Securities and
Permit to Sell Securities to the Public. Eventually, SEC revoked URPHI's Registration and Permit for its failure
to comply within the final extension period.
• A separate notice of hearing to revoke is not necessary to initiate the revocation proceeding, the Court holds
that such notice would be a superfluity since the Suspension Order already states that such proceeding shall
ensue if URPHI would still fail to submit the reportorial requirements after the lapse of the 60-day suspension
period.
• SEC has both regulatory and adjudicative functions. The revocation of registration of securities and permit
to sell them to the public is not an exercise of the SEC's quasi-judicial power, but of its regulatory power. SEC
does not settle actual controversies involving rights. Rather, when the SEC exercises its incidental power to
conduct administrative hearings and make decisions, it does so in the course of the performance of its regulatory
and law enforcement function.
• Notwithstanding the belated filing of the said reports, as well as the claim that public interest would be better
served if the SEC will merely impose penalties and allow it to continue in order to become profitable again,
the SEC cannot be faulted for revoking once again URPHI's registration of securities and permit to sell
them to the public due to its repeated failure to timely submit such reports.
F. CAPITAL STRUCTURE

1. Shares of Stock
STOCK AND STOCKHOLDERS
a. A person becomes a stockholder:
i. By subscription
ii. By purchase
1. From the corporation (when it re-issues treasury shares)
2. From other stockholders

b. Subscription vs. Purchase

SUBSCRIPTION PURCHASE
Refers to original issuance of shares Not an original issuance of shares
Made before or after incorporation Made only after incorporation
Subscriber in a subscription agreement need not Sale is reciprocal and the purchaser must fully pay at
pay unless there is a call the time the shares are transferred
Subscriber cannot be released from his obligation A stockholder who sells his shares can condone the
to pay the subscription price obligation of the purchaser to pay
Does not apply to subscription contracts Applies if the price is NOT less than P500.00

c. SECTION 59 – Subscription Contract

1. Subscription is made by entering a Subscription Contract
2. SUBSCRIPTION CONTRACT
Any contract for the acquisition of unissued stocks in an existing corporation or a corporation
still to be formed.
i. PERFECTION
There is a binding and perfected contract of subscription as soon as there is offer and
acceptance between the parties who are:
1. The Corporation
2. The Subscriber
ii. RIGHTS AND OBLIGATIONS OF PARTIES UPON PERFECTION
i. On the part of the subscriber
To have his name recorded in the Stock and Transfer Book
ii. On the part of the corporation
To the payment of the shares subscribed
iii. FORM
There is no form required for the validity of a subscription. It need not be in writing.

3. COVERAGE OF SUBSCRIPTION
i. Unissued shares (remaining balance of the ACS)
• Approved by BOD only, without need of ratification of the stockholders
ii. Increase in the ACS
• Approved by BOD, with concurrence of 2/3 of OCS
iii. Re-issuance of Treasury Shares CANNOT be covered by subscription contracts because
treasury shares are issued (not unissued) shares.

4. SECTION 60 – Pre-incorporation Subscription

i. IRREVOCABLE
1. For a period of at least 6 months from the date of subscription
2. After the filing of the AOI with the SEC even after the 6-month period (mere filing, not
approval, is required)
3. After the COI is issued by the SEC
• Once the COI is issued, the subscriber already has the status of a stockholder,
regardless if name is reflected in the STB or not.
ii. REVOCABLE
1. If all of the other subscribers consent to the revocation
2. The corporation fails to incorporate
• Within 6 months, if agreement is silent or if agreement provides a period less
than 6 months [revocable after 6 months]
• Within a longer period stipulated in the contract of subscription [revocable
after the period stipulated]
5. CAPITAL STOCK
i. Authorized Capital Stock – total amount of capital that the corporation is authorized to
raise during its lifetime. This is expressed in Pesos.
ii. The Authorized Capital Stock (ACS) is divided into shares of stock. The total shares
multiplied by its par value is equal to the ACS.
iii. Subscribed Capital Stock – amount of capital stock issued and subscribed, whether fully
paid or not.
iv. Paid Up Capital Stock – that portion of the subscribed capital stock that is actually paid.
Once fully paid, the corporation issues a certificate of stock.
v. The portion of the ACS which is not subscribed is called unsubscribed or unissued capital
stock.
vi. How to determine ownership of a stockholder: If a stockholder owns 1,000 shares out of
the 10,000 subscribed shares, then he owns 10%. The shareholding or ownership is
determined with reference to the total subscribed capital stock (not authorized capital
stock).

a. Nature of Shares of Stock

Shares of stocks are intangible personal property with an intrinsic pecuniary value. They represent
aliquot parts of the corporation’s capital and are symbolized by a stock certificate.

They do not represent proprietary rights of shareholders to the assets or properties of the corporation.

b. Consideration for Shares of Stock

SEC. 61. Consideration for Stocks
a. Stocks shall not be issued for a consideration less than par or issued price.
b. What CANNOT be a valid consideration
i. PROMISSORY NOTES
Reconciliation with the rule that subscriptions need not be fully paid
The paid portion of the subscription must still be covered by a valid consideration.
The paid portion cannot be covered by a promissory note because promissory notes
cannot give a paid status.
ii. FUTURE SERVICES
Past services are valid consideration. It is possible by giving stocks as bonus to employees
based on past services.
iii. RATIO: Because they are contingent. There is no assurance of payment.
Thus, when the stocks issued are to be paid “out of the dividends to be declared,” there is
no valid consideration because it is contingent.

c. VALID CONSIDERATIONS PAL-PAO-SO

Any or any combination of the following:
i. Property, tangible or intangible, actually received by the corporation.
1. REQUISITES:
a. necessary or convenient for its use and lawful purpose
b. at a fair value equal to the par or issued value
i. the valuation thereof shall be
1. initially be determined by the stockholder or the BOD &
2. subject to the approval of the SEC
ii. Actual cash
iii. Labor or services actually rendered
iv. Previously incurred indebtedness of the corporation
v. Amounts transferred from URE to stated capital
1. This pertains to STOCK DIVIDENDS
vi. Outstanding shares exchanged for stocks in the event of reclassification or conversion
1. An example would be reclassification from one type of share to another
vii. Shares of stock in another corporation
1. Meaning, they are stockholders of each other
viii. Other generally accepted form of consideration

d. Rights of stockholders are determined from the shares subscribed and NOT the amount nor the
type of the consideration paid. Thus, there can be no preference based only on the type of
consideration paid.

e. DEPOSIT ON SUBSCRIPTION
An amount of money received by the corporation as a deposit with the possibility of applying the
same as payment for the future issuance of capital stock. The person making the deposit does not
have the standing of a stockholder and he is not entitled to the rights of a stockholder.
c. Watered Stock
Watered Stocks are issued for less than par value or issued value, or for a consideration other than
case, valued in excess of its fair value.
i. Watered Stocks are prohibited. It will also violate the Trust Fund Doctrine.
1. RATIO: To assure the creditors that the corporation would receive a minimum
amount for its stock. The creditors expect that the corporation is funded at the
amount represented by the capital stock.

2. SEC. 64. Liability of Directors for Watered Stocks

A director or officer of a corporation who:
a. consents to the issuance of stocks for a consideration less than its par
or issued value;
b. consents to the issuance of stocks for a consideration other than cash,
valued in excess of its fair value; or
c. having knowledge of the insufficient consideration, does not file a
written objection with the corporate secretary,
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 or issued value of
the same.

d. Situs of the Shares of Stock

Situs of shares is the domicile of the corporation that issued them.

e. Classes of Shares of Stock

SECTION 6 - Classification of Shares
a. The shares of a stock corporation may be divided into classes or series of shares, any of
which may have rights, privileges or restrictions as may be stated in the AOI.
b. The classification of shares shall appear in the:
i. AOI and
ii. Certificate of Stock
c. If the classification does not appear in the AOI, is the classification still valid?
i. YES. The classification is still valid, but since it is not indicated in the AOI, the shares
are treated equal in all respects.
ii. This is known as the doctrine of equality of shares which provide that all shares are
presumed to be equal with the same privileges and liabilities if the AOI is silent on
such differences.
d. The right to classify shares is not unlimited. Section 6 provides that there shall always be a
class or series of shares with complete voting rights.

e. PAR VALUE VS. NO PAR VALUE SHARES

i. PAR VALUE SHARES are those with fixed value stated in the AOI and the share
certificate.
1. PAR VALUE – is an arbitrary amount assigned to the share and is expressed
in the certificate covering the share. This is only based on business judgment.
2. Shares may be issued:
a. At Par
b. Higher than Par
3. Shares may not be issued lower than Par because it results to watered
stocks. The prohibition on watered stocks secures equality among
subscribers and prevents discrimination against those who have paid in full
the par or issued value of shares.

ii. NO PAR VALUE SHARES – those shares without such arbitrary amount. The issued
or stated value cannot be less than P5.00.
1. The issuance of No Par Value Shares does not mean that there is no
consideration involved.
2. While it has no par value, it has always an issued value, i.e. the consideration
fixed by the corporation for its issuance.
3. A corporation can issue a single class of shares which are all par value shares
4. A corporation cannot issue a single class of shares which are all no par value
shares in the following cases: [must be par value shares only]
a. Preferred shares
b. Shares in banks, insurance companies, pre-need companies, public
utilities, and other corporations authorized to obtain or access funds
from the public.
 5. Conditions for Issuance of No-Par Value Shares:
a. Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable
b. Shares without par value may not be issued for a consideration less
than the value of P5
c. Entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available as
distribution as dividends.

f. VOTING SHARES VS. NON-VOTING SHARES

VOTING SHARES NON-VOTING SHARES
Shares with right to vote. Shares without right to vote.

Only preferred and redeemable shares Non-voting shares are not totally deprived of the right
may be deprived of voting rights. to vote; thus holders of the same may still vote on
A2SI2M ID
Treasury shares and delinquent shares (a) Amendment of the articles of incorporation
cannot vote, and there is no need to (b) Adoption and amendment of bylaws
deny them such right. (c) Sale, lease, exchange, mortgage, pledge, or
other disposition of all or substantially all of the
But, founder’s shares may be given the corporate property
exclusive right to vote and be voted for (d) Incurring, creating, or increasing bonded
in the election of directors for a indebtedness
limited period in which case voting (e) Increase or decrease of authorized capital
common stocks will have no right to stock
vote for directors. (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.

Said enumeration involves fundamental changes

not only in the corporate structure but also in the
right of all the shareholders and are therefore the
concern of all.

g. COMMON SHARES VS. PREFERRED SHARES

COMMON PREFERRED
It is the basic class of stock because its One with a stated par value which entitles the holder
holders stand upon on equal footing, thereof to certain preferences over the holders of
without extraordinary rights or common stock.
privileges.
The preference is only with respect to the:
Common stockholders are the 1. Right to dividends and/or
residual owners of the corporation. 2. Right to the net assets upon liquidation
They get only the assets left over in .
case of liquidation after all others are !!! Preferred shareholders are NOT creditors of the
paid. corporation. It also does not give a lien upon the
property of the corporation.
Common shares have complete
voting rights. Each share shall be in all respects equal to every other
In a sense, common stockholders are share except as otherwise provided in the AOI and
preferred with respect to right to certificate of stock. Thus, preferred stocks are
vote. presumed to be voting although rarely given
voting privileges.
 Kinds of Preferred Shares
Preferred Shares of as to Assets Preferred Shares of as to Dividends
Share which gives the holder thereof 1. CUMULATIVE—cumulative preferred
preference in the distribution of assets shareholders are entitled to receive
of the corporation in case of dividends for the years no declaration
liquidation. was made.
2. NON-CUMULATIVE—if the preferred shares
are non-cumulative, there is no need to
make up for undeclared dividends.
3. PARTICIPATING—after the preferred
shares receive a fixed dividend, the common
and preferred shareholders shall share the
balance.
4. NON-PARTICIPATING

h. FOUNDERS’ SHARES
Founders’ shares may be given certain rights and privileges NOT enjoyed by the owners of
the other stocks.

Where the EXCLUSIVE right to vote and be voted for in the election of directors is granted,
it must be for a limited period not to exceed 5 years from the date of incorporation:
Provided, such exclusive right shall not be allowed if its exercise will violate
Anti-Dummy Law
Foreign Investment Act and
Other pertinent laws.
!!! Only the right to vote and be voted is subject to the 5-year limit. All other rights and
privileges are not subject to such limit.

NOTE: Since Section 7 makes no distinction, then it must mean that founders’ share may be
applied to both stock and non-stock corporations. Non-stock corporations can lawfully
suspend or define the voting rights of its members, but with respect to founders’ share, the
exclusive right to vote and be voted for should expire after 5 years from approval of the SEC.

i. REDEEMABLE SHARES
i. They are shares which may be purchased by the corporation from the holders of such
shares
1. upon the expiration of a fixed period, !!! regardless of the existence of
unrestricted retained earnings and
2. upon such other terms and conditions stated in the AOI and the certificate of
stock representing the shares.
ii. They may be issued by the corporation when expressly provided in the AOI.
Thus, unless expressly provided in the AOI and certificate of stock, preferred shares
shall be deemed irredeemable.
iii. Redemption of redeemable shares can be made without the need of unrestricted
retained earnings. In effect, payment may come from the capital.
iv. !!! Redemption may NOT be made:
1. where the corporation is insolvent or
2. if such redemption will cause insolvency or inability of the corporation to
meet its debts as they mature.
NOTE: Such a limitation is based on the principle that corporate assets are a trust
fund for creditors. (Trust Fund Doctrine)
v. If the AOI does not mention as to when can the shares be redeemed –
1. Redemption, therefore, is not mandatory. The redemption now rests entirely
with the corporation (option to redeem is with the corporation and not the
stockholder), and
2. The stockholder is without right to either compel or refuse the redemption of
his stock.
vi. Effect of Redemption
1. The shares redeemed shall be considered retired and no longer issuable,
unless otherwise provided in its AOI; or
2. The shares may be held in treasury, if the provision of the AOI provides that
they can be reissued.
vii. Effect of Retirement
1. The number of authorized shares of the capital stock of the corporation
is reduced accordingly, and
2. The AOI must be amended to reflect such reduction
 j. TREASURY SHARES
i. Shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation through PRDL purchase, redemption,
donation, or some other lawful means.
ii. Treasury shares does not affect the authorized capital stock nor the
issued/subscribed capital stock.
iii. Treasury shares, however, affect the outstanding shares. (it is reduced because
treasury shares are not outstanding shares)
1. The significance of outstanding capital stock (issued capital stock less
treasury shares) is that only the outstanding capital stock is entitled to the
3 rights of a stockholder – management, dividends, net assets.
iv. Treasury shares are currently owned by the corporation and not its shareholders.
The corporation may opt to retire, sell, reissue, distribute as property dividends, or
hold the treasury shares indefinitely.
v. Treasury shares remain to be issued shares. They do not revert to unissued
shares because shares are only issued once.
vi. Treasury shares may be sold by the corporation at any price the board of directors
sees fit to accept, even at less than par or issued value, the corporation having
already received the full value upon their initial issuance, provided such price is
reasonable under the circumstances.
vii. The re-acquisition of shares (resulting to treasury shares) may be compelled only in
the case of redemption at the option of the corporation. (stockholder may be
compelled to sell)
viii. Principle of Indivisibility of Subscription – when shares of stock are issued to a
stockholder, and the stockholder only partially pay such shares, then it cannot be
reacquired by the corporation. The partial payment shall apply to all the issued
shares. (e.g. 1000 shares @10php each; but only paid P5000; it means that the
stockholder paid only partially, i.e. 1000 shares @5php.)

Gamboa vs. Teves Case

Discussion on Gamboa vs. Teves 2011 & 2012 case
a. PLDT’s equity structure was:
a. Common Shares (22% of ACS)
i. Foreigner – 64%
ii. Filipino – 36%
b. Preferred Shares (78% of ACS)
i. Foreigner - 0.56%
ii. Filipino – 99.44%
b. The pertinent Constitutional provision in this case is Section 11, Article XII which limits foreign ownership
of the capital of a public utility to not more than 40%.
c. The issue resolved in this case is what does the term capital refer to – common shares or total outstanding
shares?
i. This case resolves that capital refers only to the shares of stock that can vote in the election of
directors. THUS, in this case, only the common shares.
ii. If preferred shares also have the right to vote, then it would be included in the term capital.
HOWEVER, the AOI of PLDT expressly deprived preferred shares voting rights. Thus, only common
shares were considered in this case.
iii. This is consistent with the State policy that a self-reliant and independent national economy is
effectively controlled by Filipinos.

Roy vs. Herbosa Case

Discussion on Roy vs. Herbosa 2016 case
a. In implementing the ruling in the Gamboa case, the SEC issued a Memorandum Circular which provides that
in determining the Filipino ownership, the 60-40 rule shall be applied to both:
i. Total number of outstanding shares entitled to vote; and
ii. Total number of outstanding shares, whether or not entitled to vote
b. SC resolved that the said Memorandum Circular is valid and consistent with the Gamboa Case.
i. The pronouncement of the SC in the Gamboa Resolution (2012) that the 60-40 rule must be applied
to all classes of shares is merely an obiter dictum.
c. THUS, the prevailing rule today is:
i. The 60-40 rule is applied to:
1. Total number of shares entitled to vote, and
2. Total number of shares whether entitled to vote or not
d. The decision in Roy vs. Herbosa attained finality after the 2017 case (which is the MR) was denied by the
Supreme Court.
2. Certificate of Stock

a. Nature of the Certificate

STOCK CERTIFICATE
A written instrument signed by the proper officer of a corporation stating or acknowledging that the
person named in the document is the owner of a designated number of shares of its stock.
• It is prima facie evidence that the holder is a shareholder. It is a proof of ownership, but not the only
proof of ownership.
• PURPOSE: It serves as a tangible representation of the stocks which are intangible properties.
• Certificates of stock are not the actual shares of stock in the corporation and merely expresses the
contract between the corporation and the shareholder.

FORMALITIES OF THE CERTIFICATE

i. signed by the president or vice president,
ii. countersigned by the secretary or assistant secretary, and
iii. sealed with the seal of the corporation
iv. The certificate must be delivered
v. The full amount of the subscription must be fully paid
vi. The original certificate must be surrendered

NOTE: A stock certificate could not be considered issued in contemplation of law unless signed by the
president or vice president and countersigned by the secretary or assistant secretary.

b. Uncertificated Shares
The Commission may require corporations whose securities are traded in trading markets, and which can
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.

c. Negotiability
A stock certificate is merely a quasi-negotiable instrument in the sense that it may be transferred by
endorsement, coupled with delivery, but it is not negotiable because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner’s or transferor’s creditors may have.

d. Issuance
Summary of the Whole Process of Subscription
a. In case of original issuance of stocks, a person can become a stockholder by entering into a
Subscription Contract with a corporation.
b. Once the contract is perfected, the subscriber has:
i. the obligation to pay (in full or partially) for the subscription and
ii. the right to demand that his name be recorded in the corporate books.
c. Once his name is recorded, he now becomes a stockholder entitled to all the rights of a stockholder,
regardless of full payment and issuance of certificate of stock.
d. The unpaid portion of the subscription becomes due and payable either:
i. On the date specified in the subscription agreement; or
ii. If not specifically provided for, upon call of the Board.
e. Upon full payment of the subscription, the subscriber now has the following rights:
i. Right to demand the issuance of a Certificate of Stock
ii. Right to transfer shares

SEC. 63. Issuance of Stock Certificates

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. 65. INTEREST ON UNPAID SUBSCRIPTIONS

GENERAL RULE: Subscribers are NOT liable for INTEREST on all unpaid subscriptions.
EXCEPTION: If so required in the subscription agreement, subscribers shall be liable for
interest on all unpaid subscription.

For how much?

