Blue Notes - Commercial Law
Blue Notes - Commercial Law
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TABLE OF CONTENTS
I. INSURANCE ...................................................................................................................................10
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III. CORPORATION LAW (Provisions of B.P. Blg 68, as amended by R.A. No. 11232) ............................ 70
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1. GENERAL OVERVIEW
TOPIC OUTLINE UNDER THE SYLLABUS
a. Governing Laws
A. BASIC CONCEPTS
1. P.D. No. 612, as amended by R.A. No.
1. General Overview 10607 (hereinafter Insurance Code);
2. What May And May Not Be Insured 2. Special Laws, such as R.A. No. 1161
3. Insurable Interest (Social Security Act)
4. Double Insurance And Over- Insurance 3. Civil Code, for matters not expressly
5. No Fault, Suicide And Incontestability provided for in #1 and #2
Clauses
b. Definition
B. PERFECTION OF THE INSURANCE
CONTRACT Contract of Insurance
1. An agreement;
1. Offer And Acceptance/ Consensual 2. Whereby one undertakes for a
Nature consideration;
2. Premium Payment 3. To indemnify another against loss,
3. Non- Default Options In Life Insurance damage or liability
4. The Policy 4. Arising from an unknown or contingent
event. (Insurance Code, Sec. 2[a]).
C. RIGHTS AND OBLIGATIONS OF
PARTIES NOTE:
a. Insurer A contingent event is one that is not certain to
b. Insured take place.
c. Beneficiary
d. Agent or Trustee An unknown past event is one which had already
e. Partner or Co-Owner happened, but one is unaware if it happened or
f. Assignee not.
g. Mortgagor and Mortgagee
A past event may be a designated event only in
D. RESCISSION OF INSURANCE cases where it has happened already but the
CONTRACTS parties do not know about it, e.g., prior loss of a
ship at sea (applicable only to marine insurance).
1. Overview Of General Grounds (De Leon, The Insurance Code of the Philippines
2. Concealment Annotated [2014])
3. Misrepresentation
4. Breach Of Warranty Consideration Required in Insurance
5. Exercise Of The Right To Rescind Or An insurance business consists in undertaking,
Cancel for a consideration, to indemnify another against
6. Cancellation Of Non-Life Insurance loss, damage or liability arising from an unknown
or contingent event.
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property given to her by her husband (Harding v. Insurance Contract v. Gambling Contract
Commercial Union Assurance, G.R. No. L-12707,
1918) INSURANCE GAMBLING
CONTRACT CONTRACT
NOTE: There are only two parties to a contract of
insurance, the insured and the insurer. The The parties seek to The parties
beneficiary is NOT a party to the contract unless distribute possible contemplate gain
he is the party to be insured. loss by reason of through mere
mischance. chance.
NOTE: LGBTQ+ members have the right to
The insurer seeks to The gambler courts
designate their domestic partners as
avoid misfortune. fortune.
beneficiaries. An individual who has secured a life
insurance policy on his or her own life may
The contract tends to The contract tends to
designate any person as beneficiary provided
equalize fortune. increase the
that such designation does not fall under the
inequality of fortune.
enumerations provided in Article 739 of the Civil
Code. (Insurance Commission, Legal Opinion
What one insures Whatever one
No. 2020-02, dated March 04, 2020)
against is not at the person wins from a
e. Subject Matter of an Insurance expense of another wager is lost by the
insured person. other wagering party.
Contract
The purchase of As soon as a party
Risks or Perils That May be Insured insurance does not makes a wager, he
a. Any contingent or unknown event, create a new, and creates a risk of loss
whether past or future, which may therefore, non- to himself where no
damnify (cause damage to) a person existing risk of loss to such risk existed
having an insurable interest; or the purchaser. The previously.
b. Any contingent or unknown event, purchaser faces an
whether past or future, which may create already existing risk
a liability against the person insured of economic loss
(Insurance Code, Sec. 3) (“insurable interest”).