GENERAL RULE: At the rate of interest fixed in the contract
EXCEPTION: If no rate is fixed, the prevailing legal rate.
SEC. 66. PAYMENT OF BALANCE OF SUBSCRIPTION
a. Subject to the provisions of the subscription contract, the BOD may, at any time,
(1) declare due and payable to the corporation unpaid subscription and
(2) collect the same or such percentage thereof, in either case, with accrued interest, if any, as
it may deem necessary.
b. CALL OF BOD
It is the resolution or formal declaration of the BOD that unpaid subscription (US) is due and
payable.
GENERAL RULE: Call is necessary to make Unpaid Subscription due and payable. It is
a business judgment. The BOD may, at any time, declare due and
payable the unpaid subscription and collect the same or such
percentage thereof with accrued interest, if any, as it may deem
necessary.

EXCEPTIONS: (1) When the date of payment is specified in the subscription

agreement
(2) When the corporation becomes insolvent.
c. WHEN TO PAY
PAYMENT of unpaid subscription or any percentage thereof, together with any interest accrued,
shall be made:
(1) on the date specified in the subscription contract or
(2) on the date stated in the call made by the board.
d. FAILURE TO PAY on such date:
(1) shall render the entire balance due and payable and
(2) 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.
e. IF NO PAYMENT IS MADE WITHIN 30 DAYS FROM
(1) the date specified in the subscription contract or
(2) the date stated in the call made by the board,
all stocks covered by the subscription shall automatically become DELINQUENT. It will then
be subject to delinquency sale, unless the BOD orders the removal of delinquent status.

SEC. 70. Effect of Delinquency

1. It cannot be voted for
2. It cannot be entitled to vote
3. It cannot be represented at any stockholders’ meeting
4. The holder thereof is not entitled to any of the rights of a stockholder
a. except the right to dividends in accordance with the provisions of this Code,
5. It may be subjected to delinquency sale.
b. It is not mandatory. It is only a special remedy provided for by the RCCP. Thus,
the corporation’s available remedies are the following:
i. Delinquency Sale
ii. Court Action

Difference of Section 65 and 66 with respect to Interest

a. From the Time of Subscription up to the Time of Payment
SEC. 65
GENERAL RULE: Subscribers are NOT liable for INTEREST on all unpaid
subscriptions.
EXCEPTION: If so required in the subscription agreement, subscribers
shall be liable for interest on all unpaid subscription.

For how much?

GR: At the rate of interest fixed in the contract
XCP: If no rate is fixed, the prevailing legal rate.

b. From the Time that Payment should have been made (where there is failure to pay) up to the
Time of Full Payment
SEC. 66
The stockholder is liable for interest upon failure to pay regardless if it is provided for under
the contract or not.

For how much?

GR: At the rate of interest fixed in the contract
XCP: If no rate is fixed, the prevailing legal rate.
 SECTION 67. DELINQUENCY SALE
(1) BOD may, by resolution, order the SALE of delinquent stock
(2) NOTICE of the sale, with a copy of the resolution, shall be sent to every delinquent stockholder
(3) The same shall be published once a week for 2 consecutive weeks
(4) Said delinquent stock shall be SOLD AT A PUBLIC AUCTION to the winning bidder
a. Unless the delinquent stockholder pays to the corporation on or before the date specified for
the sale of the delinquent stock
i. the balance due on the former's subscription,
ii. plus accrued interest,
iii. costs of advertisement and
iv. expenses of sale, OR
b. Unless the board of directors otherwise orders
NOTE: The HIGHEST BIDDER is the one who shall offer:
(1) to pay the full amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale,
(2) for the smallest number of shares or fraction of a share.
(5) The stock so purchased shall be transferred to such purchaser in the books of the corporation and
a certificate for such stock shall be issued in the purchaser's favor.
(6) The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock covering such shares.

NOTE: Should there be NO BIDDER at the public auction, the CORPORATION may BID for the same,
and the total amount due shall be credited as fully paid in the books of the corporation. Title to all the
shares of stock covered shall be vested in the corporation as TREASURY SHARES.

e. Lost or Destroyed Certificates (Sec. 72)

Procedure in issuing new certificates of stock in lieu of those which have been lost, stolen or destroyed:

(1) REGISTERED OWNER (or legal representative) of a certificate of stock in a corporation shall FILE with the
corporation an AFFIDAVIT in triplicate setting forth, if possible:
i. Circumstances as to how the certificate was lost, stolen or destroyed,
ii. Number of shares represented by such certificate,
iii. Serial number of the certificate and
iv. 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) Corporation shall VERIFY the affidavit and other information and evidence with the books of the corporation
(3) PUBLISH A NOTICE in a newspaper of general circulation once a week for three (3) consecutive weeks
(4) After the expiration of one (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.
(5) In lieu thereof, the corporation shall issue a new certificate of stock.

Unless the registered owner files a bond or other security as may be required, effective for a period of one (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 one (1) year period provided
herein.

(6) 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.

Except in case of:

1. Fraud,
2. bad faith, or
3. 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.

EXCEPTION (SEC OPINION – JAN. 28, 1999)

While Section 72 appears to be mandatory, the same admits exceptions such that a corporation may voluntarily issue
a new certificate in lieu of the original stock certificate which has been lost without complying with the requirements.
It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of shares
for purposes of liquidation. It is well settled that unless proven otherwise, the stock and transfer book (STB) is the
best evidence to establish stock ownership.
3. Disposition and Encumbrance of Shares

a. Sale of Shares
GR: Shares are not owned by the corporation – they are owned by the shareholders of record. Based on
the Doctrine of Free Transferability of Shares, the sale of shares may be made by shareholders as this
is their property right.

EXP: Right of First Refusal

Sale of share is perfected not upon the meeting of the minds by the parties on the cause, consideration and
object of the sale, but upon compliance with the formalities prescribed by the RCC.

b. Allowable Restrictions on the Sale of Shares

The corporation may impose restrictions on the transfer of shares but subject to the following requisites:
1. Restrictions on the right to transfer shares must appear in the AOI and certificate of stock.
!!! If restriction is thru board resolution only, or thru bylaws, the restriction is void.
2. 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.
!!! Requiring the consent of the corporation prior to the sale of shares is a restriction more
onerous than the right of first refusal.
3. Upon the expiration of the said period, the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell their shares to any 3rd person.

c. Requisites of a Valid Transfer

There can only be a transfer of share if the shares are fully paid.
GENERAL RULE: There can be transfer of shares if there is a certificate of stock.
If with Certificate of Stock
a. By delivery of the certificate or certificates (to the transferee, not the corporation)
b. indorsed by the owner, his attorney-in- fact, or any other person legally authorized
to make the transfer (there can also be a blank indorsement)
c. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation.
i. If not recorded, the transfer is only binding between the parties. THUS, the
transferee:
1. Cannot compel the corporation that he be recognized as the
stockholder (as when the corporation declared dividends, he cannot
compel the corporation that it be issued to him)
2. Can compel the transferor because as a contract, it is binding between
them as contracting parties.

EXCEPTION: Even if there is no certificate of stock issued yet (such as when the certificate is lost or
belatedly issued by the corporation), there can still be a valid transfer.
If without Certificate of Stock
Transfer can be made by means of
1. a deed of assignment
2. but the same must be duly recorded in the books.
i. The following shall present the deed of assignment to the corporation for
recording:
1. The shareholder-transferor; or
2. The transferee or any agent, provided that the registered owner must
execute an SPA.
ii. Once the name of the transferee is recorded, the transferor ceases to exercise
all the rights of a stockholder.

Subscription is Fully Paid Subscription is NOT Fully Paid

The stockholder may sell or dispose of his The consent of the corporation is necessary
shares without having to secure the consent of before the subscriber may assign his right to the
the corporation. contract of subscription.

Assignment of shares with unpaid subscription

basically amounts to a novation as there will be
a change of debtor from the subscriber to the
assignee.
 PRINCIPLE OF INDIVISBILITY OF SUBSCRIPTION
A subscription is one, entire, and indivisible whole contract. All partial payments on one
subscription shall be deemed applied proportionately among the number of shares.
i. This principle is ONLY applicable when the subscription is not fully paid. Thus, transfers
of shares which are partially paid are not allowed.
ii. This principle is NOT applicable when the subscription is either:
1. fully paid and there is Certificate of Stock
2. fully paid and there is no Certificate of Stock
In both cases, the subscription is already divisible, and can be transferred to multiple
transferees.

HOWEVER, the entire subscription, although not yet fully paid, may be transferred to a single
transferee, who as a result must assume the unpaid balance. However, the consent of the
corporation must be secured because this constitutes a novation of contract.

RATIONALE: If the indivisibility of the subscription is not upheld and the subscriber becomes
delinquent in the payment of subscription, the corporation may not be able to sell as many as his
subscribed shares as would be necessary to cover the total amount due from him.

NOTES:
• The payment of the CGT on the part of the seller, assuming there was a gain in the sale, is not a
requirement for the validity of the sale or assignment or transfer of the shares to the buyer.
HOWEVER, if CGT is not paid, the sale or transfer shall not be registered in the books of the
corporation.
• As additional step, the transferee shall pay the taxes due on the transaction, if any, then obtain from
the BIR a certificate authorizing registration (CAR). The transferee should present the CAR and the
document evidencing the conveyance and surrender the duly endorsed stock certificate to the
secretary of the corporation who shall then cancel the stock certificate of the transferor and issue a
new stock certificate to the transferee.
• Delivery to the corporation of the certificate is not required before a valid transfer of shares. To
compel such would amount to a restriction on the right of the stockholder to have the stocks
transferred to his name.
o !!! The surrender of the certificate of stocks by the transferee to the corporation is not a
requisite before the registration of the transfer may be made in the corporate books.
HOWEVER, the surrender of the original certificate of stock is necessary before the issuance
of a new one so that the old certificate may be cancelled.
• The appropriate legal remedy if the corporation refuses to register the transfer of shares is
mandamus. Only the transferor may file the petition for mandamus. The transferee cannot compel
the corporate secretary to cause the registration because the transferee has not acquired standing
yet in the books of the corporation.

!!! Instances that the corporation may VALIDLY REFUSE to record the transfer of shares:
1. If the formalities prescribed by law for the transfer of shares (endorsement + delivery) are not
complied with.
2. If the formalities have been complied with, but the corresponding taxes for the transfer have not
been paid.
3. If the corporation holds any unpaid claim on the shares.

What is meant by unpaid claim?

The term unpaid claim only refers to any unpaid claim arising from unpaid subscription. It does not
include any indebtedness which a subscriber may owe the corporation arising from any other
transaction. It does not include monthly dues imposed by the corporation for the use of its facilities.
d. Involuntary Dealings
Are transactions where the shares of stock are subjected to security interest or encumbrance required to be
recorded in the books of the corporation in order to make the transfer effective as against the corporation and
3rd persons?
NO. Only transfer of shares resulting in a change of ownership is required to be registered in the books of the
corporation. These include sale, donation, succession. Encumbrances, like security interest on shares, are not
required to be registered to bind the corporation and 3rd persons. They are binding and enforceable if they
are registered with the appropriate registration registry under RA11057 (PPSA).

As between 2 contending judgment creditors

The first to have the writ served upon the proper officer of the corporation would be preferred.

As between an attaching/levying creditor and buyer/assignee of the shares

If the writ was properly served upon the corporate officer ahead of the registration of the sale/assignment
in the STB (even when the sale or assignment was perfected and consummated ahead of the pledge or
mortgage), the pledge or mortgage would still be preferred because the registration of the sale or assignment
in the STB is a necessary ingredient to make it binding on 3rd parties, including the pledgee or mortgagee.

NOTE: A bona fide transfer of shares, not registered in the corporate books, is not valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice
of said transfer or not. All transfers not so entered on the corporate books are absolutely void, not because
they are without notice or fraudulent in law or fact, but because they are made so void by statute.
G. DISSOLLUTION AND LIQUIDATION

1. Modes of Dissolution
DISSOLUTION
It is the extinguishment of the franchise of a corporation and the termination of its corporate existence.

Dissolution implies the termination of termination of the corporation’s existence and its utter extinction and
obliteration as an entity or body

EFFECTS OF DISSOLUTION
1. The corporation ceases as a body corporate to continue the business for which it was established.
2. A dissolved corporation can no longer continue its operations except the usual liquidation of the
business.
3. Forfeiture of assets on favor of the national government
– Sec. 138: If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth
in subparagraph (e)
– Without prejudice to the rights of innocent stockholders and employees for services rendered, and
to the application for other penalty or sanction under this Code or other laws.

MODES OF DISSOLUTION
1. Voluntary Dissolution (Sec. 134 and 135)
a) Where no creditors are affected
b) Where creditors are affected
2. Involuntary Dissolution (Sec. 138)
3. Shortening of Term (Sec. 136)
4. Expiration of Term (Sec. 136)
5. Revocation of the Certificate of Incorporation by the SEC

Section 133 Section 134

Where no creditors are prejudiced Where creditors are prejudiced
1. MEETING 1. MEETING
Before the meeting: Article 49 applies. No requirement of prior
1. SERVICE of notice of meeting at least 20 publication.
days prior to the meeting
2. PUBLICATION of the notice of meeting
ONCE in:
a. Newspaper in the place of the
principal Office; or
b. If no such newspaper, in the
newspaper of general circulation in
the Philippines
2. RESOLUTION TO DISSOLVE 2. RESOLUTION TO DISSOLVE
a. Approved by majority of BOD/BOT a. Petition signed by majority of
b. Approved by stockholders representing BOD/BOT
at least a majority of OCS or majority b. Approved by stockholders representing
of members at least two-thirds (2/3) of OCS or at
least two-thirds (2/3) of members

3. VERIFIED REQUEST FOR DISSOLUTION 3. VERIFIED PETITION FOR DISSOLUTION

1. To be filed with the SEC stating: 1. To be filed with the SEC stating:
a. Reason for dissolution; a) Reason for the dissolution;
b. Form, manner, and time when the b) Form, manner, and time when
notices were given notices the notices were given
c. Names of who approved the c) Date, place and time of the meeting
dissolution; in which the vote was made
d. Date, place and time of meeting in 2. SIGNED by a majority of BOD/BOT;
which the vote was made and 3. VERIFIED by:
e. Details of publication a) President or
b) Secretary or
c) One of the BOD/BOT
4. Shall SET FORTH all claims and demands
against it
5. RESOLVED accordingly by the required
vote of BOD/BOT and
Stockholders/members
 Section 133 Section 134
Where no creditors are prejudiced Where creditors are prejudiced
4. SUBMISSION OF DOCUMENTS TO SEC 4. SUBMISSION OF DOCUMENTS TO SEC
1. A copy of resolution authorizing the 1. A copy of resolution authorizing the
dissolution; dissolution;
a) Certified by a majority of BOD/BOT a) Certified by a majority of BOD/BOT
and and
b) Countersigned by the Secretary b) Countersigned by the Secretary
2. Proof of Publication 2. A list of all creditors
3. Favorable recommendation from
appropriate agencies

5. SEC APPROVAL 5. SEC APPROVAL

Within fifteen (15) days from the receipt of the If the petition is sufficient in form and
verified request, and in the absence of any substance, the SEC shall: (OPP)
withdrawal within said period, the SEC shall 1. Issue an ORDER fixing a deadline for filing
approve the request and shall issue the OBJECTIONS which shall be not less 30
certificate of dissolution. days but not more than 60 days after the
entry of the order;
2. PUBLICATION at least once for 3
consecutive weeks in a newspaper of GC in
the place of principal office, or if none, in
the newspaper of GC in PH.
3. POSTING of a similar copy for 3
consecutive weeks in 3 public places in
such municipality/city.
Additional Requirement: 6. SEC HEARING
No dissolution of banks, banking and quasi-banking a. Upon five days notice, the SEC will
institutions, preneed, insurance and trust companies, proceed to hear the petition and try any
NSSLAs, pawnshops, and other financial issues raised in the objections filed;
intermediaries shall be approved by a favorable b. If there are no objections which are
recommendation of the appropriate government sufficient, the SEC shall render a
agency. judgement dissolving the corporation,
including:
i. Disposition of assets;
ii. Appointment of a receiver

In either case, The dissolution shall take effect only upon the issuance by the SEC of a CERTIFICATE OF
DISSOLUTION.

Sale of all the assets will NOT dissolve a corporation.

Rationale: The sale of all the assets will not result in the automatic dissolution or termination of the existence
of the former. A decision to dissolve to terminate its corporate existence would require a separate approval by
a majority of the BOD/BOT and Stockholders/members.

NOTE: In dissolution, other classes of stockholders (e.g. non-voting class) shall be included in the voting to dissolve
the corporation. Section 6 of the RCCP expressly provides that these classes of stockholders may nevertheless vote
since their fundamental rights as stockholders are affected by the dissolution.

SEC. 136: DISSOLUTION BY SHORTENING OF CORPORATE TERM

HOW EFFECTED
1. By amending the AOI to shorten the corporate term AND
2. A copy of the amended AOI shall be submitted to the SEC

- Only upon the approval by the SEC that the corporation shall be deemed dissolved.
- Last paragraph of Sec. 15 RCCP, which provides for automatic approval of SEC after 6 months if the
SEC does not act upon the filing of amended AOI, does not apply to Sec. 136.
EFFECT
• Upon the expiration of the shortened term, the corporation shall be deemed dissolved without further
proceedings, except liquidation.
• Dissolution shall take effect on the day following the last day of the corporate term stated in the AOI
– No need for SEC to issue a certificate of dissolution
SEC. 138: INVOLUNTARY DISSOLUTION
MODES:
1. Filing a verified by any interested party
2. Revocation of AOI by the SEC; OR
3. Quo warranto proceedings
- This method is impliedly found in Sec. 19 RCC which authorizes the SolGen to bring a quo warranto
proceeding against a de facto corporation claiming in good faith to be a corporation, to oust it from
the exercise of corporate powers and to have it dissolved.
GROUNDS:
a) Non-use of corporate charter (Sec. 21)
Corporation does not formally organize and commence its business within 5 years. The Certificate of
Incorporation shall be deemed revoked.

Meaning of Organization
The systematization and orderly arrangement of the internal and managerial affairs of the corporation. It
includes adoption of by-laws, election of directors/trustees and officer, or establishment of principal Office

Meaning of Commencement
If it has performed preparatory acts geared toward the fulfillment of the purposes of the corporation It
includes entering into contracts or negotiations, or making plans for construction of factory.
b) Continuous inoperation of a corporation (Sec. 21)
Corporation has commenced its business but subsequently becomes inoperative for a period of at least 5
consecutive years. After due notice and hearing, the corporation will be put on delinquent status. It shall
have 2 years to resume operations, otherwise, certificate will be revoked.
c) Upon receipt of a lawful court order dissolving the corporation
This may involve or arise from a quo warranto proceeding involving a de facto corporation or a liquidation
proceeding involving an insolvent debtor under FRIA.

d) By a final judgment that the corporation procured its incorporation through fraud
e) By a final judgment that the corporation:
1. Was created for the purpose of committing, concealing or aiding the commission of securities
violation, smuggling, tax evasion, money laundering, or graft and corrupt practices
2. 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
3. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.

REVOCATION OF CERTIFICATE BY SEC

SEC has the power to revoke Certificates of Incorporation. If CI is dissolved = corporation is dissolved.
REMEDY IN CASE THERE IS REVOCATION
Corporation shall file petitions to lift the order of revocation in accordance with the procedure provided
for by SEC.

PETITION FOR REVIVAL (SEC MC No. 23-2019)

Corporations covered:
1. Corporation whose corporate term has expired
2. Expired corporation whose CI had been revoked for non-filing of reports
3. Expired corporation whose CI has been suspended
4. Corporation whose corporate name has been validly re-used, and is currently being used by an existing
corporation, duly registered with SEC
– Provided that the former shall change its name within 30 days from the revival

MUST BE APPROVED BY:

• At least majority of the directors/trustees; AND
• Stockholders representing majority of OCS/members

Rich vs. Paloma III, 858 SCRA 27, G.R. No. 210538 March 7, 2018
FACTS: MTLC entered into the real estate mortgage agreement with Estanislao after its dissolution. Estanislao
defaulted and MTLC now seeks to redeem the property.

RULING: MTLC cannot redeem. Such real estate mortgage agreement would be void ab initio because of the
nonexistence of MTLC’s juridical personality, by virtue of its dissolution. If, however, MTLC entered into the real
estate mortgage agreement prior to its dissolution, then MTLC’s redemption of the subject property, even if already
after its dissolution (as long as it would not exceed three years thereafter), would still be valid because of the
liquidation/winding up powers accorded by Section 122 of the Corporation Code to MTLC.
 Business Transactions/Operations
BEFORE DISSOLUTION Within 3 years AFTER AFTER 3 years from
DISSOLUTION DISSOLUTION
Valid GR: New Business entered into are Corporation ceases to exist FOR
VOID. ALL PURPOSES.

EX: Transactions entered into after The corporation has no more legal
dissolution are in pursuance of capacity to sue after 3 years from
business transacted prior to the its dissolution.
dissolution.

The Corporation continues as a

body corporate for three years for
purposes of winding up or
liquidation.

Rationale: This continuance of its

legal existence for the purpose of
enabling it to close up its business is
necessary to enable the corporation
to collect the demands due it as well
as to allow its creditors to assert the
demands against it.

Example: A real estate mortgage

executed by a corporation after its
dissolution is void. The redemption
is likewise void for being
inconsistent with liquidation.

2. Methods of Liquidation
CORPORATE LIQUIDATION
It is the process of settling the affairs of the corporation after its dissolution. This consists of:
1. Collection of all that is due the corporation
2. Settlement and adjustment of claims against it
3. Payment of its debts
4. Distribution of the remaining assets, if any, among the stockholders thereof

The corporation shall remain as a body corporate for 3 years for the purpose of
1. Prosecuting and defending suits by or against it, and
2. Enabling it
a. To settle and close its affairs
b. To dispose of and convey its properties, and
c. To distribute its assets

• A corporation cannot, within the 3-year period, continue the business for which it was established. A
dissolved or revoked corporation can no longer conduct the usual business provided for in its primary
purpose or even its secondary purpose during the period of liquidation. The existence of the corporation
continues only for purpose of liquidation and winding up its affairs. Transactions that are not for the purpose
of liquidation shall be considered void.

RATIONALE: The rationale is that dissolution of the corporation carries with it the termination of the
corporation's juridical personality.

NOTES:
• The liquidation and distribution of assets do not require the approval of SEC.
• Liquidation is within the jurisdiction of the RTC.
• The SEC has jurisdiction to order the dissolution of a corporation, but any question or controversy regarding
the liquidation is raised before the appropriate RTC.
• Liquidation requires settlement of claims which clearly falls within the jurisdiction of the regular courts, the
RTC is in the best position to convene all creditors, ascertain their claims, and determine their preferences.
MODES OF LIQUIDATION
1. Liquidation through the Board of Directors
2. Liquidation through a Trustee to whom the properties are conveyed

EFFECT OF CONVEYANCE: After any such conveyance, 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.

GR: Liquidation is supposed to be made within 3 years, if without trustee

EXP: If full liquidation can only be effected after the 3-year period and there is no trustee, the directors
may be considered as trustees by legal implication
• There is no time limit within which the liquidation should be completed if in the hands of a
trustee.
• A receiver or trustee can still commence actions after the 3-year period provided it is in
furtherance of the liquidation process
• There is nothing that bars recovery of debts of the corporation after the 3-year liquidation period.
• The trustee has legal title that can serve as basis for the filing of cases as a real-party-in-interest
even after the 3-year period.

3. Liquidation through a Receiver

4. Liquidation under Financial Rehabilitation and Insolvency Act
The liquidation of the debtor will be carried out by the rehabilitation receiver, or the liquidator appointed by
the court. Under Section 25 of FRIA, the rehabilitation court may convert a petition for rehabilitation to
liquidation if there is no showing that the debtor may be rehabilitated.

NOTES:
• SEC approval is not required in the approval of the distribution or liquidation of the assets of the dissolved
corporation. This falls within the authority of the directors and stockholders or duly appointed trustee or
receiver.
• Any asset distributable to the creditor or stockholder or member who is unknown or cannot be found shall
be escheated in favor of the national government.

May the following legal actions involving the corporation be enforced by or against the corporation beyond
the 3-year liquidation period?
Action filed during the lifetime of Action filed during the 3-year Action filed after the 3-year
the corporation liquidation period liquidation period
YES. The trustee may commence a YES. The trustee appointed may NO. Such action should be
suit which can proceed to final initiate a suit during the 3-year dismissed since by that time, the
judgment even beyond the 3-year liquidation period, which may corporation lacks the capacity to
period of liquidation. continue even beyond the said sue because it no longer possesses
period. juridical personality by reason of its
dissolution.

CHUA VS. PEOPLE

FACTS: In 2000, Joselyn Chua, a stockholder of Chua Tee Corporation of Manila, was deprived of her right to inspect
the books and records of CTCM. The corporate officers contend that they cannot be held liable because ABC
Corporation ceased to exist as a corporate entity since 1999. Are the officers correct?

RULING: The officers are not correct. The termination of the life corporation does not by itself extinguish the rights
of stockholders. Thus, aside from the right to a share in the assets, the stockholders can also exercise other rights
like the right to inspect the books and records of the corporation.

REYES VS. BANCOM

FACTS: Bancom filed a complaint for sum of money against Marbella, the principal debtor, and the individual
members of the Reyes Group. The SEC eventually revoked the certificate of registration of Bancom. Reyes Group
contends that the pending suit should be abated because no trustee or receiver was appointed. Is the RR Group
correct?

RULING: Reyes Group is not correct. A receiver or an assignee need not even be appointed for the purpose of bringing
suits or continuing those that are pending. In the absence of receiver or assignee, suits may be instituted or continued
by a trustee specifically designated for a particular matter, such as a lawyer representing the corporation.
H. Other Corporations

1. Close Corporations
A close corporation is one whose AOI provides that:
REQUISITES:
(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).
This means the AOI can provide less than 20 but not more than 20

(b) all the issued stock of all classes shall be subject to one (1) 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.

What happens if one of the shareholders dies and there are more than 1 heir which will violate the
numerical limit?
The heirs have 2 options:
(1) the shares of the deceased may be placed in the name of 1 of the heirs who will be the
nominee or representative of the heirs or
(2) a corporation can be organized to hold all the shares (must still be a close corporation)

NOTES:
• A narrow distribution of ownership does not by itself make a close corporation. ALL the
requisites above must be present.
• A family corporation is not necessarily a close corporation. It can be an ordinary corporation
if the requisites are not met.

CANNOT BE A CLOSE CORPORATION

a. 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
RATIO: The corporation will be effectively held by more than 20 persons.
b. mining or oil companies,
c. stock exchanges,
d. banks,
e. insurance companies,
f. public utilities,
g. educational institutions and
h. corporations declared to be vested with public interest.
RATIO: These are corporations vested with public interest. There is a requirement that these
types of corporations are to be funded by an unlimited number of people.

DIFFERENCE OF A CLOSE CORPORATION AND ORDINARY CORPORATION

The main difference of a close corporation and ordinary corporation pertains to the
1. identity of stock ownership and
2. active management.

CLOSE CORPORATION ORDINARY CORPORATION

There is a limit of ownership where it shall not exceed There is no limit of ownership
20 stockholders
There MUST be a restriction in the transfer of shares Restriction may not be provided
Specific qualifications to be eligible as stockholder are Qualifications are not normally provided
usually provided for
Public offering of shares is not allowed Public offering of shares is allowed
May be managed directly by stockholders provided that Managed by the BOD
it is provided in AOI
There are rules on deadlock There are no rules on deadlock
A shareholder may withdraw and may ask the Generally, a shareholder may not withdraw and ask the
corporation to purchase his share corporation to buy his share, except under Section 40
A close corporation is different from a closed corporation and a closely held corporation.
CLOSED CLOSELY HELD
May refer to either: Focuses more on the number of shareholders in the
(1) Corporations which ceased to engage in corporation at the particular time indicating that they
business as an ongoing concern or has dissolved are few in numbers.
its corporate personality.
THUS,
(2) Corporations who are still going concern, but (1) A close corporation is necessarily a closely held
the stockholders have reserved the corporation.
participation and management to themselves (2) A closely held corporation is not necessarily
only. They desire to keep outsiders away. close. Because even if beyond 20 stockholders,
it can still be a closely held corporation if the
In this respect, a close corporation can also be a shares are owned by a relatively limited
closed corporation if there is a restriction number.
stated in the AOI or bylaws to keep the
membership and management exclusive among
themselves.

Principal Characteristics of Close Corporations

1. The business of the corporation may be managed by the stockholders of the corporation rather than
by the Board of Directors
a. There is no need to call a meeting to elect directors
b. The stockholders of the corporation shall be deemed to be directors
c. The stockholders of the corporation shall be subject to all liabilities of directors.
i. Stockholders of a close corporation, however, are not automatically liable for corporate debts
and obligations.
2. A board resolution authorizing the sale or mortgage of corporate property is not necessary to bind
the corporation for the action of its president.
3. Quorum may be greater than a mere majority
4. Transfers of stocks to others which would increase the number of stockholders to more than the
maximum are invalid.
5. Corporate actions may be binding even without a formal board meeting, if the director had
knowledge or ratified the informal action of the others, unless after having knowledge thereof, the
director promptly files his written objection with the secretary of the corporation.
6. Pre-emptive right extends to all stocks issued, including re-issuance of treasury shares, whether for
money or for property or personal services, or in payment of corporate debts, unless the AOI provide
otherwise.
7. Deadlocks in the board may be settled by the SEC, on written petition by any stockholder
a. If the directors or stockholders are so divided on the management of the corporation's business
and affairs that the votes required for a corporate action cannot be obtained, with the
consequence that the business and affairs of the corporation can no longer be conducted to the
advantage of the stockholders generally.
b. This remedy for Close Corporation is not available to ordinary corporation because in case of a
deadlock in the board, the stockholders may come in (Remove those directors that is/are causing the
deadlock). Unlike in a Close Corporation, where the shareholders are also the directors, there is no
one that they may turn to. Thus, in the latter, they have the option to go to SEC.
8. A stockholder may withdraw for any reason and avail himself of his right of appraisal, when the
corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock.
a. Stockholder may compel the Corporation to buy its share for WITH OR WITHOUT any reason,
provided that:
i. Such is not contrary to any of the right found under the provisions of the RCCP
ii. That such purchase shall be at fair value, which shall be not less than the par value of the said
shares
iii. That the corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock
b. Stockholder may compel the dissolution a close corporation, provided:
i. He/she files a written petition to the SEC
ii. The acts of its directors, officers or those in control of the corporation are:
1. Illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or
any of its stockholder; or
2. Whenever corporate assets are being misapplied or wasted.
Bustos v. Millians Shoe, Inc. Case
In this case, the CA found the subject property of Sps. Cruz answerable for the obligations of MSI. The CA
characterized the spouses as stockholders of a close corporation, who as such, are liable for its debts.

SC ruled that the conclusion is baseless. To be considered a close corporation, an entity must abide by the
requirements laid out in Section 96 of the Corporation Code. The lower courts did not at all refer to the AOI
of MSI. The limited liability of stockholders still applies to stockholders of close corporations. They are only
liable to all liabilities of directors but they are not automatically liable to corporate debts.

CONDITIONS FOR A VALID RESTRICTION ON TRANSFER OF SHARES Section 97

a. To be binding on any purchaser in good faith, restrictions must appear:
1. in the AOI,
2. in the bylaws, as well as
3. in the certificate of stock
b. The restriction on transfer is in the nature of a right of first refusal/option to purchase in favor
of the existing stockholders OR the corporation within such reasonable terms, conditions and period.
This right is waivable if not exercised within the period stated.

MANDATORY RESTRICTION
GR: No sale to a third person by a stockholder in a close corporation shall be valid except in
accordance with the procedure provided for by the AOI, By laws and Certificate of Stock.
EXP:
(1) when there is substantial compliance with the procedure/condition for restriction.
(2) when remaining stockholders of the close corporation consent to such transfer.

OTHER RESTRICTIONS
i. Any transfer of shares should not result in the corporation having stockholders exceeding the
maximum number of allowed in the AOI and the RCCP.
j. Restriction prohibiting public offering.
k. Transfer to an ineligible stockholder.

Rogelio Florete vs. Marcelino Florete Case

Paragraph 7 of the AOI of Marsal Corporation (a close corporation) provides for the procedure in the sale of
shares:
i. Notification in writing by the stockholder to BOD of his intention to sell.
ii. Notification of BOD to ALL stockholders OF RECORD within 5 days from receipt of such letter.
iii. Stockholders to exercise their preemptive right within 10 days from notice of the Board.

SC ruled that the transfer from Teresita Florete to Rogelio Florete was valid because there was already
substantial compliance with paragraph 7 of the AOI when respondents obtained actual knowledge of the sale
when their counsel conformed to the Deed of Assignment. In fact, respondents had already given their
consent and conformity by their inaction for 17 years despite knowledge of the sale.

Even if the transfer of stocks is made in violation of the restrictions enumerated under Section 98, such
transfer is still valid if it has been consented to by all the stockholders of the close corporation, and the
corporation cannot refuse to register the transfer of stock in the name of the transferee.

The corporation may, at its option, REFUSE REGISTRATION of the transfer in the name of the third
person conclusively presumed to have notice of the foregoing.
EXCEPTIONS: Transfer is binding upon the corporation notwithstanding such conclusive presumption,
where:
(1) Consented to by all the stockholders of the close corporation or
(2) close corporation has amended its AOI.

NOTES:
1. If there is a violation of Sec. 98 and there is conclusive presumption, the defense of good faith is
not tenable.
2. If there is a violation of Sec. 98 but there is no conclusive presumption, as when a restriction is
not provided for in AOI, Bylaws and COS, good faith may be interposed as a defense by the
transferee.
3. Even if there is a violation of Sec. 98, the corporation remains as a close corporation. Provided,
that the restriction violated is not one that would render the corporation unable to comply with
the requisites provided under Sec. 95 to be characterized as a close corporation.
2. Non-Stock Corporations
One without a capital stock and/or where no part of its income is distributable as dividends to its members,
trustees, or officers

ESSENTIAL REQUISITES
1. It does not have a capital stock divided into shares
2. No part of its income is distributable as dividends to its members
3. It must be formed or organized for purposes provided for under Section 87
4. It must have members

PROFITABLE BUSINESS
GENERAL RULE: Non-stock corporations are not empowered to venture in profitable business.
EXCEPTION: It is allowed to do so only as an incident to its operations, whenever necessary or
proper for the furtherance of the purpose/s for which the corporation was organized.
(as long as the profit is not distributed to its incorporators, members or officers)

Section 87. Purposes. –

Nonstock 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
12. any combination thereof, subject to the special provisions of this Title governing particular classes of
nonstock corporations.

NOTE: Despite its nomenclature, the essence of a non-stock corporation is not the non-existence of shares
of stock to cover its capital (it is still legally possible for a corporation having capital stock to be considered
as non-stock corporation), but that its primary purpose is any of those under Section 87, and there is a
prohibition that no part of the income is distributable to the members.

NATIONALITY
The nationality of non-stock corporation is computed on the basis of the nationality of its members and
not premised on the membership contribution.

CONVERSION
NON-STOCK TO STOCK
A non-stock corporation cannot be converted into a stock corporation by mere amendment of the AOI. The
amendment would be inconsistent with the nature of a non-stock corporation because the same will have
the effect of distributing the assets of the non-stock corporation to its members so that the latter can become
its stockholders.
WHAT SHOULD BE DONE?
The non-stock corporation should dissolve itself first then the members may thereafter decide to
organize a stock corporation.

STOCK TO NON-STOCK
This is possible by mere amendment of the AOI. The effect is that the stockholders who now become
members will no longer have any pecuniary interest in the corporate assets, nor they be entitled to any share
in the profit.
DIFFERENCE OF NON-STOCK VS. STOCK CORPORATION
NON-STOCK STOCK
Components Members Shareholders
Board Members Trustees Directors
Existence of Shares There is no capital stock divided into There is a capital stock divided into shares.
shares.
Dividends No dividends are declared. Dividends are declared.
Purpose Primary purpose is non-profit. It is limited The purpose is primarily business.
to those specified under Section 87.
Business activities It can conduct business but only if it is The business purpose is the primary
incidental to the primary purpose. purpose.
Voting rights The voting rights can be modified, limited One share is one vote
or broadened.
Transferability of Membership is generally non-transferrable Shares are transferrable
interest
Termination Membership can be terminated Ownership of shareholder cannot be
terminated until the transfer of the shares
or upon liquidation
Effect of Death Death of a member terminates the Shares can be acquired through succession
membership. Generally, membership is not
transferred
Dues Payment of dues can be required No dues are paid
Board There can be more than 15 members or Not more than 15 members or directors
trustees
Term of Board 3 years 1 year
Members
Voting Cumulative voting is not allowed unless Cumulative voting is expressly allowed.
provided for in the AOI or Bylaws. The
general rule in Section 23 is that the
members may not cast more than 1 vote
for 1 candidate.

Liquidation Generally, the members will not get a Shareholders will get their share in the net
share in the assets unless provided for in assets known as liquidated dividends.
the AOI or bylaws.
Election of Officers The members may directly elect the Officers are elected by the BOD.
officers of the non-stock corporation
unless otherwise provided in the AOI or
Bylaws.

SEC. 88. RIGHT TO VOTE

GR: Each member shall be entitled to 1 vote, regardless of the contributions. [1 MEMBER = 1 VOTE]
EXP: The right to vote may be limited, broadened, or denied to the extent specified in the AOI or the bylaws.
Examples:
Limited Regional elections of trustees for nationalized corporations
Broadened When the voting right is in proportion to the area of ownership in the building in the
case of condominium owners.
Denied When delinquent members are not entitled to vote.

Can a Non-Stock Corporation provide in its bylaws that in case a member is not able to attend the meeting, their
voting rights will be exercised by the Chairman of the Board? YES. This is known as the Residual Voting
Power of the Chairman of the Board. In such a case, the voting right of the Chairman is broadened, whereas
the voting right of the absent member is limited.

HOWEVER, the Residual Voting Power of the Chairman under the Bylaws cannot be used for the purpose of
determining the quorum. The provision which provides that the bylaws can limit, broaden or deny the rights
of a member only pertains to the voting rights and not to the determination of quorum.

a. HOW TO VOTE
GR: A member may vote personally or by proxy.
EXP: AOI or Bylaws can provide that:
1. proxy is not allowed (unlike in stock corporations where it is always allowed), or
2. voting through remote communication is authorized.
 b. QUORUM
i. Quorum in Trustees’ Meeting vs. Quorum in Directors’ Meeting
TRUSTEES DIRECTORS
Majority of the trustees as stated in the AOI, Majority of the directors as stated in the AOI,
except when the AOI or bylaws provides for except when the AOI or bylaws provides for
a greater majority. a greater majority.

ii. Quorum in Members’ Meeting vs. Quorum in Stockholders’ Meeting

MEMBERS STOCKHOLDERS
Majority of actual living members entitled Majority of the stockholders on record
to vote. representing the outstanding capital stock.

The best evidence of who are the present members of the corporation is the “MEMBERSHIP
BOOK." Unless there is a specific requirement in the Code, the By-Laws of non-stock
corporations may provide for a quorum that is more or less than the majority of the
members.