Past Events – Marine Insurance In both cases, one party promises to pay a
A past event which may be insured against is given sum to the other upon the occurrence
peculiar to Marine Insurance. A person insured by of a given future event, the promise being
a contract of marine insurance is presumed to conditioned upon the payment of, or
have knowledge, at the time of insuring, of a prior agreement to pay, a stipulated amount by the
loss, if the information might possibly have other party to the contract. In either case, one
reached him in the usual mode of transmission party may receive more, or much more, than
and at the usual rate of communication. he paid or agreed to pay.
(Insurance Code, Sec. 111)
Contingent Liability
Example: Reinsurance f. Perfection of an Insurance
Contract
NOTE: Sec. 4 does not authorize an insurance
for or against the drawing of any lottery, or for or Consensual Nature of Contract
against any chance or ticket in a lottery drawing a A contract of insurance must be assented to by
prize. (Insurance Code, Sec. 4) both parties, either in person or through their
agents and so long as an application for
Elements of a Lottery insurance has not been either accepted or
a. Consideration; rejected, it is merely a proposal or an offer to
b. Prizes; and make a contract. (Perez v. CA, G.R. No. 112329,
c. Chance 2000)
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Consensual
Perfected by the meeting of the minds of the
parties (Civil Code, Art. 1315)
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Insurance by Minor
2. WHAT MAY AND MAY NOT BE Under the Civil Code, the minor cannot enter into
INSURED a contract of insurance without the consent of the
parents/guardian and if he does, the contract is
What May Be Insured voidable.
Any contingent or unknown event, whether past In such case, the insurer cannot, however, raise
or future, which may damnify a person having an the incapacity of the minor to the contract as
insurable interest, or create a liability against him, defense, as it is voidable at the option of the
may be insured against, subject to the provisions insured and not the insurer:
of this chapter. a. But, emancipation terminates parental
authority over the person and property of
The consent of the spouse is not necessary for the child.
the validity of an insurance policy taken out by a b. Hence, an emancipated minor may
married person on his or her life or that of his or procure any kind of insurance without the
her children. consent of the parents or guardian.
All rights, title and interest in the policy of Effect of Death of Policy’s Original Owner
insurance taken out by an original owner on the In case the original owner of a policy taken on the
life or health of the person insured shall life of another should predecease the latter, all
automatically vest in the latter upon the death of interests in the policy shall automatically vest in
the original owner, unless otherwise provided for the insured unless otherwise provided for in the
in the policy. (Section 3, Insurance Code) policy.
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upon the death of the insured (44 Am. Jur. 2d. policy, without the need of a court
639 cited in de Leon, 2010, p. 96). authority or a bond.
3. If the premiums are paid out of the
Designation of Beneficiary conjugal funds, the proceeds are
General rule: When one insures his own life, he considered conjugal.
may designate any person as the beneficiary,
whether or not the beneficiary has an insurable If the beneficiary is other than the insured’s
interest in the life of the insured. estate, the source of premiums (either from
paraphernal or conjugal funds) would not be
Exceptions: Persons specified in Article 739 of relevant (BPI v. Posadas, G.R. No. L-34583,
the Civil Code cannot be designated: 1931).
a. Those made between persons who were
guilty of adultery or concubinage Right of Insured to Change Beneficiary in Life
(conviction is not a condition precedent); Insurance
b. Those made between persons found General Rule: The insured shall have the right to
guilty of the same criminal offense, in change the beneficiary he designated in the
consideration thereof; policy. (Insurance Code, Sec. 11)
c. Those made to a public officer or his wife,
descendants or ascendants by reason of Exception: If the insured expressly waived his
his office. right to change the beneficiary, this makes the
latter an irrevocable beneficiary. But despite the
In order for Article 739 to apply, it is not required waiver, he can still change the beneficiary,
that there be a previous conviction for adultery provided that he obtains the beneficiary’s
or concubinage, due to the wording of consent. (Insurance Code, Sec. 11)
“preponderance of evidence” (Insular Life v.