SEC. 89. NON-TRANSFERABILITY OF MEMBERSHIP

GR: Membership in a nonstock corporation and all rights arising therefrom are personal and
nontransferable,
EXP: AOI or the bylaws otherwise provide.

SEC. 90. TERMINATION OF MEMBERSHIP

a. Membership shall be terminated in the manner and for the causes provided in the AOI or the bylaws.
i. The standards of qualifications, manner and causes of termination must be provided in the
AOI or bylaws.

b. Directors or officers may be subject to an action for damages if they exercised their right to reject
the application for membership with abuse of right under Article 19, 20, and 21 of the NCC.

c. NONPAYMENT OF DUES
Members may be expelled for non-payment of dues and for non-attendance of meetings as expressly
sanctioned by the By- Laws of the non-stock corporation. The expulsion is valid if the same was made
by virtue of a Board resolution and after according the member the right to due process including the
procedure provided for in the By-Laws.

d. OTHER GROUNDS FOR TERMINATION

i. Offense committed which would render him unfit for the society of honest men
ii. Violation of his duty as a member
iii. Violation of mixed nature (duty as member + indictable)

e. EFFECT OF DEATH OF MEMBER.

The determination of whether or not "dead members” are entitled to exercise their voting rights
(through their executor or administrator), depends on the provisions of the Articles of Incorporation
or By-Laws.

SEC. 91. Election and Term of Trustees

a. The number of trustees shall be fixed in the AOI or bylaws, which may or may not be more than 15
b. QUALIFICATION
GR: The only qualification of a trustee is membership in the corporation. A trustee who ceases
to be a member can no longer act as a trustee.
EXP: Independent trustees of non-stock corporations vested with public interest
c. TERM
They shall hold office for not more than 3 years until their successors are elected and qualified.
d. VACANCY
Trustees may fill vacancies in the Board, provided that those remaining still constitute quorum. If
there is no quorum, the members will fill the vacancies.
e. ELECTION OF OFFICERS
GR: Members may directly elect officers
EXP: AOI or Bylaws provide otherwise
SEC. 93. Rules of Distribution
The assets of a non-stock corporation undergoing the process of dissolution for reasons other than those
set forth in Section 139 of this Code shall be applied AND distributed as follows:
i. Liabilities and obligations of the corporation shall be paid, satisfied and discharged
ii. Assets held upon a condition requiring return, transfer or conveyance shall be returned, transferred
or conveyed in accordance with such requirements
iii. Assets held permitting their use only for CREBS charitable religious, benevolent, educational or
similar purpose, but not held upon a condition requiring return, transfer or conveyance, shall be
transferred or conveyed to corporations with substantially similar purpose/s
RATIONALE: To maintain continued use of such assets. This practice is encouraged by the State since
the purposes of non-stock corporations coincide with the duties of the State. Doing so lessens the burden
of the State.
iv. Assets other than those mentioned shall be distributed in accordance with the AOI or the bylaws
!!! Assets of a non-stock corporation cannot be distributed to members or trustees unless their
distributive rights upon dissolution are specified in the AOI or in a plan of distribution duly adopted
by at least a majority of the board and approved by at least 2/3 of the members.

NOTE: If the AOI/By laws are silent as to the right of the members to the distribution of the assets, then
the members are not entitled to the same.

v. In any other case, assets may be distributed to such person, societies, organizations or corporations,
whether or not organized for profit, as may be specified in a plan of distribution.

SEC. 94. Plan of Distribution of Assets

A Plan of Distribution of Assets may be adopted by a non-stock corporation in the process of dissolution in
the following manner:
1. BOT, by majority vote, adopt a Resolution recommending such
2. Submission and Written Notice to Members
3. Approval of at least 2/3 of the Members

Lim vs. Moldex Case

CONDOCOR is a nonstock condominium corporation whose members are unit owners of a condominium.
Petitioner LIM claimed that there was no quorum during the July 21, 2012 general membership meeting
because only 29 out of 108 unit owners were present. Quorum was declared based on the presence of the
majority of voting rights.
i. As to the determination of the quorum
1. For nonstock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum. Quorum is the
MAJORITY of its actual living members with voting rights, UNLESS some other basis
is provided by the By-Laws.
2. Quorum is different from voting rights. Quorum is determined based on the actual
living members with voting rights in order for a meeting to be valid. Voting rights only
become significant in passing a valid act.
ii. As to non-members who cannot be elected as directors or officers
1. While MOLDEX may rightfully designate proxies or representatives, the latter,
however, cannot be elected as directors or trustees of Condocor. A director or trustee
must be a member of record of the corporation. The power of the proxy is merely to
vote.
iii. As to the transfer of membership
1. Condocor’s Bylaws provide that any member who transfers his unit/s shall
automatically cease to be a member of the corporation, the membership being
automatically assumed by the buyer upon registration of the sale or transfer with the
Register of Deeds for the City of Manila.
2. Nothing in the records showed that the alleged transfer was registered with the
Register of Deeds or was reported to the corporation. Until and unless the registration
is effected, Lim remains to be the registered owner and thus, continues to be a
member.
 3. Foreign Corporations
A foreign corporation is one
i. formed, organized or existing under laws other than those of the Philippines' AND
ii. whose laws allow Filipino citizens and corporations to do business in its own country or State.
RULE OF RECIPROCITY: If Philippine corporations are not recognized in the country where
the foreign corporation was organized, the latter will likewise not be recognized in the
Philippines.

It shall have the right to transact business in the Philippines

i. after obtaining a license for that purpose in accordance with this Code AND
ii. certificate of authority from the appropriate government agency.

FOREIGN CORPORATION DOMESTIC CORPORATION

One formed, organized or existing under laws other One that is organized, registered, and existing under
than those of the Philippines' AND whose laws allow Philippine laws.
Filipino citizens and corporations to do business in its
own country or State.
Test Applied
INCORPORATION TEST – a corporation is determined to be a foreign or domestic corporation based on the
place of incorporation.

PHILIPPINE NATIONAL FOREIGN NATIONAL

Under Sec. 3, FIA Those who are not classified as Philippine Nationals are
i. Citizen of the Philippines or Foreign Nationals.
ii. Domestic partnership or association
wholly owned by citizens of the Philippines
iii. Domestic Corporation of which at least
60% of the OCS entitled to vote is owned
and held by citizens of the Philippines
iv. Foreign Corporation doing business in
the Philippine of which 100% of the OCS
entitled to vote is wholly owned by
Filipinos
v. Trustee of funds for pension or other
employee retirement or separation benefits,
where the trustee is a Philippine national
and at least 60% of the fund will accrue to
the benefit of Philippine nationals.
vi. Where a corporation and its non-Filipino
stockholders own stocks in a SEC-registered
enterprise, at least 60% of the OCS
entitled to vote of each of both
corporations must be owned and held by
citizens of the Philippines and at least 60%
of the members of the Board of Directors
of each of both corporations must be citizens
of the Philippines.

Test Applied
CONTROL TEST – wherein the 60% threshold for Filipino Ownership must be met, and
GRANDFATHER RULE – when there exists doubt as to the true extent of the percentage of equity in the
corporation used in a nationalized or partly nationalized area.

Q: Can a domestic corporation be a foreign national? Foreign corporation be a Philippine national?

A: YES. These two classifications have different tests. It may be that it is a domestic corporation, meaning it is
organized here in the Philippines and registered with the SEC, but it is a foreign national at the same time because
for example more than 40% of its ownership may belong to foreign citizens. At the same time, it can also be that it is
a foreign corporation, meaning organized under the laws in a country abroad but it is at the same time a Philippine
national, because for example, all those comprising it are Filipino citizens.
 a. What constitutes “doing business”
Twin-Characterization Test:
i. SUBSTANCE TEST
The foreign corporation is continuing the body or substance of the business or enterprise for which
it was organized or whether it has retired from it or turned it over to another; AND

ii. CONTINUITY TEST

The doing of business implies a continuity of commercial dealings and arrangements and
contemplates to that extent the performance of acts or works and in progressive prosecution of, the
purpose and object of its organization.

A foreign corporation is “doing”, “transacting”, “engaging in”, or “carrying on” business in the State when, and
ordinarily only when, it has entered the State by its agents and is there engaged in carrying on and transacting
through them some substantial part of its ordinary or customary business, usually continuous in the sense that it
may be distinguished from merely casual, sporadic, or occasional transactions and isolated acts.

“Doing business” includes any act/acts that imply a continuity of commercial dealings or arrangements.

An essential condition to be considered as doing business in the Philippines under Section 3(2) of the FIA 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.

NOTE: The acts of foreign corporations doing business should be distinguished from a single or isolated
business transaction or occasional, incidental, and casual transactions that do not come within the meaning of
the law.

!!! A single act or transaction may be considered as doing business when a corporation performs acts for
which it was created or exercises some of the functions for which it was organized (indicates the foreign
corporation’s intention to do business).

DOING BUSINESS DOES NOT CONSTITUTE DOING BUSINESS

Acting as a headquarter
If for several years, it has been performing functions
such as supervision, communications and coordination
for its home office's affiliates in Singapore, and in the
process has named its local agent and has employed
Philippine nationals

Participating in a bidding process Owning a condominium unit

Rationale: It shows the foreign corporation’s intention to Rationale: There is no actual performance of commercial
engage in business to pursue its main business. acts.

Insurance corporations
A foreign corporation with a settling agent in the
Philippines that issued twelve marine policies covering
different shipments to the Philippines

Distributorship agreement is so restrictive that the Distributors transacting in its own name and for its
foreign corporation is in complete control of the own account
distributor. If the local distributor is transacting business in its own
The foreign corporation will be considered doing name independently of the foreign corporation and in
business if it is in complete control of the distributor. its own account and not in the name or for the account
of the foreign corporation.

Exporters
The mere act of exporting from one's own country,
without doing any specific commercial act within the
territory of the importing country.
 FIA, SEC. 3, PAR. (D)—“DOING BUSINESS” SEC. 1, IRR OF FIA—NOT DEEMED “DOING BUSINESS”
Soliciting orders Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business,
and/or the exercise of rights as such investor

GR: It does not cover investment in a partnership.

Investment in a partnership may constitute doing
business if there is participation in its management,
supervision and control.

EXP: When—
a. the foreign corporation is exclusively a
LIMITED PARTNER; AND
b. takes no part in the management and control
of the business operation of a LIMITED
PARTNERSHIP.

Entering into service contracts Having a nominee director or officer to represent its
interest in such corporation

Opening offices whether called “liaison” offices or Appointing a representative or distributor domiciled in the
branches Philippines that transacts business in the
representative's or distributor's own name and
account

Appointing representatives or distributors The publication of a general advertisement through any

domiciled in the Philippines print or broadcast media

Appointing representatives or distributors who in Maintaining a stock of goods in the Philippines solely for
any calendar year stay in the country for a period or the purpose of having the same processed by another
periods totaling one hundred 180 days or more entity in the Philippines

Participating in the management, supervision, or Consignment by a foreign entity of equipment with a local
control of any domestic business, firm, entity, or company to be used in the processing of products for
corporation in the Philippines. export

Collecting information in the Philippines

Performing services auxiliary to an existing isolated

contract of sale which are not on a continuing basis, such
as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar
incidental services.

Cases “not doing business”

• Hiring of an attorney by a foreign corporation which owns the copyright to foreign films and exclusive
distribution rights in the Philippines to file criminal cases for the protection of its property rights
• Mere act of exporting from one’s own country, without doing any specific commercial act within the territory
of the importing country
• A foreign company that merely imports goods from a Philippine exporter, without opening an office or
appointing an agent in the Philippines
• 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
• A foreign corporation may file a petition to enforce a foreign arbitral award even though it is not licensed to
do business in the Philippines.
• !!! A foreign corporation, if its is a holder in due course of a draft, can file a suit in the Philippines to enforce
the warranties of the drawer and endorser after the drawee dishonored the instrument.
• Subscribing to shares of stock of a domestic corporation, maintaining investments therein, and deriving
dividend income.
SLIDING SCALE TEST FOR INTERNET COMPANIES
Involves foreign corporations that do not have physical presence in the Philippines but are engaged in e-commerce
participated in by people in the Philippines.
• SLIDING SCALE TEST—under which the determination if personal jurisdiction can be exercised is directly
proportionate to the nature and quantity of the commercial activity that the entity conducts in the internet.
a. Active Websites—generate sufficient business through the internet to justify personal jurisdiction
over them. The Active Websites send files through the internet to residents of a foreign country or
constantly sell products to persons in the foreign country.

Alfred Hahn v. CA and BAYERSCHE MOTOREN WERKE AKTIENGSELLSCHAFT (BMW)

Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-Manila.” BMW is a
nonresident foreign corporation. Hahn filed a complaint for specific performance and damages against BMW. BMW
moved to dismiss the case, contending that the trial court did not acquire jurisdiction over it through the service
of summons on the DTI, because it was not doing business in the Philippines.
• BMW is doing business in the Philippines. Petitioner Hahn is not conducting business for himself. He is
actually acting as the agent of BWM.
• The phrase "doing business" shall include appointing representatives or distributors domiciled in the
Philippines. However, the phrase "doing business" shall NOT be deemed to include appointing a
representative or distributor domiciled in the Philippines which transacts business in its own name
and for its own account.

b. Necessity of a license to do business

(1) To place foreign corporations under the jurisdiction of the courts
(2) To place foreign corporations in the same footing as domestic corporations
(3) Protection for the public in dealing with said corporations

c. Requisites for issuance of a license

A foreign corporation applying for a license shall submit to SEC:
1. A copy of its AOI and Bylaws, certified in accordance with law, and their translation to an
official language of the Philippines, if necessary.
2. The application shall be under oath and, unless already stated in its articles of incorporation,
shall specifically set forth the following:
a. Date and time of incorporation
b. Address, including the street number, of the principal office of the corporation in the
country or State of incorporation
c. Name and address of its resident agent
d. Place in the Philippines where the corporation intends to operate
e. Specific purpose/s which the corporation intends to pursue
f. Names and addresses of the present directors and officers
g. Statement of its authorized capital stock and the aggregate number of shares which
the corporation has authority to issue
h. Statement of its outstanding capital stock and the aggregate number of shares which
the corporation has issued
i. Statement of the amount actually paid in
j. Such additional information as may be necessary or appropriate in order to enable
the Commission to determine whether such corporation is entitled to a license to
transact business in the Philippines and determine and assess the fees payable.
3. Attached to the application for license shall be:
a. A CERTIFICATE UNDER OATH duly executed by the authorized official/s of the
jurisdiction of its incorporation, attesting to the fact that:
(a) the laws of the country of the applicant allow Filipino citizens and
corporations to do business therein, AND
(b) that the applicant is an existing corporation in good standing.
b. A STATEMENT UNDER OATH of the president or any other person authorized by the
corporation, showing to the satisfaction of the Commission and when appropriate,
other governmental agencies that the applicant is solvent and in sound financial
condition.
NOTE: The removal of the resident agent and failure to appoint a replacement does not result to
automatic revocation of license, but can be a ground for revocation or suspension of its license to do
business.

Effects if a foreign corporation does business in the Philippines without the required license:
i. The foreign corporation is open to court actions
ii. It shall not be allowed to maintain or intervene in an action, suit or proceeding for its own
account in any court or tribunal or agency in the Philippines
Q: Consequence if a foreign corporation is determined to be doing business in the Philippines?
A: It must get a license.

Q: What must a foreign corporation do to be able to transact business in the Philippines?

A: Apply for a license with the SEC.

Q: Can a foreign corporation doing business without license sue before Philippine Courts?
A: NO. It cannot sue before Philippine Courts. Without the license, it debars the foreign corporation from access to
Philippine Courts.

TERM OF LICENSE
GR: Valid as long as the foreign corporation legally exists in its place of incorporation
XPN: Unless revoked, surrendered, suspended or annulled in accordance with the RCCP and special laws.

Withdrawal of Foreign Corporations

Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may
be allowed to withdraw from the Philippines by filing a petition for withdrawal of license.

No certificate of withdrawal shall be issued by the Commission unless all the following REQUIREMENTS are met:
(a) All claims which have accrued in the Philippines have been paid, compromised or settled
(b) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of
its agencies or political subdivisions, have been paid; and
(c) The petition for withdrawal of license has been published once a week for three (3) consecutive weeks
in a newspaper of general circulation in the Philippines.

d. Resident agent
Section 144. Who may be a Resident Agent
A Resident Agent may be either:
1. An individual who is:
a. Residing in the Philippines
b. of good moral Character; and
c. of sound Financial standing or
2. A domestic corporation that is
a. lawfully Transacting business in the Philippines
b. of sound Financial standing
c. in good standing as Certified by the SEC.

POWER OF A RESIDENT AGENT: It is limited to the authority to receive, for and in behalf of the
corporation, services and other legal processes in all actions and other legal proceedings against the
foreign corporation.

Section 145. Resident Agent; Service of Process

As a condition to the issuance of the license for a foreign corporation to transact business in the
Philippines, such corporation shall:
i. file with the Commission a Written Power of Attorney designating a person who must be a
resident of the Philippines; and
ii. Consenting that service upon such resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the corporation shall likewise execute and
iii. file with the Commission an Agreement or stipulation, executed by the proper authorities
of said corporation.

Whenever such service of summons or other process is made upon the Commission, the Commission
shall, within 10 days thereafter, transmit by mail a copy of such summons or other legal process to
the corporation at its home or principal office.

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.

SUBSTITUTION OR ADDITION OF A RESIDENT AGENT

Foreign corporation shall file with the SEC a petition for change or substitution of resident agent
within 30 days after acceptance of the appointment by the new resident agent.
 e. Personality to sue and suability
SUMMARY OF RULES
1. If a foreign corporation does business in the Philippines without a license, it cannot sue, but may be sued
before Philippine courts.
2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action entirely independent of any business transaction
3. If a foreign corporation does business in the Philippines with the required license, it can sue and be sued
before Philippine courts on any transaction and
4. If a foreign corporation does business in the Philippines without a license, a Philippine national who has
contracted with said corporation might be estopped from challenging the foreign corporation’s personality
in a suit before Philippine courts.

NOTES:
• It is not the absence of the license but the doing of business without license which debars the foreign
corporation from access to our courts.
• 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. In other words, license is not necessary if the foreign corporation is not engaged in business in the
Philippines.
• If a foreign corporation doing business in the Philippines without a license enters into a contract with another
party, any defect is cured if it will subsequently obtain a license to do business.

INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS ARE ALLOWED TO SUE

1. Casual or isolated transactions
Isolated Transaction → a transaction or series of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose
and object of the business organization.
2. Action to protect good name, goodwill, and reputation of a foreign corporation
3. Subject contracts provide that Philippine courts will be venue to controversies
4. Recovery of misdelivered property
5. Where the defendant is estopped
6. Intellectual Property Code
a. Trademark or service ark enforcement action
b. Patent infringement

LAW APPLICABLE TO FOREIGN CORPORATIONS

GR: 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.
EXP:
1. Those which provide for the creation, formation, organization or dissolution of corporations
2. Those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers
of corporations to each other or to the corporation.

Grounds for Revocation of License F5-MATT

(a) Failure to file its annual report or pay any fees as required by this Code
(b) Failure to appoint and maintain a resident agent in the Philippines as required by this Title
(c) Failure, after change of its resident agent or address, to submit to the Commission a statement of such
change as required by this Title
(d) 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
(e) A Misrepresentation of any material mater in any application, report, affidavit or other document
submitted by such corporation pursuant to this Title
(f) 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
(g) Transacting business in the Philippines outside of the purpose or purposes for which such corporation
is authorized under its license
(h) 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 Philippine; or
(i) Any other ground as would render it unfit to transact business in the Philippines.
 4. One Person Corporations
It is a corporation with a single stockholder

TERM
GR: Perpetual, unless AOI states otherwise
EXP: In case of trust or estate, the term of existence shall be co-terminus with the existence of the trust or
estate

WHO MAY FORM AN OPC?

1. NATURAL PERSON
2. TRUST → does not refer to a trust entity, but the subject being managed by a trustee.
3. ESTATE

WHO MAY NOT FORM OPC (PROHIBITED PERSONS)?

1. Natural persons licensed to exercise a profession (unless otherwise provided under special laws)
2. Banks and quasi-banks, preneed, trust, insurance, public and publicly listed companies, and non-
chartered government-owned and -controlled corporations

FOREIGN STOCKHOLDER
A foreign natural person may put up an OPC, subject to the applicable capital requirement and constitutional
and statutory restrictions on foreign participation in certain investment areas or activities. In case of a
natural person, the only requirement is that he or she must be of legal age.

NOTES:
• It is not required to have a minimum capital stock, except as otherwise provided by special law.
• No portion of the ACS is required to be paid-up at the time of incorporation.
o In case of amendment of AOI for increase of ACS, the rules on ordinary corporations apply because of
suppletory application of the provisions. Thus, 25% of the increase must be subscribed and 25% of the
subscribed must be paid.
• OPC is not required to submit and file corporate bylaws.
• An OPC shall indicate the letters "OPC" either below or at the end of its corporate name.
• 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 One Person Corporation. The date of
recording in the minutes book shall be deemed to be the date of meeting for all purposes under this Code.

NOMINEE AND ALTERNATE NOMINEE

● NOMINEE
One 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
o CONSENT OF NOMINEE REQUIRED
Consent may be withdrawn in writing, any time before the death or incapacity of the single stockholder
o TERM - it depends on:
▪ Temporary incapacity of single stockholder
● Until the stockholder, by self-determination, regains the capacity to assume such
duties
▪ Death or permanent incapacity of single stockholder
● 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 One Person Corporation.

● ALTERNATE NOMINEE
One who shall sit as director and manage the OPC in case of the nominee’s inability, incapacity, death, or
refusal to discharge the functions as director and manager of the OPC

● CHANGE OF NOMINEE or ALTERNATE NOMINEE

The singe stockholder may, at any time, change its nominee and alternate nominee by submitting to the
Commission the names of the new nominees and their corresponding written consent. AOI need not be
amended.
CORPORATE OFFICERS
1. PRESIDENT
The single stockholder shall be the sole director and president of the One Person Corporation.

2. TREASURER
Who may become a treasurer?
1. The single stockholder; or
Requisites:
a. He shall give a surety bond to the Commission in such a sum as may be required
a. The bond shall be renewed every 2 years or as often as may be required.
b. The bonding requirement is a continuing requirement as long as the single
stockholder is the self-appointed stockholder.
b. He shall undertake in writing to faithfully administer the OPC’s funds to be received
as treasurer, and to disburse and invest the same according to the articles of
incorporation as approved by the Commission.
2. Other appointed person

3. CORPORATE SECRETARY
The single stockholder may not be appointed as the corporate secretary.
SPECIAL FUNCTIONS OF CORPORATE SECRETARY
1. 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 five (5) days from such occurrence;
3. Notify the Commission of the death of the single stockholder within five (5) days from such
occurrence and stating in such notice he names, residence addresses, and contact details of
all known legal heirs; and
4. Call the nominee or alternate nominee and the known legal heir to 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.
4. OTHER CORPORATE OFFICERS
These are appointed by the single stockholder, unlike in ordinary corporations where officers are appointed
in the by-laws.

WHEN TO APPOINT Treasurer, Corporate Secretary, and other officers?

Within 15 days from issuance of certificate of incorporation. MUST NOTIFY the Commission of such
appointment within 5 days from appointment

DELINQUENT STATUS OF OPC

The Commission may place the corporation under delinquent status should the corporation fail to submit the
reportorial requirements three (3) times, consecutively or intermittently, within a period of five (5) years.

LIABILITY OF SINGLE SHAREHOLDER

● DOCTRINE OF SEPARATE PERSONALITY
Applies because under the law an OPC is also a corporation

● LIMITED LIABILITY RULE

Sole shareholder has burden of showing that:
(1) Corporation was adequately financed (enough resources to meet OPC’s purpose).
(2) Property of OPC is independent of the stockholder’s personal property
(3) There is no ground to pierce the veil of corporate fiction
Otherwise, stockholder is solidarily liable with the OPC.

● PRINCIPLE OF PIERCING THE CORPORATE VEIL

Applies with equal force to One Person Corporations as with other corporations.
CONVERSION OF CORPORATION TO OPC & VICE VERSA
● ORDINARY STOCK CORPORATION → OPC
o Single stockholder acquires all the stocks of an ordinary stock corporation
▪ If the application for conversion is approved, the Commission shall issue a certificate of filing
of amended articles of incorporation reflecting the conversion.
o OPC converted from an ordinary stock corporation shall succeed the later and be legally responsible
for all the latter's outstanding liabilities as of the date of conversion. (legal personality continues,
there is no dissolution)

● OPC → ORDINARY STOCK CORPORATION

o If all requirements have been complied with, the Commission shall issue a certificate of filing or
amended articles of incorporation reflecting the conversion.
o The ordinary stock corporation converted from OPC shall succeed the latter and be legally
responsible for all the latter's outstanding liabilities as of the date of conversion.

● In case of death of the single stockholder

o The nominee or alternate nominee shall:
▪ transfer the shares to the duly designated legal heir or estate within seven (7) days from
receipt of either an affidavit of heirship or self-adjudication executed by a sole heir, or any
other legal document declaring the legal heirs of the single stockholder and
▪ notify the Commission of the transfer.
o The legal heirs shall:
▪ Within sixty (60) days from the transfer of the shares, notify the Commission of their decision
to either wind up and dissolve the OPC or convert it into an ordinary stock corporation.
▪ This option applies to conversion hence in case of single stockholder’s death or incapacity, the
legal heir may continue the OPC (in line with the purpose and rationale of OPC)

Corporation Sole OPC

Non-stock Stock
Without capital stock With capital stock
No dividends With dividends
Close Corporation OPC
Stock Stock
Cannot exceed 15 directors Only 1 director
No. of stockholders must not exceed as specified Only 1 stockholder
By-laws is required By-laws is not required
Suffix in name – corp., inc., company, ltd. Suffix in name - “OPC”
Public offering – cannot Public offering - cannot
I. MERGERS AND CONSOLIDATIONS
1. Concept
MERGER CONSOLIDATION
One where a corporation absorbs another One where a new corporation is created, and the
corporation, where the former corporation remains in consolidating corporations are extinguished.
existence while the latter is dissolved.
NOTE: Merger or consolidation does not become effective by mere agreement of the constituent corporations. The
approval of the SEC is required.

OUTLINE OF PROCEDURES
1. Board of each corporation shall draw up a PLAN OF MERGER OR CONSOLIDATION setting forth:
TM-NSO
(a) The Terms of the merger or consolidation
(b) The Mode of carrying the same into effect.
(c) The Names of the constituent corporations
(d) In case of merger, a Statement of the changes, if any, in the AOI of the surviving corporation.
In case of consolidation, all the statements required to be set forth in the AOI; and
(e) Such Other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.
2. Plan or any amendment thereto shall be APPROVED BY MAJORITY of the Board of each corporation
3. Plan or any amendment thereto shall be APPROVED BY 2/3 of the OCS of each corporation
4. ARTICLES OF MERGER OR ARTICLES OF CONSOLIDATION shall be executed by each corporation,
signed by the President or VP and certified by the Secretary or Asst. Secretary setting forth:
PNN-CMPO
(a) The Plan of the merger or the plan of consolidation
(b) As to stock corporations, the Number of shares outstanding, or
As to nonstock corporations, the number of members
(c) As to each corporation, the Number of shares or members voting for or against such plan
(d) The Carrying amounts and fair values of the assets and liabilities of the respective
companies as of the agreed cut-off date
(e) The Method to be used in the merger or consolidation of accounts of the companies
(f) The Provisional or pro forma values, as merged or consolidated, using the accounting
method; and
(g) Such Other information as may be prescribed by the Commission.
5. 4 copies of the Articles of Merger or Consolidation (together with favorable recommendation of
government agency in some cases) shall be SUBMITTED TO THE SEC FOR APPROVAL
6. SEC issues a CERTIFICATE approving the Articles and the Plan
THERE CAN BE NO EFFECTIVE MERGER OR CONSOLIDATION WITHOUT THE APPROVAL OF SEC

!!! Without following these requirements and procedures, there can be no valid merger or consolidation. It would
be, at most, a mere sale of all or substantially all of the assets.

ASSET-ONLY LEVEL BUSINESS ENTERPRISE LEVEL EQUITY LEVEL

A corporation that purchases the Purchase of substantially all the Purchaser takes control of the
assets of another will not be liable assets of the corporation extending business by purchasing the
for the debts and liabilities of the to its going concern. shareholdings. Purchasing
selling corporation provided the corporation is still protected by the
former acted in good faith. The transferee is liable for the limited liability feature but the
debts and liabilities of the same can be pierced.
EXCEPT: NELL DOCTRINE transferor.

The transfer must be of such degree

that the transferor corporation is
rendered incapable of continuing
its business or its corporate
purpose.
MERGER/CONSOLIDATION VS. SALE OF ALL OR SUBSTANTIALLY ALL OF PROPERTIES
MERGER/CONSOLIDATION SALE OF ALL OR SUBSTANTIALLY ALL OF
PROPERTIES
Separate Existence
Separate existence of the constituent corporations shall Separate existence does not cease.
cease.
Approval
Majority of the Board and 2/3 of stockholders of each Majority of the Board and 2/3 of stockholders of the
constituent corporation. selling corporation only.
Assumption of Liabilities
Liabilities of the constituent corporations are assumed Generally, liabilities are not assumed by the
by the surviving or consolidated corporation. transferee. Exceptions are the instances under the Nell
Doctrine.

2. Effects
Effects of Merger or Consolidation
(a) The constituent corporations shall become a SINGLE CORPORATION
(b) The SEPARATE EXISTENCE of the constituent corporations shall CEASE
(c) The surviving or the consolidated corporation
a. shall possess all the rights, privileges, immunities and powers and
b. shall be subject to all the duties and liabilities of a corporation organized under this Code.
(d) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all property, receivables, interest shall be deemed
transferred to and vested in such surviving or consolidated corporation without further act or deed
(e) The surviving or the consolidated corporation shall be responsible for all the liabilities and
obligations of each constituent corporation. 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.

EFFECT ON EMPLOYEES
In merger, the surviving corporation shall absorb the employees of the dissolved corporation.
In consolidation, the employees of the constituent corporations shall become the employees of the
new corporation.
• The tenure shall be treated as having started when they started with the dissolved or
constituent corporation
• Merger by itself is not a ground to dismiss the employees. Nevertheless, the surviving
corporation is given the right to terminate employees for just or authorized cause such as
redundancy.

RIGHT OF APPRAISAL OF DISSENTING STOCKHOLDER

A stockholder who does not want to become a stockholder in the surviving or consolidated corporation has
the right of appraisal.

TRIANGULAR MERGER / PHANTOM MERGER / REVERSE PHANTOM MERGER

This type of merger occurs when the purchasing corporation creates a subsidiary corporation (phantom
corporation) and transfers to the subsidiary shares in the parent company which will be used to acquire the
target corporation.

Can the debtor of the absorbed bank invoke novation against the surviving corporation which
demanded payment of the debtor’s loan?
NO. A bank which merged with another bank can sue the debtor of the absorbed bank because it acquired
the rights of the latter. Novation is not a valid defense because it is settled that in a merger of 2 existing
corporations, one of the corporations survives and continues the business, while the other is dissolved and
all its rights and liabilities are acquired by the surviving corporation.

JURISPRUDENCE:
• BPI cannot avoid the obligation attached to the writ of garnishment by claiming that the fund was not
transferred to it, in light of the rule on merger, that all liabilities and obligations of the absorbed
corporation shall be transferred to the surviving corporation.
• The successor BPI cannot be permitted to foreclose the mortgage for the reason that its predecessor
BSA violated the terms of the contract. BPI did not only acquire all the rights and privileges of BSA,
but likewise acquired the liabilities and obligations as if BPI itself incurred it.
 DE FACTO MEGER AND CONSOLIDATION
It is a sale or all or substantially all of the assets of a corporation in exchange for an equivalent value
of shares of stock.. 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.

It is treated as having the effect of a merger or consolidation, but the procedures under the RCCP
were not followed.
• A dissenting stockholder is entitled to exercise his appraisal right.
• The liabilities of the target corporation is assumed by the acquiring corporation.
• It has the same effect with the Doctrine of Piercing the Veil of Corporate Entity.
o The purchasing corporation is seen as the continuation of the selling corporation.
o They are seen as one and the same.
o The purchasing corporation is liable for the liabilities of the selling corporation.

These 2 doctrines overlap but –

1. If the issue is protection of creditors – use Doctrine of Piercing the Veil of Corporate Entity
2. If the issue is shareholder protection – use Doctrine of De Facto Merger or Consolidation

Who determines that the transaction is actually a de fact merger or consolidation?

The SEC will decide when the nature of the transaction is being questioned.

Can the constituent corporations agree that some of the liabilities and/or assets will not be transferred
to the surviving or consolidated corporation? NO. Upon merger or consolidation, all assets and
liabilities will be assumed by the surviving or consolidated corporation. Nothing will be left to the
constituent or non-surviving corporations.
i. Creditors, employees and stockholders or owners of the constituent corporations become
creditors, employees, and stockholders or owners of the surviving or consolidated
corporation.

ii. The constituent corporations do not need to undergo winding up or liquidation because the
surviving corporation automatically acquires all their rights, privileges and powers as well
as their liabilities. The properties are not sold to the surviving corporation but are
automatically transferred and vested by operation of law.

iii. Such is the peculiarity of mergers and consolidations –

If one wants to cease operations and terminate the life of the corporation and continue the
same operation in another corporation with higher capacities and wider market reach,
merger and consolidation is the convenient way because otherwise the corporation has to
undergo the long and meticulous process of winding up and liquidation.

Limitations
Under the Philippine Competition Act (RA 10667), the Philippine Competition Commission can review the
mergers and acquisitions of a corporation/s based on the factors it deems to be relevant.

Parties to a merger or acquisition agreement without complying with the thresholds are prohibited from
consummating their agreement until 30 days after providing notification to the SEC.

A transaction that meets the thresholds and does not comply with the notification requirements and
waiting periods shall be considered void and will subject the parties to an administrative fine of 1% to 5%
of the value of transaction..

Threshold for Compulsory Notification

Size of Party • The aggregate annual gross revenues in, into or from the
Philippines or
• The value of the assets in the Philippines of the ultimate parent
entity of either the acquiring or acquired entities
exceeds P6 Billion.

Size of Transaction The size of transaction will be met if the transaction value exceeds P2.4
Billion.
 IPRIGHTS-9-tieP.ie/E00d-ucK.P-utangtna
1. COPYRIGHT & RELATED RIGHTS
L . MARK

IV. INTELLECTUAL PROPERTY CODE (RA 8293)

3. GEOGRAPHIC INDICATIONS
4. INDUSTRIAL DESIGNS
5.
PATENTS
6
INTELLECTUAL PROPERTY LAYOUT DESIGNS INTEGRATED
'

OF CIRCUITS
7. PROTECTION
UNDISCLOSED INFORMATION OF

Intangible assets resulting from the creative work of an individual or organizations

Creations of the mind (inventions, literary and artistic works, symbols, names, images, and designs)
Legal rights which result from intellectual activities in the industrial, scientific, and artistic fields

CONSTITUTIONAL BASIS (Sec. 13, Art. 14)

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, for such period as may be
provided by law

A. PATENTS
A patent is a set of exclusive rights granted by the State to an inventor or his assignee for a fixed period of time in
exchange for a disclosure of an invention
COMPULSORY UUENSIN 6

THREE-FOLD PURPOSE
a license issued
by the Director General of IPO to
-

exploit a patented invention without the permission

1. Foster inventions
by manufacture
or
of the patent holder, either
2. Promote disclosure of inventions
parallel importation
3. Availability of the inventions to the public
.

BASIC PATENT PRINCIPLES

1. Territoriality – patents are only valid in the country or region in which they have been registered
2. First-to-file – applicant who files first will get the patent
3. Disclosure – applicant shall disclose the invention in a manner sufficiently clear and complete
Quid Pro Quo Principle – protection in exchange for disclosure
4. Conditional – patents are granted only upon compliance with the criteria of patentability
5. Limited rights

1. Patentable v. non-patentable inventions

PATENTABLE INVENTIONS (Sec. 21, IPC)
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

CRITERIA FOR PATENTABILITY

1. Novelty – an invention shall not be considered new if it forms part of a prior art
Prior art – (1) everything which has been made available to the public in the world, before the filing date or
the priority date of the application, or (2) the whole contents of an earlier published Philippine application
or application with earlier priority date of a different inventor

GENERAL RULE: When a work has already been made available to the public, it shall be non-patentable for
absence of novelty

EXCEPTION: Doctrine of Non-Prejudicial Disclosure – the disclosure of information contained in the

application during the 12-month period before the filing date of the priority date of the application if
such was made by: (1) the inventor, (2) a patent office and the information was contained, (3) sea in another
(b)
application filed by the inventor and should not have been disclosed by the office, or in an application filed
without the knowledge or consent of the inventor by a third party which obtained the information directly
or indirectly from the inventor, or (4)
as a third party who obtained the information directly or indirectly from
the inventor

2. 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

TEST OF NON-OBVIOUSNESS
If any person possessing ordinary skill in the art was able to draw the inferences and he constructs that the
supposed inventor drew from prior art, then the latter did not really invent it

PERSON SKILLED IN THE ART (Ordinary practitioner, fictional person)

Has access and understanding of all the prior art, aware of the common general knowledge in the specific art,
observes developments in the related technical field

3. Industrially applicable – an invention that can be produced and used in any industry. This means an
invention is not merely theoretical, but also has a practical purpose

#GETTHATBAR2022
FLORES · TARADJI
 NON-PATENTABLE INVENTIONS PADS DAM
-

1. Plant varieties or animal breeds or essential biological processtor the production of plants or animals. This
provision shall not apply to micro-organisms and non-biological and microbiological processes
-

2. Aesthetic creations
=
3. Discoveries, scientific theories, and mathematical methods
4. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for
computers
-

5. Anything which is contrary to public order or morality

✓

6. Methods for treatment of the human or animal body

-

7. In the case of drugs and medicines, mere discovery of a new form or new property of a known substance
-

which does not result in the enhancement of the efficacy of that substance

Is Covid-19 vaccine patentable?