Ebrado, G.R. No. L-44059, 1977) Forfeiture by Beneficiary of Interest in
Insurance Policy
NOTE: LGBTQ+ members have the right to The interest of a beneficiary in a life insurance
designate their domestic partners as policy shall be forfeited when the beneficiary is
beneficiaries. An individual who has secured a life the principal, accomplice, or accessory in willfully
insurance policy on his or her own life may bringing about the death of the insured; in which
designate any person as beneficiary provided event, the share forfeited shall be paid as follows:
that such designation does not fall under the 1. To the other beneficiaries if not
enumerations provided in Article 739 of the Civil disqualified;
Code. (Insurance Commission, Legal Opinion 2. If no other beneficiaries, in accordance
No. 2020-02, dated March 04, 2020) with the policy contract; (e.g. to the
contingent or substitute of beneficiaries)
When is the estate entitled to the proceeds of 3. If the policy contract is silent, to the estate
the insurance? of the insured. (Insurance Code, Sec. 12)
1. Where the insured has not designated
any beneficiary; or 2. In Property
2. When the designated beneficiary is Coverage of Insurable Interest in Property
disqualified by law to receive the 1. Property itself;
proceeds (Heirs of Maramag v. 2. Any relation thereto; or
Maramag, G.R. No. 181132, 2009) 3. Liability in respect thereof (Insurance
Code, Sec. 13)
NOTE:
1. The designation is revocable unless the It may consist of:
right to revoke is expressly waived in the 1. An existing interest;
policy. 2. An inchoate interest founded on an
2. If the insured or beneficiary is a minor, existing interest; or
and the amount involved does not 3. An expectancy, coupled with an existing
exceed P50,000.00, the father, or in his interest in that out of which the
absence or incapacity, the mother may expectancy arises
exercise the minor’s rights under the
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Change of Interest That Suspends an since such policy is for the benefit of both the
Insurance Contract mortgagor and mortgagee.
The change of interest contemplated by law is an
absolute transfer of the insured’s entire interest in Upon recovery of the mortgagee to the extent of
the property insured to one not previously his credit from the insurer, the mortgagor is
interested or insured. In the following cases, the released from his indebtedness.
policy is not suspended: (ML2R2)
Insurance by Mortgagee of His Own Interest
a. Execution of a Mortgage The mortgagee may collect from the insurer upon
b. Lease of the insured property the occurrence of the loss to the extent of his
c. Vendor who has a Lien on the property credit.
sold until the purchase price is paid or the
conditions of the sale are performed Unless otherwise stated in the policy, the
d. Judgment debtor whose property has mortgagor has no right to collect the balance of
been sold on execution (Right to the proceeds of the policy after payment of the
redeem) interest of the mortgagee.
e. Mortgagor whose property has been
foreclosed (Right of redemption) The insurer, upon payment to the mortgagee-
insured, becomes subrogated to the rights of the
Extent of Insurable Interest in a Mortgage mortgagee against the mortgagor and may collect
Situation the debt of the mortgagor to the extent of the
Interest of the Mortgagor and the Mortgagee in amount paid to the mortgagee.
the mortgaged property is separate and distinct
from the other. In case both of them take out Standard or Union Mortgage Clause
separate insurance policies on the same If a fire insurance policy contains this, the acts of
property, or one policy covering their respective the mortgagor do not affect the mortgagee. It
interests, there is no double insurance. makes a separate and distinct contract of
insurance on the interest of the mortgagee.
Mortgagor, as owner, may insure the property
mortgaged to the full value of such property. Open or Loss-Payable Mortgage Clause
It is a contract which provides that the payment of
Mortgagee can insure the same only to the extent loss to the mortgagee, if any, will be according to
of the amount of his credit. his interest as it may appear in the contract.
Under such clause, the acts of the mortgagor will
Insurance by Mortgagor for the Benefit of affect the mortgagee.
Mortgagee, or Policy Assigned to the
Mortgagee: 4. DOUBLE INSURANCE AND OVER
The insurance is still deemed to be upon the INSURANCE
interest of the mortgagor who does not cease to
be a party to the original contract. Double insurance exists where the same person
is insured by several insurers separately in
Any act of the mortgagor, prior to the loss, which respect to the same subject and interest.
would otherwise avoid the insurance, will have
the same effects, although the property is in the NOTE: It is not prohibited by law.
hands of the mortgagee. But it may be contractually prohibited by a
provision in an insurance policy.