Yes. It is not a method for treating an illness, not a surgical method, and not a drug or medicine. It satisfies all
the requirements of patentability

2. Ownership of a patent ①
The right to a patent belongs to the inventor, his heirs, or assigns. When 2 or more persons have jointly made an
invention, the right to a patent shall belong to them jointly
②
ASSIGNMENT OF PATENT (Sec. 105, IPC)
The assignment must be in writing, acknowledged before a notary public or other officer authorized to administer
oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer

TERM OF PATENT
20 years, non-renewable

③ FIRST-TO-FILE RULE (not first-to-invent) (Sec. 29, ICP)

1. If 2 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
2. Where two or more applications are filed for the same invention, to the applicant who has the earliest filing
date

FILING DATE
Not understood in its ordinary meaning, i.e. the day the application was filed. Rather, it should be taken to mean
according to what the law says, i.e. filing date is accorded only when all the requirements provided under Sec. 40
are present
1. An express or implicit indication that a Philippine patent is sought
2. Information identifying the applicant
3. Description of the invention and one or more claims in Filipino or English
+Abstract
+Drawing of invention

PRIORITY DATE
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 as filed as of the
date of filing the foreign application

CONDITIONS TO AVAIL PRIORTIY DATE

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

④ INVENTION PURSUANT TO A COMMISSION ⑤ INVENTION PURSUANT TO EMPLOYMENT

The person who commissions the work shall own the In case the employee made the invention in the course
patent, unless otherwise provided in the contract of his employment contract, the patent shall belong to
↳ commissioner the:
a. EMPLOYEE, if the inventive activity is not a part
of his regular duties even if the employee uses
the time, facilities, and materials of the
employer
b. EMPLOYER, if the inventive activity is the result
of the performance of his regularly-assigned
duties, unless there is an agreement, express or
implied, to the contrary
#GETTHATBAR2022
FLORES · TARADJI
PATENT REGISTRATION
1. Filing of the application (Sec. 32.1, IPC)
The patent application shall be in Filipino or English and shall contain the following:
a. Request for the grant of a patent
b. Description of the invention
c. Drawings necessary for the understanding of the invention
d. One or more claims, and
e. Abstract
2. Accordance of the filing date
3. Formality examination
4. Classification and search
5. Publication of application
6. Substantive examination
7. Grant of patent
8. Publication upon grant
9. Issuance of certificate

UNITY OF INVENTION
The application should relate to one invention only or to a group of inventions forming a single general inventive
concept

3. Grounds for cancellation of a patent

Any interested party may petition to cancel any patent or any claim or parts of a claim any of the following grounds:
1. The invention is not new or patentable
2. 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
3. Contrary to public order or morality
4. Patent is found invalid in an action for infringement
5. The patent includes matters outside the scope of disclosure contained in the application

PATENT APPLICATION BY PERSONS NOT HAVING THE RIGHT TO A PATENT

REMEDIES OF PERSONS WITH A RIGHT TO A PATENT REMEDIES OF THE TRUE AND ACTUAL INVENTOR
If a person other than the applicant is declared by final If a person, who was deprived of the patent without his
court order or decision as having the right to a patent, consent or though fraud is declared by final court order
he may within 3 months after such decision has or decision to be the true and actual inventor, the court
become final: shall
1. Prosecute the application as his own 1. Order for his substitution as patentee, or
2. File a new patent application 2. At the option of the true inventor, cancel the
3. Request the application to be refused, or patent, and award actual and other damages in
4. Seek cancellation of the patent his favor if warranted by the circumstances
1- DAMAGES IN EITHER CASE
Time to file action: Within 1 year from the date of Time to file action: Within 1 year from the date of
publication publication

RIGHTS CONFERRED BY PATENT LIMITATION OF PATENT RIGHTS

1. In case of product – right to restrain, prohibit, The owner of a patent has no right to prevent third
and prevent any unauthorized person or entity parties from making, using, offering for sale, selling, or
from making, using, offering for sale, selling, or importing a patented product in the following
importing the product circumstances:
2. In case of process – right to restrain, prohibit, 1. Using a patented product after it has been put
and prevent any unauthorized person or entity on the market in the Philippines by the owner
from manufacturing, dealing in, using, offering of the product, or with express consent
for sale, selling, or importing any product
obtained directly or indirectly from such In case of drugs or medicines, the said limitation
process applies after a drug or medicine has been
3. Right to assign the patent, to transfer by introduced in the Philippines or anywhere else
succession, and to conclude licensing contracts in the world by the patent owner, or by any
party authorized to use the invention. This
The rights conferred by a patent application take effect allows parallel importation for drugs and
after publication in the Official Gazette medicines

The right to import the drugs and medicines

shall be available to any government agency or
any private third party
#GETTHATBAR2022
FLORES · TARADJI
 2. Where the act is done privately and on a non-
commercial scale or for a non-commercial
purpose
3. Exclusively for experimental purpose of the
invention for scientific purposes or educational
purposes
4. In the case of drugs and medicines, where the
act includes testing, using, making, or selling the
invention including any data related thereon,
solely for purposes reasonably related to the
development and submission of information
and issuance of approvals by government
regulatory agencies
5. Where the act consists of the preparation for
individual cases, in a pharmacy or by a
medical professional, or a medicine in
accordance with medical prescription
6. Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country
entering the territory of the Philippines
temporarily or accidentally: Provided, That
such invention is used exclusively for the needs
of the ship, vessel, aircraft, or land vehicle and
not used for the manufacturing of anything to be
sold within the Philippines

7. PRIOR USER
Any prior user, who, in good faith, was using
the invention in the Philippines 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, but this right
shall only be transferred or assigned further
with enterprise or business

8. USE BY GOVERNMENT
Government may exploit the invention even
without agreement of the patent owner where:
a. Public interest so requires (national
security, nutrition, health, or the
development of sectors)
b. A judicial or administrative body
determined that the manner of exploitation
is anti-competitive
c. In the case of drugs or medicines, there is
national emergency or other
circumstance of extreme urgency
d. In the case of drugs or medicines, there is
public non-commercial use of the
patentee without satisfactory reason
e. In the case of drugs or medicines, the
demand for the patented article in the
Philippines is not being met to an
adequate extent and on reasonable
terms as may be determined by the Sec. of
DOH

DOCTRINE OF EXHAUSTION (Doctrine of First Sale)

The patent holder has control of the first sale of his invention. He has the opportunity to receive the full
consideration for his first invention form his sale. Hence, he exhausts his rights in the future control of his invention
(Once a patent owner sold or commercialized his invention to the public, all his rights to control the distribution and
sale are already exhausted, that is anyone can resell his invention, the foregoing doctrine provides that the patent holder
has control only over the first sale)

#GETTHATBAR2022
FLORES · TARADJI
4. Patent infringement
The making, using, offering for sale, selling, or importing
1. a patented product, or
2. a product obtained directly or indirectly from a patented process, or
3. the use of a patented process
4. without authorization of the patentee

A patent may be infringed either

1. Literally -
item contains all the elements of patent claim
Literal infringement exists if an accused device falls directly within the scope of properly interpreted claims

2. By equivalents
Doctrine of equivalents – an infringement occurs whence a device appropriates a prior invention by
incorporating its innovative concept and despite some modification and change, performs substantially the
same function in substantially the same way to achieve substantially the same result (function-means-and-
result test)

Economic Interest Test

When the discoverer’s economic interests are compromised, i.e., when others can import the products that result
from the process

REMEDIES AGAINST PATENT INFRINGER DEFENSES OF INFRINGER

1. Civil action for infringement 1. Invalidity of patent
2. Criminal action for infringement – if the 2. Any of the grounds for cancellation of patents
infringement is repeated; the criminal action i. What is claimed as the invention is not
prescribes in 3 years from the commission of new or patentable
the crime ii. The patent does not disclose the
3. Administrative remedy – where the amount of invention in a manner sufficiently clear
damages claimed is not less than 200K and complete for it to be carried out by
4. Destruction of infringing material – only upon any person skilled in the art
court order iii. The patent is contrary to public order or
morality
3. Prescription

B. TRADEMARKS

1. Marks vs. collective marks vs. trade names

MARK COLLECTIVE MARKS TRADENAMES
Any visible sign capable of Mark or tradename used by the Any name or designation
distinguishing the goods members of a cooperative, an identifying or distinguishing an
(trademark) or services (service association, or other collective enterprise or a business
mark) of an enterprise and shall group or organization (Halal
include a stamped or marked Certification Service)
container of goods

REQUIREMENTS
1. Visible sign (scents and
sounds are not visible under
Philippine jurisdiction)
2. Capable of distinguishing
one’s goods and services
from another

DISTINCTIVENESS OF A MARK
1. Fanciful trademarks – made-up words which are invented to be used as a trademark name (kodak,
polaroid)
2. Arbitrary trademarks – words that have a real, common meaning but they are completely unrelated to the
product or service (apple, dove, shell)
3. Suggestive trademarks – those named after a characteristic of the product or service (jaguar, Microsoft,
Netflix)
4. Descriptive trademarks – description of the product or service (sharp, British Airways, best buy)
5. Generic trademarks – cannot be protected as theyroam
are imply a generic description of the product or service
(band-aid, aspirin, thermos)

#GETTHATBAR2022
FLORES · TARADJI
MARKS WHICH MAY BE REGSITERED
Any word, name, symbol, emblem, device, figure, sign, phrase, or any combination thereof except those enumerated
under Sec. 123

TRADEMARK TRADENAME
Identifies or distinguishes the goods or services Identifies or distinguishes the business or enterprise
Registration is required Registration is not required

RIGHTS OVER A TRADEMARK CONFERRED

1. The rights in a mark shall be acquired through registration with the IPO. The filing date of application is
the operative act to acquire trademark rights
2. Prior use is no longer a condition precedent for registration of trademark, service mark, or tradename

2. Acquisition of ownership
The rights in a mark shall be acquired through registration but the right to register a trademark should be based
on ownership (e.g., an exclusive distributor does not acquire any proprietary interest in the principal’s trademark
and cannot register his own name unless it has been validly assigned to him)

a. Concept of actual use

b. Effect of registration
OLD NEW
In order to register a trademark, one must be the owner RA 8293 has already dispensed with the requirement
thereof and must have actually used the mark in of prior actual use at the time of registration. Thus,
commerce in the Philippines for 2 months prior to the there is more reason to allow registration of marks
application for registration under the name of its true and lawful owner

One may be an owner of a mark due to its actual use (not Note:
in the Philippines), but may not yet have the right to 1. Prior use is not a requirement but there must
register such ownership in the Philippines due to its be actual use after application
failure to use the same in the Philippines for 2 months 2. Declaration of Actual Use (DAU) – within 3
prior registration years from filing of the application

DURATION OF TRADEMARK REGISTRATION

10 years, subject of indefinite renewals of 10 years each

The registrant is required to file a DAU and evidence to that effect, or show valid reasons based on the existence of
obstacles to such use, within 1 year from the 5th anniversary of the date of registration of the mark. Otherwise,
the mark shall be removed from the Register

3. Well-known marks
A well-known mark is protected against reproductions, translations, and confusingly similar marks even if it is not
registered in the Philippines

GENERAL RULE: Trademark registration abroad shall not be valid and binding here in the Philippines
(Territoriality Principle)

EXCEPTION: Well-known marks, bad faith

4. Rights conferred by registration

1. Right to exclusive use of the mark
2. Right to prevent others from use of an identical mark for the same, similar, or related

5. Cancellation of registration
NON-REGISTRABLE MARKS
1. Immoral, deceptive or scandalous matter
2. Matter which may disparage or falsely suggest a connection with persons, etc.
3. Flag or coat of arms or other insignia of the Philippines
4. Identical with a registered mark belonging to a different proprietor
5. Identical with, or confusingly similar to a well-known mark (internationally and in the Philippines, whether
registered here or not)
6. Contrary to public order or morality
7. Names, portraits, or signature of living persons (except if with consent)

#GETTHATBAR2022
FLORES · TARADJI
 8. Names, portraits, or signature of a deceased President of the Philippines (except if with written consent of
his or her living widow, if none, the next of kin)
9. Misleading marks
10. Generic marks (signs or 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
11. Descriptive terms (signs or indications that may serve in trade to designate kind, quality, quantity,
intended purpose, value, geographical origin, time or production of the goods or rendering of services, or
other characteristics)
12. Color alone
13. Shapes dictated by technical factors

Upon application of the registrant, the Office may permit any registration to be surrendered for cancellation, and
upon cancellation, the appropriate entry shall be made in the records of the Office

6. Trademark infringement
Use without consent of the trademark owner of any reproduction, counterfeit, copy, or colorable imitation of
any registered mark or tradename

Such use is likely to cause confusion or mistake or to deceive purchaser or other others as to the source or origin
of such goods or services, or identity of such business

ELEMENTS
1. Ownership of a trademark through registration
2. The trademark is reproduced, counterfeited, copied, or colourably imitated by another
Colorable imitation – such close or ingenious imitation as to be calculated to deceive ordinary purchasers,
or such resemblance of the infringing mark to the original as to deceive an ordinary purchaser giving
such attention as a purchaser usually gives, and to cause him to purchase the one supposing it to be the
other

3. No consent by the trademark owner or assignee

4. Use in connection with the sale, offering for sale, or advertising of any such goods, business, or services
or those related thereto
5. Likelihood of confusion

TYPES OF CONFUSION
i. Confusion of goods – as to the goods themselves
ii. Confusion of business – as to the source or origin of such goods

TESTS OF CONFUSING SIMILARITY

i. Dominancy Test
Focuses on the similarity of the prevalent features of the competing trademarks that might cause
confusion and deception, thus constituting infringement.

ii. Holistic Test / Totality Test

Entails a consideration of the entirety of the marks as applied to the products, including the labels and
packaging, in determining confusing similarity

Determined on the basis of visual, aural, connotative comparisons and overall impressions engendered
by the marks in controversy as they are encountered in the marketplace

Other factor
Idem Sonans Rule – aural effects of the words and letters contained in the marks (an identity of sound
in the pronunciation of words or names)

#GETTHATBAR2022
FLORES · TARADJI
 IMPORTANT!!!
Kolin Electronics v. Kolin Phil. International (2021)

The SC emphasized the adoption of the Dominancy Test and the abandonment of the Holistic Test in
evaluating the trademark resemblance. This is confirmed by the provisions of the IPC and the
legislative deliberations:
i. Only the Dominancy Test is incorporated in the IPC, particularly Sec. 155.1 which defines
trademark infringement as the “colorable imitation of a registered mark or a dominant feature
thereof”
ii. The committee notes the varying decisions of the SC regarding colorable imitation of a registered
mark. There are decisions which espouse the Dominancy Test, while there are others which use
the Holistic Test. We (committee), therefore, recommend the adoption of the Dominancy Test
to resolve once and for all the debate

Applying the Dominancy Test, KPII's kolin mark resembles KECI's KOLIN mark because the word
"KOLIN" is the prevalent feature of both marks. Phonetically or aurally, the marks are exactly the same.
Surely, the manner of pronouncing the word "KOLIN" does not change just because KPII's mark is in
lowercase and contains an italicized orange letter "i". In terms of connotation and overall impression,
there seems to be no difference between the two marks

The Court also abandoned “the use of product or service classification” as a factor in determining
relatedness or non-relatedness” of goods or services

Here, the SC rejected the “kolin” trademark application filed by KPII for its television and DVD players.
The SC reinstated and affirmed the decision of the IPO- Director General which had ruled in favor of KECI,
which had already been declared as the owner of the “KOLIN” mark under the Trademark Law

DOCTRINE OF SECONDARY MEANING

A word or phrase originally incapable of exclusive appropriation with reference to an article in the market
(because it is geographically or otherwise descriptive) might nevertheless have been used for so long and so
exclusively by one producer with reference to his article that, in the trade and to that branch of the purchasing
public, the word or phrase has come to mean that the article was his property

7. Unfair competition
It is the passing off (or palming off) or attempting to pass off upon the public of the goods or business of one person
as the goods or business of another with the end and probable effect of deceiving the public

TRADEMARK INFRINGMENT UNFAIR COMPETITION

Unauthorized use of a trademark The passing off of one’s goods as those of another
Fraudulent intent is unnecessary Fraudulent intent is essential
GR: Prior registration of the trademark is a pre- Registration is not necessary
requisite to the action
XCP: Well-known marks

REMEDIES AND JURISDICTION

1. Administrative action – IPO-BLA concurrent with RTC-SCC
2. Civil action – RTC-SSC concurrent with IPO-BLA
3. Criminal action exclusive with RTC-SCC
2-5 years imprisonment, 50K-200K fine

#GETTHATBAR2022
FLORES · TARADJI
KOLIN ELECTRONICS CO., INC. (KECI) v.
KOLIN PHILIPPINES INTERNATIONAL, INC. (KPII)
G.R. No. 228165, February 09, 2021

KPII'S TRADEMARK APPLICATION IS NOT REGISTRABLE BECAUSE IT WILL CAUSE DAMAGE TO KECI
In determining likelihood of confusion - which can manifest in the form of "confusion of goods" and/or "confusion
of business" - several factors may be taken into account. These criteria may be collectively referred to as
the MULTIFACTOR TEST.

There are two which are uniformly deemed significant under the Trademark Law and the IP Code:
1. the resemblance of marks (the degree of similarity between the plaintiffs and the defendant's marks) and
2. the relatedness of goods or services (the proximity of products or services).

Discussion of the Criteria:

(1) RESEMBLANCE OF MARKS
Considering the adoption of the Dominancy Test and the abandonment of the Holistic Test, as confirmed by
the provisions of the IP Code and the legislative deliberations, the Court hereby makes it crystal clear that
the use of the Holistic Test in determining the resemblance of marks has been abandoned.

Applying the Dominancy Test here, KPII's kolin mark resembles KECI's KOLIN mark because the word
"KOLIN" is the prevalent feature of both marks. Phonetically or aurally, the marks are exactly the same.
Surely, the manner of pronouncing the word "KOLIN" does not change just because KPII's mark is in
lowercase and contains an italicized orange letter "i". The minor differences between kolin and KOLIN mark
should be completely disregarded. The fact that KPII's trademark application possesses the italicized orange
letter "i" makes no difference in terms of appearance, sound, connotation, or overall impression.

(2) RELATEDBESS OF GOODS/SERVICES

The Nice Classification (NCL) serves purely administrative purposes - merely a way for trademark offices
worldwide to organize the thousands of applications that are filed - and the classification of
products/services should not have been included as one of the factors in determining relatedness because
there was no legal basis for its inclusion. The Court hereby abandons the use of product or service
classification as a factor in determining relatedness or non-relatedness.

The factors to determine relatedness in the Mighty Corporation Case yields the conclusion that the goods
covered by KOLIN and kolin are related:
(a) the nature and cost of the articles Goods covered by KOLIN and kolin are electronic m nature, relatively
expensive, and rarely bought. It will likely take several years before consumers
would make repeat purchases of the goods involved.

(b) the descriptive properties, physical attributes or Considering that they are electronic goods, goods covered
essential characteristics with reference to their form, by KOLIN and kolin are likely made of metal. It is also likely that such goods
composition, texture or quality cannot be easily carried around and are usually brought back to the
consumer's place after being bought.

(c) the purpose of the goods The audiovisual goods covered by kolin (Television and DVD players)
and KOLIN (stereo booster) marks can be used for entertainment purposes.

(d) whether the article is bought for immediate Goods covered by KOLIN and kolin are not bought for immediate
consumption, that is, day-to-day household items consumption.

(e) the conditions under which the article is usually Because they are relatively expensive and they last for a long time, goods
purchased, and covered by KOLIN and kolin are rarely bought. They are non-essential goods.

(f) the channels of trade through which the goods flow, The goods covered by KOLIN and kolin marks will likely be offered in "the
how they are distributed, marketed, displayed and same channels of trade such as department stores or appliance stores".
sold.

In addition to the factors in Mighty Corporation, another ground for finding relatedness of goods/services is
their complementarity.
• The goods of the parties may be used together for the same purposes, may be found in the same
channels of trade, and may appeal to the same purchasers. It is clear that the goods covered by
KECI's KOLIN are complementary to the goods covered by KPII's kolin and could thus be considered
as related.

(3) ACTUAL CONFUSION

If "likelihood of confusion" is already abhorred by the infringement provisions of the law and the evidence
of likelihood of confusion already creates basis to prevent another's use of its mark, it should logically
follow that actual confusion should be given more weight because confusion among consumers is not
only speculated but has actually transpired.
(4) NORMAL POTENTIAL EXPANSION OF BUSINESS
The registered trademark owner enjoys protection in product and market areas that are the normal
potential expansion of his business." the goods covered by KOLIN and kolin are related. Therefore, it is
likely that the goods covered by kolin falls within the normal potential expansion of business of KECI.

(5) SOPHISTICATION OF BUYER

The goods covered by KOLIN and kolin are not inexpensive goods and consumers may pay more attention
in buying these goods. However, this does not eliminate the possibility of confusion, especially since most
consumers likely do not frequently purchase Automatic Voltage Regulators, stereo boosters, TV sets, DVD
players, etc.

(6) STRENGTH OF THE MARK

The factor on "strength of plaintiffs mark" pertains to the degree of distinctiveness of marks, which can be
divided into five categories157 enumerated in decreasing order of strength below:

COINED OR FANCIFUL MARKS - invented words or signs that have no real meaning (e.g., Google, Kodak). These marks are the
strongest and have the greatest chance of being registered.

ARBITRARY MARKS - words that have a meaning but have no logical relation to a product (e.g., SUNNY as a mark covering mobile
phones, APPLE in relation to computers/phones).

SUGGESTIVE MARKS - marks that hint at the nature, quality or attributes of the product, without describing these attributes (e.g.,
SUNNY for lamps, which would hint that the product will bring light to homes). If not considered as bordering on descriptive, this
may be allowed.

DESCRIPTIVE MARKS - describe the feature of the product such as quality, type, efficacy, use, shape, etc. The registration of
descriptive marks is generally not allowed under the IP Code.161

GENERIC MARKS - words or signs that name the species or object to which they apply (e.g., CHAIR in relation to chairs). They are
not eligible for protection as marks under the IP Code.

KECI's KOLIN mark is a fanciful or coined mark. Considering that it is highly distinctive, confusion would be
likely if someone else were to be allowed to concurrently use such mark in commerce.

(7) BAD FAITH

There exists relevant evidence and factual findings that a reasonable mind might accept as adequate to
support the conclusion that KPII was in bad faith.
C. COPYRIGHTS
Right over literary and artistic works which are original intellectual creation in the literary and artistic domain
protected from the moment of creation

1. Copyrightable works
1. ORIGINAL LITERARY OR ARTISTIC WORKS
These are original intellectual creations in the literary and artistic domain protected from the moment of
their creation such as books, periodicals, lectures, musical compositions.

2. DERIVATIVE WORKS
a. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary
or artistic works, and
b. Collections of literary, scholarly, or artistic works, and compilations of data and other materials which
are original by reason of the selection or coordination or arrangement of their contents

2. Non-copyrightable works
1. Idea, procedure, system, method or operation, control, principle, discovery, or mere data
2. News of the day and other miscellaneous facts having the character of mere items of press information
3. Official text of a legislative, administrative, or legal nature, as well as any official translation thereof
4. Pleadings
5. Decisions of courts and tribunals
6. Any work of the government of the Philippines
7. TV programs, format of TV programs (Joaquin v. Drilon)
8. System of bookkeeping
9. Statutes

Are telephone directories copyrightable?

No. Directories are not copyrightable. The use of them does not constitute infringement. The IPO mandates
originality as a prerequisite for copyright protection. This requirement necessitates independent creation plus a
modicum of creativity

A compilation is not copyrightable per se but is copyrightable only if its facts have been “selected, coordinated,
or arranged in such a way that the resulting work as a whole constitutes an original work of authorship.”

3. Rights conferred by copyright

1. Economic rights – right to carry out, authorize, or prevent the following acts:
i. Reproduction of the work or substantial portion thereof
ii. Carry-out derivative work (dramatization, adaption, etc.)
iii. First distribution of the original and each copy of the work by sale or other forms of transfer of
ownership
iv. Rental right
v. Public display
vi. Public performance
vii. Other communications to the public

DURATION OF ECONOMIC RIGHTS

WORK TERM OF PROTECTION
Literary and artistic works Life of the author + 50 years after his death
Derivative works
Joint authorship Life of the last surviving author + 50 years after
his death
Anonymous or pseudonymous works 50 years from date it is first lawfully published

If before expiration of period, identity is

revealed or no longer in doubt, the rule on
literary and joint authorship applies
Work of applied art 25 years from the date of making
Photographic works Published – 50 years from publication
Audiovisual works Unpublished – 50 years from making
Performances not incorporated in 50 years from end of the year in which
recordings performance took place
Sound recordings and performances 50 years from end of the year in which
incorporated therein recording took place

#GETTHATBAR2022
FLORES · TARADJI
 2. Moral rights – for reasons of professionalism and propriety, the author has the right to:
i. Require that the authorship of the works be attributed to him (attribution right/paternity right)
ii. Make any alteration of his work prior to, or to withhold it from publication
iii. Preserve integrity of work, object to any distortion, mutilation, or other modification which be
prejudicial to his honor or reputation
iv. Restrain the use of his name with respect to any work not of his own creation or in a distorted version
of his work (right against false attribution)

DURATION OF MORAL RIGHTS

During the lifetime of the author and in perpetuity after his death (attribution right/paternity right)

Coterminous with Economic rights – alteration and non-publication rights, right to preservation of
integrity, and right against false attribution

EXPIRATION OF COPYRIGHT
It transfers to public domain (e.g., pride and prejudice, the lizzie bennet diaries)

4. Ownership of a copyright
WORK OWNER
Original literary and artistic works Author
Joint authorship Co-authors

In the absence of agreement, apply rules on co-

ownership

If work consists of parts that can be used separately,

then the author of each part shall be the original owner
of the copyright in the part that he has created

Audiovisual work GR: Producer, author, composer, film director, author of

the work adopted

XCP: Unless otherwise provided in an agreement, the

producers shall exercise the copyright to an extent
required for the exhibition of the work in any manner,
except for the right to collect performing license fees for
the performance of musical composition, with or
without words, which are incorporated into the work

Anonymous and pseudonymous works Publishers shall be deemed to represent the authors
Commissioned work Person who commissioned – owns the work
Creator – owns the copyright
Unless there is a written stipulation to the contrary
Collective works When an author contributes to a collective work, his
right to have his contribution attributed to him is
deemed waived unless he expressly reserves it
In the course of employment Employee – if creation is not a part of his regular duties

Employer – if work is a result of the performance of his

regularly-assigned duties, unless there is an agreement
to the contrary

Letters Recipient – owns the letter

Writer – owns the copyright

5. Limitations on copyright
The following acts shall not constitute infringement of copyright
a. The recitation or performance of a work, once it has been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a charitable or religious institution or society
b. The making of quotations from a published work if they are compatible with fair use and only to the extent
justified for the purpose, including quotations from newspaper articles and periodicals in the form of press
summaries: Provided, That the source and the name of the author, if appearing on the work, are mentioned
c. The reproduction or communication to the public by mass media of articles on current political, social,
economic, scientific, or religious topic, lectures, addresses and other works of the same nature, which

#GETTHATBAR2022
FLORES · TARADJI
 are delivered in public if such use is for information purposes and has not been expressly reserved: Provided,
That the source is clearly indicated
d. The reproduction and communication to the public of literary, scientific, or artistic works as part of
reports of current events by means of photography, cinematography or broadcasting to the extent
necessary for the purpose
e. The inclusion of a work in a publication, broadcast, or other communication to the public, sound recording
or film, if such inclusion is made by way of illustration for teaching purposes and is compatible with fair
use: Provided, That the source and of the name of the author, if appearing in the work, are mentioned
f. The recording made in schools, universities, or educational institutions of a work included in a broadcast
for the use of such schools, universities or educational institutions: Provided, That such recording must be
deleted within a reasonable period after they were first broadcast: Provided, further, That such recording may
not be made from audiovisual works which are part of the general cinema repertoire of feature films except
for brief excerpts of the work
g. The making of ephemeral recordings by a broadcasting organization by means of its own facilities and
for use in its own broadcast
h. The use made of a work by or under the direction or control of the Government, by the National Library or
by educational, scientific, or professional institutions where such use is in the public interest and is
compatible with fair use
i. The public performance or the communication to the public of a work, in a place where no admission fee
is charged in respect of such public performance or communication, by a club or institution for charitable or
educational purpose only, whose aim is not profit making, subject to such other limitations as may be
provided in the Regulations
j. Public display of the original or a copy of the work not made by means of a film, slide, television image
or otherwise on screen or by means of any other device or process: Provided, That either the work has been
published, or, that the original or the copy displayed has been sold, given away or otherwise transferred to
another person by the author or his successor in title, and
k. Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice
by a legal practitioner

The provisions of this section shall be interpreted in such a way as to allow the work to be used in a manner which
does not conflict with the normal exploitation of the work and does not unreasonably prejudice the right
holder's legitimate interests

6. Doctrine of fair use

Fair use is a privilege to use the copyrighted material in a reasonable manner without the consent of the
copyright owner. Fair use is an exception to the copyright owner’s monopoly of the use of the work to avoid stifling
the very creativity which that law is designed to foster

The fair use of a copyrighted work for criticism, comment, news reporting, teaching including limited number of
copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright

Factors to Consider
1. Purpose and character of the use (commercial or non-profit educational purpose?)
2. Nature of copyrighted work (more factual rather than creative?)
3. Amount and substantiality of portion used in relation to the work (reproduction of whole or small portion
only?)
4. The effect upon the potential market for or value of the copyrighted work

7. Copyright infringement
The unauthorized use of copyrighted material in a manner that violates one of the copyright owner’s exclusive rights

ELEMENTS:
1. Ownership of a valid copyright (proof of ownership: sec 218 – affidavit evidence)
2. Exercise of any of the exclusive economic rights without consent of the copyright owner

WHO ARE LIABLE FOR INFRINGEMENT

1. Directly commits an infringement
2. Benefits from the infringing activity of another person if such person has been given notice of the infringing
activity and has the right and ability to control the activities of the other person
3. With knowledge of the infringing activity, induces, causes, or materially contributes to the infringing
conduct of another

#GETTHATBAR2022
FLORES · TARADJI
COPYRIGHT VS. PLAGIARSISM
COPYRIGHT INFRINGMENT PLAGIARISM
The unauthorized use of copyrighted material in a The use of another’s information, language, or writing,
manner that violates one of the copyright owner’s when down without proper acknowledgement of the
exclusive rights original source

REMEDIES IN COPYRIGHT INFRINGEMENT

1. Injunction
2. Damages, including legal costs and other expenses, as he may have incurred due to the infringement as well
as the profits the infringer may have made due to such infringement
3. Impounding, during the pendency of the action, sales invoices and other documents evidencing sales
4. Destruction without any compensation all infringing copies
5. Moral and exemplary damages
6. Seizure and impounding of any articles, which may serve as evidence in the court proceedings

SUMMARY
BASIS PATENT TRADEMARK COPYRIGHT
Intellectual rights Technical solution of a Any visible sign capable of Literary and artistic works
problem in any field of distinguishing goods or
human activity which is services of an enterprise
new (novel invention) and
industrially applicable
Term of protection 20 years from filing date of 10 years and renewable It depends on the type of
application upon expirations work (generally 50 years)
Office where registered Bureau of Patents – IPO Bureau of Trademarks – Not required – optional at
IPO the National Library or
IPO

#GETTHATBAR2022
FLORES · TARADJI
 ANTI-MONEY LAUNDERING ACT OF 2001 (RA 9160)
A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS
COVERED PERSON
1. Financial Institutions
a. Supervised and/or regulated by BSP
i. Banks, non-banks, quasi-banks, trust entities

b. Supervised and/or regulated by IC

i. Securities dealers, brokers, salesmen, investment houses, mutual funds, foreign exchange
corporations, money changers, etc.

c. Supervised and/or regulated by SEC

2. Designated Non-Financial Business and Professions (DNFBO)

a. Jewelry dealers (for transactions in excess of P1M)
b. Lawyers, accountants who manage client money, and provide services of management of bank, and
organization of companies
c. Casinos (whether internet-based or ship-based)
d. Real estate brokers and developers
e. Offshore gaming operations

OBLIGATION OF COVERED PERSON

1. Account Maintenance
a. Maintain accounts only in true and full name of owner
b. Anonymous accounts not allowed

2. Customer Due Diligence

Covered Institutions shall:
a. Establish and record the true identity of its clients based on official documents
b. Maintain a system of verifying the true identity of clients or beneficial owner

3. Record Keeping
All records of all transactions shall be maintained and stored for 5 years from the dates of
transactions.

For closed accounts, records shall be preserved and stored for 5 years from the date the
account closure.

4. Reporting of Covered and Suspicious Transactions

Covered institutions shall submit Covered Transactions Report and Suspicious Transactions

NOTE: Conviction of the unlawful activity (predicate crime) is not necessary before a report is
made.

When to report to AMLC?

Within 5 working days from occurrence thereof,
Unless AMLC provides otherwise: (2021)
Covered Transactions → Within 5 working days from occurrence
Suspicious Transactions → Within next working day from occurrence

Exception on Reporting Requirements

Lawyer or accountant acting as independent legal professional can raise professional secrecy or
legal professional privilege.

Republic vs. SB (2021)

Court issued subpoena against AMLC to produce records of Lionair’s bank account. AMLC invoked
confidentiality of reports.

SC ruled that AMLC is not prohibited from disclosing confidential and suspicious transaction report.
AMLC is not merely a repository of reports.

#GETTHATBAR2022
FLORES · TARADJI
B. COVERED AND SUSPICIOUS TRANSACTIONS
COVERED TRANSACTIONS
1. Transaction exceeds P500,000 within 1 banking day
2. Transaction involving jewelry dealers exceeds P1,000,000
3. Transaction involving casinos exceeds P5,000,000
4. Transaction involving real estate brokers exceeds P7,500,000

SUSPICIOUS TRANSACTIONS
Regardless of the amount involved, where any of the following circumstances exists:
[SUSU DIC]
1. (Transaction is) Structured to avoid being subject of the report
2. (Relates to) Unlawful activity
3. Similar or analogous transactions
4. (No) Underlying legal or trade obligation
5. Deviates from client profile
6. (Client not properly) Identified
7. (Not) Commensurate with client’s business

C. SAFE HARBOR PROVISION

If the reporting (covered transaction report or suspicious transaction report) is done by any person in the regular
performance of his duties in good faith, no administrative, criminal or civil proceedings shall lie against said
person.

When reporting covered or suspicious transactions to the AMLC, covered persons and their officers and employees
shall not be deemed to have violated the Bank Secrecy Laws and other banking laws, provided that confidentiality is
observed.

D. WHEN IS MONEY LAUNDERING COMMITTED (& PREDICATE CRIMES)

MONEY LAUNDERING
1. Refers to act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they
appear to have originated from legitimate sources.

2. Committed by:
a. any person who, knowing that any money or property involves or relates to the proceeds of any
unlawful activity, [PUTA CA]
i. Performs or fails to perform any act, as a result he facilitates the offense
ii. Uses, converts, transfers, disposes, acquires, moves, or possesses
iii. Transacts said money or property
iv. Attempts or conspires to commit
v. Conceals or disguises true nature
vi. Aids, abets, assists or counsels
b. Any covered person who knowing a covered or suspicious transaction, fails to report to AMLC.

UNLAWFUL ACTIVITIES / PREDICATE CRIMES

Among others, (just read the long list)
1. Kidnapping for ransom
2. Specific offenses in RA 9165
3. Qualified theft (not simple theft)
4. Violation of Strategic Trade Management Act
5. Tax Evasion – where the deficiency tax is in excess of P25M per taxable year for each tac type covered.
a. If the BIR already recovered the deficiency tax, AMLC cannot institute forfeiture anymore
6. Similar foreign offenses

NOTE: The prosecution of any offense or violation of AMLA shall proceed independently of any proceeding relating
to the unlawful activity or predicate crime.

JURISDICTION
RTC shall have jurisdiction to try all cases on money laundering.
Sandiganbayan, if committed by public officers.

#GETTHATBAR2022
FLORES · TARADJI
E. AUTHORITY TO INQUIRE INTO BANK DEPOSITS
F. FREEZING AND FORFEITURE
ANTI-MONEY LAUNDERING COUNCIL (AMLC)
1. Governor of BSP
2. Commissioner of IC
3. Chairman of SEC

POWERS OF AMLC
1. Bank Inquiry
The power to inquire into deposits or investments.
This is an exception to the Bank Secrecy Law.

Related Accounts → refers to accounts, the funds and sources of which originated from and/or materially
linked to the monetary instrument or property subject of the freeze order.

When allowed?
a. Upon order of competent court (i.e., the Court of Appeals)
b. Based on ex-parte application and
c. There is probable cause
i. That deposits are related to an unlawful activity or money laundering offense.

Bank Inquiry Order

This is issued by the Court of Appeals, effective for 120 calendar days, extendible for another 120 days.

Republic vs. Bolante

The Court of Appeals must also have an independent determination of probable cause.

NOTE It is not necessary that there be a money laundering offense case filed in court first before a bank
inquiry order may be issued.

IMPORTANT! COURT ORDER NOT REQUIRED →

No Court Order is required in the following cases:
c. Kidnapping for ransom
d. Drug offenses
e. Hijacking, Arson, Murder
f. Similar foreign offense
g. AMLC’s authority under Anti-Terror Law
h. AMLC’s authority to investigate property or funds related to terrorism financing

NOTES:
• Inquiry into deposits under Section 11 does not require a pre-existing criminal case
• Inquiry by AMLC does not violate substantive due process there being no physical seizure of
property involved at that stage. It is the preliminary and actual seizure of the bank deposits which
brings these within reach of judicial process.
• There is no violation of the right to privacy as the law provides safeguards before a bank inquiry
order is issued:
o AMLC is required to establish probable cause
o CA, independent from AMLC, itself makes a finding of probable cause
o Bank inquiry court order for related accounts is preceded by a bank inquiry court order for
the principal account.
o Authority to inquire or examine accounts shall comply with the requirements of Article III,
Section 2 and 3 of the Constitution (rights against unreasonable search and seizure and right
of privacy of communication)

2. Freeze Order
It is an extraordinary and interim relief issued to prevent the dissipation, removal or disposal of properties
that are suspected to be the proceeds of, or related to, unlawful activities.

When issued?
a. Upon verified ex-parte petition by the AMLC
b. Probable cause exists
c. Court of Appeals shall issue, effective immediately for 20 days.
a. Within the 20-day period, CA will conduct summary hearing to determine whether to
modify or lift the freeze order. It may extend the effectivity up to 6 months, including the
first 20 days (meaning additional 160 days).
#GETTHATBAR2022
FLORES · TARADJI
 NOTES:
• Only the Supreme Court can issue a TRO or WPI against any freeze order
• CA should act on the petition to freeze within 24 hours from filing of the petition
• A person whose account has been frozen may file a motion to lift the freeze order and the court must
resolve before the expiration of the freeze order

3. Asset Forfeiture
a. Upon determination of probable cause by AMLC
b. Verified petition for Civil Forfeiture
c. Filed before the Regional Trial Court (RTC)

Effect
The money or property is forfeited in favor of the State.

If money instrument or property cannot be located, the RTC will order to pay the value in lieu of forfeiture.

Rules
No need of prior criminal charge or conviction of unlawful activity or predicate crime
No forfeiture to prejudice candidates during election period.
NOTE: It is prohibited to file money laundering cases against candidates during election period.

IMPORTANT
Covered persons and their officers and employees are prohibited from communicating directly or indirectly, in any
manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction has
been reported or is about to be reported, the contents of the report, or any other information in relation thereto.

Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail or other
similar devices.

In case of violation thereof, the concerned officer and employee of the covered person and media shall be held
criminally liable.

#GETTHATBAR2022
FLORES · TARADJI
 VI. ELECTRONIC COMMERCE ACT (RA 8792)
A. Legal Recognition of Electronic Data Messages, Documents and Signatures
PARTIES
1. Originator → person by whom or on whose behalf the electronic document purports to have been created,
generated and/or sent.
2. Addressee → person who is intended by the originator to receive the electronic data message or electronic
document.
3. Intermediary → person who in behalf of another person and with respect to a particular electronic
document, sends, received and/or stores, provides other services in respect of that electronic data message
or document.
4. Service Provider → provider of online services or network access or the operator of facilities therefor, or
provider of necessary technical means by which electronic documents may be stored, and made accessible
to designated or undesignated 3rd party.