Any act, which under the contract of insurance is
to be performed by the mortgagor, may be Over insurance exists when the amount of the
performed by the mortgagee with the same effect insurance is beyond the value of the insured’s
as if it has been performed by the mortgagor. insurable interest.
Upon the occurrence of the loss, the mortgagee When there is double insurance and over
is entitled to recover to the extent of his credit and insurance results, the insured can claim in case
the balance, if any, is payable to the mortgagor of loss only up to the agreed valuation or up to the
full insurable value from any, some or all insurers,
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The following rules on claim under the “no fault shorter period: Provided, however, That suicide
indemnity” provision where proof of fault or committed in the state of insanity shall be
negligence is not necessary for payment of any compensable regardless of the date of
claim for death or injury to a passenger or third commission. (Section 183, Insurance Code)
party are established:
1. A claim may be made against one Burden of Proof in Suicide Clauses
motor vehicle only. The basic instinct of self-preservation militates
2. If the victim is an occupant of a vehicle, against the commission of suicide. Hence it is
the claim shall lie against the insurer of incumbent upon a party alleging suicide as a
the vehicle in which he is riding, mounting defense, especially in actions involving insurance
or dismounting from. policies to prove it by clear and convincing proof.
3. In any other case (i.e. if the victim is
not an occupant of a vehicle), the claim Incontestability Clause
shall lie against the insurer of the directly Whenever a right to rescind a contract of
offending vehicle. insurance is given to the insurer by any provision
4. In all cases, the right of the party of Chapter I of the Insurance Code (The Contract
paying the claim to recover against the of Insurance), such right must be exercised
owner of the vehicle responsible for the previous to the commencement of an action on
accident shall be maintained. the contract.
Right of Insurer Paying “No Fault Indemnity” After a policy of life insurance made payable on
In all cases, the right of the party paying the claim the death of the insured shall have been in force
to recover against the owner of the vehicle during the lifetime of the insured for a period of
responsible for the accident shall be maintained. two (2) years from the date of its issue or of its
last reinstatement, the insurer cannot prove that
It is of no moment that the vehicle insured is not the policy is void ab initio or is rescindable by
the one that caused accident since the law reason of the fraudulent concealment or
provides that the insured is not the one that misrepresentation of the insured or his agent.
caused the accident since the law provides that (Section 48, Insurance Code)
the insurer paying the claim may recover from the
owner of the vehicle responsible for the accident. Meaning of Incontestable Clause (Sec 48(2))
An incontestable clause is an agreement by
This is precisely the essence of "no fault which the insurance company limits the period of
indemnity" insurance which was introduced to time within which it will interpose objections to the
and made part of our laws in order to provide validity of the policy or set up any defense.
victims of vehicular accident or their heirs
immediate compensation, although in a limited Requisites of Incontestability
amount, pending final determination of who is 1. It must be a life insurance policy.
responsible for the accidental and liable for the 2. It must be payable on the death of the
victim's injuries or death. insured.
3. It must have been in force during the
The "no fault indemnity" provision is part of the lifetime of the insured for a period of two
provisions on compulsory motor vehicle liability years.
insurance and should be read together with the
requirement for compulsory passenger and/ or Effects and Purpose of Incontestability
third party-liability insurance which was When all requisites are present, the insurer can
mandated in order to ensure ready compensation no longer escape liability nor be allowed to prove
for victims of vehicular accidents. that the policy is void ab initio or rescindable.
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made false representations in order to escape When the insured concealed in the application for
liability on the policy. reinstatement the fact that she had been suffering
for at least 3 years from bronchial asthma, the
Period of Incontestability period of incontestability should be computed
Old Doctrine: The insurer has 2 years from the from the date of reinstatement.
date of issuance of the life insurance contract or
its last reinstatement within which to contest the b. No Fault Clauses In Casualty
policy, whether or not the insured still lives within Insurance
such period. (Tan v. CA)
It is an insurance covering loss or liability arising
Prevailing Doctrine: The insurer must rescind the from accident or mishap, excluding those falling
life insurance contract on the ground of under those types of insurance such as fire,
concealment or misrepresentation within 2 years suretyship, life or marine. (Section 176, Insurance
from the time the policy was issued provided the Code)
insured is still alive at that time. If the insured is
already dead, the life insurance policy is already Accident or Health Insurance
incontestable even if less than 2 years had Insurance against specified perils which may
elapsed at that time. (Sun Life v. Sibya) affect the person and/or property of the insured.
(ex. Personal Accident, Robbery/Theft Insurance)
Insurer’s Defenses Not Barred by
Incontestable Clause Third Party Liability Insurance
1. That the premiums were not paid. Insurance against specified perils which may give
2. That the insured violated the condition in rise to liability on the party of the insured for
the policy relating to military or naval claims for injuries to or damage to property of
service in times of war. others. (ex. Motor Vehicle Liability, Professional
3. That the insured has no insurable interest Liability, Product Liability)
in the subject matter of the insurance.
4. That the cause of death was expected or Where the contract is one of indemnity against
not covered by the terms of the policy. liability, it becomes operative as soon as the
5. That the fraud committed was of a liability of the person indemnified arises
particularly vicious type such as: irrespective of whether or not he has suffered
a. Where the policy was taken in actual loss (Republic Glass Corp v. Qua, G.R. No.
furthereance of a scheme to 144413, 2004)
murder the insured;
b. Where the insured substituted In a third-party liability insurance contract, the
another person for the medical insurer assumes the obligation of paying the
examination; or injured third party to whom the insured is liable.
c. Where the beneficiary The insurer becomes liable as soon as the liability
feloniously killed the insured. of the insured to the injured third person attaches.
6. That the necessary notice or proof of Prior payment by the insured to the injured third
insured’s death was not given. person is not necessary in order that the
obligation of the insurer may arise. From the
Period of Contestability in Reinstated Policies moment that the insured became liable to the
When the policy lapses and is subsequently third person, the insured acquired an interest in
reinstated, the 2 year period of contestability the insurance contract, which interest may be
should start from the date of last reinstatement garnished like any other credit. (Perla Compania
because a reinstated policy should be viewed as de Seguros v. Ramolete, G.R. No. L-60887,
a new contract. 1991)
Thus, where the insurer asserts that the Right of the Injured Person to Sue Insurer of
reinstatement was obtained through fraud, he the Party at Fault
may raise this defense at any time before the
expiration of the contest period, reckoned from SCENARIO EFFECT
the date of reinstatement.
The contract 3rd persons, to whom
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“No Fault”
provides for the insured is liable,
The concept of accident is not necessarily
indemnity against CAN sue the insurer.
synonymous with “NO FAULT”. It may be utilized
liability to 3rd
simply to distinguish intentional or malicious acts
persons.
from negligent or careless acts of man (Pan
Malayan Insurance Corp. v. CA, G.R. No. 81026,
The contract is for 3rd persons
1990).
indemnity against CANNOT proceed
actual loss or against the insured.
The reinsurance contracts were correctly issued
payment.
in favor of Plaridel. By its nature, reinsurance
(Guingon v. Del Monte, G.R. No. L-22042, 1967) contracts are issued in favor of the direct insurer
because the subject of such contracts is the direct
NOTE: The injured person may sue the insurer insurer’s risk, in this case, Plaridel’s contingent
and the person at fault, notwithstanding the liability to MSAPL, and not the risk assumed
stipulation against suing the insurer (“no-action” under the original policy. With or without
clause) in the policy. (Guingon v. Del Monte, G.R. reinsurance, the obligation of the surety to the
No. L-22042, 1967) party against whom writ of attachment is issued
remains the same (Communication and
NOTE: Where casualty insurance insures against Information Systems Corporation v. Mark
liability, then an injured third party may have Sensing Australia, G.R. No. 192159, 2016).
direct recourse against the insurance. On the
other hand, if the casualty insurance insures c. No Fault Clauses In
against loss, then an injured third party will not be Compulsory Motor Vehicle
able to directly sue the insurer. Liability Insurance (CMVIL)
Rules as to Death or Injury Resulting from A protection coverage that will answer for legal
Accidental Means liability for losses and damages for bodily injuries
and/or property damage that may be sustained by
“Intentional” another arising from the use and operation of a
Implies the exercise of the reasoning faculties, motor vehicle by its owner.
consciousness, and volition.