ELECTRONIC DATA MESSAGE

Refers to information generated, sent, received or stored by electronic, optical or similar means.

Section 6. Legal Recognition of Electronic Data Messages

Information shall not be denied legal effect, validity or enforceability solely on the grounds that:
1. It is in the data message purporting to give rise to such legal effect, or
2. It is merely referred to in that electronic data message.

ELECTRONIC DOCUMENT
Refers to information or the representation of information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is established or an obligation extinguished, or
by which a fact may be prove and affirmed, which is receive, recorded, transmitted, stored, processed, retrieved
or produced electronically.
NOTE: A facsimile transmission is not an electronic document. (MCC Industrial Sales vs. Ssangyong Corp.)

Section 7. Legal Recognition of Electronic Documents

Electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing,
and:
(a) Agreement Required to be in Writing.
Where the law requires a document to be in writing, that requirement is met by an electronic document
if the said electronic document
a. maintains its integrity and reliability and
b. can be authenticated so as to be usable for subsequent reference, in that
i. The electronic document has remained complete and unaltered, apart from the
addition of any endorsement and any authorized change, or any change which arises in
the normal course of communication, storage and display; and
ii. The electronic document is reliable in the light of the purpose for which it was
generated and in the light of all relevant circumstances.

(b) Electronic document meets the requirement that the document is in writing under the immediately
preceding rule, whether the requirement therein is in the form of an obligation or whether the law
simply provides consequences for the document not being presented or retained in its original
from.

(c) When Original is Required.

Where the law requires that a document be presented or retained in its original form, that requirement
is met by an electronic document if:
a. There exists a reliable assurance as to the integrity of the document from the time when it was
first generated in its final form; and
b. That document is capable of being displayed to the person to whom it is to be presented:
Provided, That no provision of this Act shall apply to vary any and all requirements of existing
laws on formalities required in the execution of documents for their validity.

For evidentiary purposes, an electronic document shall be the functional equivalent of a written document.

NOTE: The above-stated rules apply to Carriage of Goods and Transport Documents that are required to be in
writing. If a transport document has been issued in the form of electronic document or data message and paper
document shall subsequently be issued to modify the existing transportation agreement, it is mandatory that:
1. The electronic document or data message should be first terminated and
2. The termination should be stated in the paper document.

#GETTHATBAR2022
FLORES · TARADJI
ELECTRONIC SIGNATURE
Refers to any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person
and attached to or logically associated with the electronic data message or electronic document or any methodology
or procedures employed or adopted by a person and executed or adopted by such person with the intention of
authenticating or approving an electronic data message or electronic document.

Section 8. Legal Recognition of Electronic Signatures

An electronic signature on the electronic document shall be equivalent to the signature of a person on a written
document if that signature is proved by showing that a prescribed procedure, not alterable by the parties
interested in the electronic document, existed under which:
1. A method is used to identify the party sought to be bound and to indicate said party's access to the
electronic document necessary for his consent or approval through the electronic signature
2. Said method is reliable and appropriate for the purpose for which the electronic document was
generated or communicated, in the light of all circumstances, including any relevant agreement
3. It is necessary for the party sought to be bound, in order to proceed further with the transaction, to have
executed or provided the electronic signature; and
4. The other party is authorized and enabled to verify the electronic signature and to make the
decision to proceed with the transaction authenticated by the same.

B. Presumption Relating to Electronic Signatures

Section 9. Presumption Relating to Electronic Signatures
In any proceedings involving an electronic signature, it shall be presumed that -
1. The electronic signature is the signature of the person to whom it correlates; and
2. The electronic signature was affixed by that person with the intention of signing or approving the
electronic document unless the person relying on the electronically signed electronic document knows or
has noticed of defects in or unreliability of the signature or reliance on the electronic signature is not
reasonable under the circumstances.

C. Admissibility and Evidential Weight of Electronic Data Message or Electronic

Document
Section 12. Admissibility and Evidential Weight of Electronic Data Message or Electronic Document
In any legal proceedings, nothing in the application of the rules on evidence shall deny the admissibility of an
electronic data message or electronic document in evidence
1. On the sole ground that t is in electronic form or
2. On the ground that it is not in the standard written form, and
the electronic data message or electronic document meeting and complying with the requirements under Section 6
or 7 hereof shall be the best evidence of the agreement and transaction contained therein.

In assessing the evidential weight of an electronic data message or electronic document,

1. the reliability of the manner in which it was generated, stored or communicated,
2. the reliability of the manner in which its originator was identified and
3. other relevant factors shall be given due regard.

D. Obligation of Confidentiality
Section 32. Obligation of Confidentiality
Any person who obtained access to any electronic key, electronic data message or electronic document, book,
register, correspondence, information, or other material pursuant to any powers conferred under this Act, shall not
convey to or share the same with any other person.

Except for the purposes authorized under this Act.

#GETTHATBAR2022
FLORES · TARADJI
 VII. FINANCIAL REHABILITATION AND INSOLVENCY ACT
BANKRUPTCY – the liabilities are more than the assets
ILLIQUIDITY – the inability of a person to pay his debts as they become due
INSOLVENCY – under the FRIA, it is
1. the inability to pay debts as they become due or
2. when liabilities are greater than assets.

DEBTOR INCLUDES– PICS

1. A Sole proprietorship duly registered with the DTI
2. A Partnership duly registered with the SEC
3. A Corporation duly organized and existing under Philippine laws
GOCCs, other than banks, are covered unless their charter provides otherwise.
4. An Individual debtor who has become insolvent as defined in the law
Insolvent Debtor – debtor that is generally unable to pay its obligations as they fall due in the
ordinary course of business or has liabilities that are greater than its assets

DEBTOR DOES NOT INCLUDE – BPI UNJET

1. Banks
2. Insurance companies
3. Pre-need companies
4. National and local government agencies or units
5. Unincorporated company
6. Joint venture not registered as partnership
7. Estate of a deceased person
8. Trust

CLAIM – refer to all claims or demands of whatever nature or character against the debtor or its property, whether
for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed.

FRIA covers claims against the debtor or its property, but not claims by the debtor against its own debtors or
against 3rd parties.

REMEDIES AVAILABLE TO INSOLVENT DEBTOR –

1. Judicial
a. Rehabilitation
b. Suspension of payment
c. Liquidation
2. Extra-judicial
a. Transferring of assets as payment of its debt
b. Out of court restructuring

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
A remedy available to The restoration of the debtor to a condition of The debtor and the required A rehabilitation plan agreed Liquidation proceedings arise if the
an INDIVIDUAL successful operation and solvency, if it is number of creditors agree upon by the debtor and the debtor is insolvent, and there is no
debtor who seeks to shown that its continuance of operation is in the rehabilitation plan required number of substantial likelihood for the debtor to be
suspend the economically feasible, and its creditors can before the filing of a petition creditors. Unlike in a pre- successfully rehabilitated.
payments outside of recover more if the debtor continues as a going with the rehabilitation court. negotiated rehabilitation, the
the necessary or concern than if it is immediately liquidated. OCRA is not submitted to
legitimate expenses the court for approval.
of his business while
the proceedings are
pending.

This is always The following must be A creditor or group The insolvent debtor, by MINIMUM REQUIREMENTS When it is filed by when it is filed by
voluntary. alleged: of creditors with itself or jointly with any of its 1. Debtor must agree to the debtor the creditor
1. Insolvency of aggregate claims of at creditors, may file a verified the OCRA
Only individual debtor least P1M or at least petition with the court for 2. Creditors must The filing of petition The debtor must
debtors can file. 2. Viability of its 25% of subscribed the approval of a pre- approve is by itself the act of have committed acts
rehabilitation capital or partner’s negotiated Rehabilitation a. representing insolvency of insolvency.
The debtor must contribution, Plan. at least 67%
attach in the An insolvent debtor whichever is higher, of the 3 WAYS: 4 WAYS:
petition for initiates rehabilitation if: Approved by the creditors secured (1) By an (1) For INDIVIDUAL
suspension: SIP proceeding 1. There is no representing 2/3 of total obligations of INDIVIDUAL whose debtors, by any
1. A Schedule of genuine issue liabilities including the debtor (1) liability creditor/s with
debts and The petition must have of fact or law 1. secured creditors b. representing exceeds his aggregate claim of at
liabilities the approval from: on the claims holding more than at least 75% assets and least P500,000 may
2. An Inventory 1. The owner in of the 50% of total of the (2) whose debts file a verified
of assets case of single petitioners secured claim and unsecured exceed petition for
3. A Proposed proprietorship 2. The debtor 2. unsecured obligations of P500,000 liquidation
agreement 2. The majority of has failed creditors holding the debtor may file a
with his partners in case generally to more than 50% of c. holding at verified
creditors of partnership meet its unsecured claims. least 85% of petition for
4. The petition 3. The majority liabilities the total liquidation
must indicate vote of the 3. A creditor, liabilities,
the names of board and the other than secured and VENUE: Court of
at least 3 vote of the unsecured, of province or city in
nominees for stockholders petitioners, the debtor. which he resided for
commissioner representing at has initiated 6 months prior to
. least 2/3 of foreclosure filing such petition.
capital stock proceedings
#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
Receiver – can be VENUE: RTC which has EFFECT OOF APPROVAL OF STANDSTILL AGREEMENT (2) By an (2) For JURIDICAL
natural or juridical jurisdiction over the PRE-NEGOTIATED It is an agreement by the INSOLVENT PERSONS, by 3 or
principal office of the REHABILITATION PLAN debtor and creditors JURIDICAL more creditors the
Liquidator – can be debtor. The approval of a pre- providing for a standstill DEBTOR may file a aggregate of claims
natural or juridical negotiated Rehabilitation period pending negotiation petition for is at least EITHER
Plan shall have the same and finalization of the out-of- liquidation (1) P1M or
Commissioner – legal effect as confirmation court or informal (2) at least 25%
only natural person of a Rehabilitation Plan in a restructuring agreement (3) By conversion of of the
voluntary rehabilitation which is effective and proceedings subscribed
NOTES: proceedings. enforceable not only against capital stock
• Amount of the contracting partis, but or partner’s
indebtedness also against other creditors. contribution
is not affected s of the
• Number of STANDSTILL PERIOD – debtor,
creditors is The period agreed upon by whichever is
immaterial the debtor and its creditors to HIGHER,
• The purpose enable them to negotiate may file a petition
is to suspend and enter into an OCRA. for liquidation.
or delay the
payment of (3) Same as above,
debts but, pending the
rehabilitation
proceedings, the
petition filed is
petition to convert
to liquidation.

(4) Court-ordered
conversion

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
SUSPENSION THE REHABILITATION PLAN – REQUIREMENTS OF CONVERSION INTO LIQ PROCEEDINGS
ORDER The plan by which the financial well-being and STANDSTILL PERIOD – 1. Debtor is insolvent and there is no
Upon motion filed by viability of an insolvent debtor can be 1. Such agreement is substantial likelihood to be
the individual debtor, restored using various means such as debt approved by successfully rehabilitated.
the court may issue rescheduling or debt forgiveness. creditors 2. If rehabilitation receiver or other
an order suspending
representing more party is ordered to cure the defect,
any pending REHABILITATION RECEIVER
execution against the The person, natural or juridical, appointed as than 50% if the total and
individual debtor. such by the court pursuant to the FRIA and who liabilities of the a. the debtor acted in bad faith
is entrusted with such powers, duties and debtor or
Properties held as responsibilities in relation to the rehabilitation b. that it is not feasible to cure
security by secured of the debtor. 2. Notice thereof is
the defect in the
creditors shall not be published in a
rehabilitation plan.
the subject of such NOTE: The court is not bound by the report of newspaper of general
suspension order the Rehabilitation Receiver. The determination of 3. If the court does not confirm the
circulation in the PH
validity and approval of rehabilitation plan Rehabilitation Plan within 1 year
once a week for 2
Suspension order remains to be the function of the court. from the date of the filing of the
shall lapse when 3 consecutive weeks
petition
months shall have MANAGEMENT COMMITTEE 4. Court order upon breach of or
The standstill period does
passed without the GR: The existing Board and/or Management of failure of rehabilitation plan.
not exceed 120 days from
proposed agreement the debtor shall continue to manage.
the date of effectivity 5. Failure of rehabilitation
being accepted by the
creditors or as soon EXP: The management can be replaced. Upon 6. Debtor or creditors supporting the
Cram Down Effect – Rehabilitation Plan acted in bad
as such agreement is motion, the court may appoint a Management
When the OCRA Plan is
denied. Committee to undertake the management of the faith
approved, it shall have the
debtor, in the following cases: 7. Upon motion of the debtor or 3 or
same legal effect as a
No creditor shall sue 1. Actual or eminent danger of dissipation, more creditors aggregate claims of
confirmation of a
or institute loss, wastage, or destruction of debtor’s Rehabilitation Plan. The at least P1M or at least 25% of the
proceedings to collect assets cram down rule applies upon subscribed capital stock, whichever
his claim from the
2. Paralyzation of the business operations publication of the notice of is higher
debtor from the time
of the debtor out-of-court approved 8. Upon recommendation of the
of the filing of
3. Gross mismanagement of the debtor, or rehabilitation plan.
petition for rehabilitation receiver
suspension. fraud, or other wrongful conduct or gross
or willful violation of FRIA

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
The following EFFECT OF TERMINATION – LIQUIDATION PLAN –
creditors are NOT 1. Discharge the rehabilitation receiver Enumerates all the assets, all the claims
affected by the 2. Lifting of the stay order against the debtor, and a schedule of
Suspension Order: liquidation of the assets and payment of the
1. Creditors CRAM-DOWN CLAUSE claims.
having claims A Rehabilitation Plan may be approved and
for personal implemented by the Court despite the lack of LIQUIDATION ORDER –
approval, or objection from the owners, Liquidation order will
labor,
partners, stockholders, or creditors of the 1. declare the debtor insolvent,
maintenance,
insolvent debtor. 2. order the liquidation of the debtor,
expense of
3. order the sheriff to take possession
last illness COMMENCEMENT ORDER – DAPAS of all the property, and
and funeral It is the order that commences the rehabilitation
4. set the case for hearing for election
incurred in proceedings which is issued by the Rehabilitation
Court after it finds the petition sufficient in form and appointment of liquidator.
the 60 days
and substance. It shall
immediately
1. declare that the debtor is under
prior to filing RIGHTS OF SECURED CREDITORS –
rehabilitation,
of petition The liquidation order will NOT affect the
2. appoint a rehabilitation receiver, right of a secured creditor to enforce his
2. Secured
3. prohibit the debtor’s suppliers from lien. He may either:
creditors
withholding supply, (1) waive his rights under the
Unless they 4. authorize the payment of administrative security or lien, prove his claim,
participated and expenses as they become due, and and share in the distribution of
voted in the creditors’ the assets of the debtor OR
5. set the case for initial hearing
meeting. (2) maintain his right under his
Nature of Proceedings security or lien
➔ In rem. Jurisdiction over all persons
acquired upon publication of the notice
of commencement of proceedings.

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
PROHIBTIED ACTS EFFECTS OF COMMENCEMENT ORDER EFFECTS OF LIQ ORDER
1. Selling or 1. Vests the rehabilitation receiver with all 1. Juridical debtor shall be deemed
disposing in the powers and functions dissolved and its corporate
any manner 2. Prohibit any extrajudicial activity or existence terminated
of his process to seize property 2. Legal title to and control of all
property, 3. Serve as legal basis for rendering null and assets of the debtor shall be
except those void any set-off of debts after deemed vested in the liquidator
used in commencement date 3. All contracts of the debtor shall
ordinary 4. Serve as legal basis for rendering null and be deemed terminated and/or
operations of void the perfection of any lien against breached, unless liquidator
commerce debtor’s property within 90 days declares
2. Making any 5. Consolidate the resolution of all legal otherwise and the contracting
payment proceedings by or against the debtor parties agree
outside of the 4. No separate action for collection
necessary or The CO is effective for the duration of the
of an unsecured claim shall be
legitimate rehabilitation proceedings unless
expenses of 1. Earlier lifted by the court allowed. Actions already
his business 2. The rehabilitation plan is seasonably pending will be transferred to
confirmed or approved or the Liquidator.
3. The rehabilitation proceedings are 5. No foreclosure proceedings
shall be allowed for a period of
ordered terminated by the court
180 days.
NOTE: The commencement order retroacts to
CROSS-BORDER INSOLVENCY –
the date of the filing of the petition for
Involves either:
rehabilitation. Thus, the effects of the
1. domestic entity with foreign-based
commencement order and stay order shall apply
during the period between the filing of petition assets
and the issuance of the commencement order. 2. foreign entity with domestic-based
assets

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
RIGHTS OF STAY ORDER – SSPP How does the Liquidator determine the
SECURED 1. Suspends all actions for enforcement of claims against the insolvent debtor?
CREDITORS – claims Within 20 days from his assumption into
Generally, it will not 2. Suspends all actions to enforce any office, the liquidator shall prepare a
affect the rights of judgment preliminary registry of claims of secured
secured creditors. 3. Prohibits the debtor from selling or and unsecured creditors.
Secured creditors can encumbering properties
sue and institute 4. Prohibits the debtor from making any Liquidator shall make the registry available
proceedings to collect payment of liabilities for public inspection and provide
their claims. publication notice to creditors, individual
NOTE: Stay Order does not affect, diminish or debtors, owners, partners, shareholders.
impair the security or lien of a secured creditor.
The preferred status is retained, but the Within 30 days from expiration of period
enforcement of such preference is suspended. for filing of applications for recognition of
claims , any interest party may submit a
A court hearing is not required before the challenge to a claim/s to the court. Upon
issuance of a Stay Order. expiration of 30 days, the Liquidator shall
submit to the court the registry of claims
EXCEPTIONS TO STAY ORDER containing the undisputed claims that have
1. Cases already pending appeal in the not been subject to challenge.
Supreme Court as of commencement date
2. Cases pending or filed at a specialized If the debtor and creditor are mutually
court or quasi-judicial agency debtor and creditor of each other, one debt
3. Enforcement of claims against sureties shall be set off against the other, and only
and other persons solidarily liable, the balance if any shall be allowed in the
including issuers of letters of credit liquidation proceedings.
4. Actions of customers or clients of a
securities market participation to recover Liquidator shall resolve disputed claims
claims entrusted to the latter and submit his findings thereon to the court
5. Actions of a licensed broker or dealer to for final approval.
sell pledged securities
6. Clearing and settlement of financial
transactions thru the facilities of a
clearing agency
7. Any criminal action against individual
debtor, owner, partner or director

#GETTHATBAR2022
FLORES · TARADJI
 REHABILITATION LIQUIDATION
SUSPENSION OF
COURT-SUPERVISED OUT OF COURT OR
PAYMENTS PRE-NEGOTIATED VOLUNTARY INVOLUNTARY
VOLUNTARY INVOLUNTARY INFORMAL
NOTE: The issuance of a Stay Order is not
appealable. The effectivity period is only from
the date of its issuance until dismissal of the
petition or termination of the rehabilitation
proceedings.

DOUBLE MAJORITY COURT’S ACTION:

RULE 1. Give due course to the petition
The proposed If debtor is insolvent and there is
agreement for substantial likelihood to be successfully
suspension of
rehabilitated.
payments should be
approved by 2/3 of
number of creditors 2. Dismiss the petition or
and such number of (1) Debtor is not insolvent
creditors must (2) The petition is a sham
represent at least (3) The petition, the Rehabilitation
3/5 of total Plan and the attachments thereto
liabilities. contain any materially false or
misleading statements
(4) The debtor has committed acts of
misrepresentation or in fraud of
its creditors

3. Convert the proceedings into

liquidation proceedings
If the debtor is insolvent and there is no
substantial likelihood to be successfully
rehabilitated. (Failure of Rehabilitation)

#GETTHATBAR2022
FLORES · TARADJI