It is unlawful for any land transportation operator
Where the provision of the policy excludes or owner of a motor vehicle to operate the same
intentional injury, the intention of the person in public highways unless there is an insurance or
inflicting is the controlling factory. guaranty to indemnify the death or bodily injury of
However, if the injuries suffered by the insured a third party or passenger arising from the use
clearly resulted from the intentional act of a third thereof. (Insurance Code, Sec. 387)
person, the insurer is relieved from liability as
stipulated (Biagtan v. The Insular Life Assurance Motor Vehicle
Co. Ltd., G.R. No. 26194, 1972). Shall mean any vehicle propelled by any power
other than muscular power using the public
“Accidental” highways (R.A. No. 4136, Sec. 3[a])
That which happens by chance or fortuitously,
without intention or design, which is unexpected, Exceptions: road rollers, trolley cars, street
unusual and unforeseen (Sun Insurance v. CA, sweepers, sprinklers, lawn mowers, bulldozers,
G.R. No. 92383, 1992) graders, forklifts, amphibian trucks, and cranes if
not used in public highways, vehicles which run
The terms “accident” and “accidental” do not, only on rails or tracks, and tractors, trailers and
without qualification, exclude events resulting in traction engines of all kinds used exclusively for
damage or loss due to fault, recklessness or agricultural purposes.
negligence of third parties. (Pan Malayan
Insurance v. CA, G.R. No. 81026, 1990)
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the law, by using the word "shall," makes it beneficiaries, the proceeds shall be paid in
mandatory that the claim be made against the accordance with the policy contract. If the policy
insurer of such vehicle. That said vehicle might contract is silent, the proceeds shall be paid to the
not be the one that caused the accident is of no estate of the insured. (Insurance Code, Sec. 12)
moment since the law itself provides that the party
paying the claim may recover against the owner Exceptions:
of the vehicle responsible for the accident. (Perla a. Accidental killing;
Compania de Seguros v. Ancheta, G.R. No. L- b. Self-defense; and
49699 August 8, 1988) c. Insanity of the beneficiary at the time he
killed the insured
NOTE: In all cases, the right of the party paying
the claim to recover against the owner of the e. Incontestability Clauses
vehicle responsible for the accident shall be
maintained. (Insurance Code, Sec. 391) In relation to the time to exercise the right to
rescind the insurance contract, it shall be made
d. Liability Of Insurer In Case Of prior to the commencement of an action on the
Suicide Or Death contract, if it be a Non-Life Policy, and before the
incontestability clause sets in, if it be a Life
1. Suicide Policy.
The insurer is LIABLE in the following cases:
a. Suicide was committed after the policy Requisites of Incontestability Clause:
has been in force for a period of two a. The insurance is a life insurance policy.
years from the date of its issue or its last b. It is payable on the death of the insured.
reinstatement; c. It has been in force during the lifetime of
b. Suicide committed in a state of insanity the insured for at least 2 years from its
regardless of the date of the commission date of issue or of its last reinstatement.
of the suicide; or
c. If committed after the lapse of a shorter NOTE: The period of 2 years may be shortened
period in the policy (Insurance Code, but it cannot be extended by stipulation.
Sec. 183)
When incontestability clause sets in
NOTE: Any stipulation extending the two-year Whichever is earlier, between:
period is void. a. Within 2 years from the date of issuance
or its last reinstatement; or
The insurer is NOT liable in the following cases: b. Upon the insurer’s death (Sun Life v.
a. The suicide is not by reason of insanity Sibya, G.R. No. 211212, 2016)
and is committed within the two-year
period; After the two-year period lapses, or when the
b. The suicide is by reason of insanity but is insured dies within the period, the insurer must
not among the risks assumed by the make good on the policy, even though the policy
insurer regardless of the date of was obtained by fraud, concealment, or
commission; and misrepresentation (Sun Life v. Sibya, G.R. No.
c. The insurer can show that the policy was 211212, 2016).
obtained with the intention to commit
suicide even in the absence of any Defenses Not Barred by Incontestability
suicide exclusion in the policy. Clause:
a. Person taking the insurance lacked
2. Killing by the Beneficiary insurable interest as required by law;
General Rule: The interest of a beneficiary in a b. Cause of the death of the insured is
life insurance policy shall be forfeited when the excepted risk;
beneficiary is the principal, accomplice, or c. Premiums have not been paid;
accessory in willfully bringing about the death of d. Conditions of the policy relating to
the insured. In such a case, the share forfeited military or naval service have been
shall pass on to the other beneficiaries, unless violated;
otherwise disqualified. In the absence of other e. The fraud is of a particularly vicious type,
wherein:
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i. The policy was taken in not been either accepted or rejected, there is no
furtherance of a scheme to contract yet as it is merely and offer or proposal
murder the insured; (Insurance, de Leon, p.176).
ii. The insured instituted another
person for the medical Delivery of the Policy
examination; and, The delivery of a policy is not, however, a
iii. The beneficiary feloniously killed prerequisite to a valid contract of insurance. The
the insured; contract may be completed prior to delivery of the
f. Beneficiary failed to furnish proof of policy or even without delivery of the policy
death or to comply with any condition depending on the intention of the parties
imposed by the policy after the loss has (Insurance, de Leon, p.180).
happened; or,
g. Action was not brought within the time
specified. 2. PREMIUM PAYMENT
Premium
B. PERFECTION OF THE INSURANCE Premium is the consideration paid to an insurer
CONTRACT for undertaking to indemnify the insured against a
specified peril.
Consensual Nature of Contract
A contract of insurance must be assented to by An insurer is entitled to payment of the premium
both parties, either in person or through their as soon as the thing insured is exposed to the
agents and so long as an application for peril insured against.
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to Effect of Non-Payment of Premium
make a contract. (Perez v. CA, G.R. No. 112329, General Rule:
2000) Non-payment of first premium - Prevents the
contract from becoming binding notwithstanding
Also, according to Enriquez v. Sun Life the acceptance of the application or the issuance
Assurance (G.R. No. L-15895, 1920): of the policy.
1. Submission of application, even with But non-payment of the balance of the premium
premium payment is a mere offer on the due does not produce the cancellation of the
part of the applicant, and does not bind contract. (Phil. Phoenix Surety & Insurance v.
the insurer; Woodworks, G.R. No. L-22684, Aug. 31, 1967).
2. An insurance contract is also not
perfected where the applicant dies before Subsequent premiums - Does not affect the
the approval of his application or it does validity of the contracts unless, by express
not appear that the acceptance of the stipulation, it is provided that the policy shall in
application ever came to the knowledge that event be suspended or shall lapse.
of the applicant;
3. An acceptance made by letter shall not Exceptions:
bind the person making the offer except a. In case of life and industrial life whenever
from the time it came to his knowledge. the grace period provision applies.
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b. Contract is voidable due to the fraud or the date of default for a time either stated
misrepresentation of insurer; or equal to the amount as the net value
c. Insurer never incurred liability; of the policy taken as a single premium,
d. The insurance is for a definite period and will purchase. In case of death of the
the insured surrenders his policy before insured within the extended term, he may
the termination thereof (pre-termination); recover the face value of the policy.
e. Contract is voidable because of the Extended insurance is sometimes called
existence of facts of which the insured "term insurance," "temporary insurance,"
was ignorant without his fault; or "paid-up extended insurance." (De
f. There is over-insurance (but only a Leon, The Insurance Code of the
ratable return of premium); and Philippines Annotated [2014])
g. rescission is granted due to the insurer’s
breach of contract. b. Paid-up Insurance
Where insurance is "paid-up," the
Payment of Interest on Refund of Premium: insured is given the right, upon default,
Sections 243 and 244 of the Insurance Code after the payment of at least three annual
explicitly provide for payment of interest when premiums (Ibid.) to have the policy
there is unjustified refusal or withholding of continued in force from the date of default
payment of claim by the insurer. Article 2209 of for the whole period of the insurance
the Civil Code likewise provides for payment of without further payment of premiums. In
interest when the debtor is in delay. However, in case of death of the insured, he may
cases where the refusal to refund insurance recover only the "paid-up" value of the
premiums is because the insurer wants to rescind policy, usually less than the "paid-up"
the contract due to concealment, the insurance premiums, under the same conditions as
company did not unreasonably deny or withhold the original policy. Technically, the term
the insurance proceeds (Sun Life v. Tan Kit, G.R. "paid-up" insurance is often referred to as
No. 183272, 2014). "reduced paid- up" insurance. (De Leon,
The Insurance Code of the Philippines
3. NON-DEFAULT OPTIONS IN LIFE Annotated [2014])
INSURANCE
c. Automatic Premium Loan
Options to a Policyholder This provision protects against the
The options available to a policyholder in case of unintentional lapse of the contract by
non-payment of premium after three full annual advancing, in the form of policy loan, the
premiums have been paid are: unpaid amount of a premium due. The
a. Received the cash surrender value automatic premium loan is advantageous
b. Apply such value as the premium for an to the policy owner because it helps to
extended insurance continue the contract and all its features
c. Apply such value as the premium for a in full force and effect.
paid-up insurance
d. Secure from such value an automatic Conditions:
premium loan before the expiration of the 1. In the event of default in premium
grace period payment, the Premium Loan provision
shall only apply if requested in writing by
Cash Surrender Value the policyholder either in the application
An amount to be paid to the insured upon or at any time before the expiration of the
surrender of the policy contract. grace period.
2. The moment there is default in premium
Alternatives to Cash Surrender Value payment and no option has been elected
a. Extended Insurance/Term Insurance either in the application or within the time
Where insurance is "extended," the specified in the policy, one of the paid-up
insured is given the right, upon default, options specified therein shall
after the payment of at least three full automatically take effect. (De Leon, The
annual premiums (see Sec. 227[f].), to Insurance Code of the Philippines
have the policy continued in force from Annotated [2014])
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4. THE POLICY the insurer and the insured, the actual value of
the property in the absence of evidence of greater
Insurance Policy or lesser value. (Dev’t Ins. Corp. v. IAC, G.R. No.
A written document issued by the insurer to the L-71360, 1986).
insured, embodying the terms and conditions of
their contract of insurance. Valued Policy
Definite valuation is agreed upon by both parties,
The policy is not necessary for the perfection of and written on the face of the policy; (ex. Marine
the contract. The Policy is only the formal written and Fire Insurances) (Section 51, Insurance
instrument evidencing the contract. It is required, Code)
however, that all policies issued or delivered must
be in the form previously approved by the Running Policy
Insurance Commission. Also called Floating, Adjustable, Blanket or
Declaration Policy; Contemplates successive
Formal Requirements of a Policy insurances and which provides that the subject of
a. In printed form which may contain blank the policy may from time to time be defined.
spaces; (Section 62, Insurance Code)
b. Any word, phrase, clause, mark, sign,
symbol, signature, number or word Void Stipulations in an Insurance Contract
necessary to complete the contract of • Stipulations for the payment of loss
insurance shall be written in the blank whether the person insured has or has
spaces provided therein. (Insurance not any interest in the property insured;
Code, Sec. 50) • The policy shall be received as proof of
such interest; or
Contents of an Insurance Policy • Policies executed by way of gaming or
a. The parties between whom the contract wagering.
is made;
b. The amount to be insured except in the Form NOT REQUIRED to Perfect a Contract of
cases of open or running policies; Insurance
c. The premium, or if the insurance is of a The policy is the formal written instrument
character where the exact premium is evidencing the contract of insurance entered into
only determinable upon the termination between the insured and the insurer. No form is
of the contract, a statement of the basis required to perfect (i.e., to give rise to rights and
and rates upon which the final premium obligations) a contract of insurance although an
is to be determined; insurer is potentially exposed to sanctions if the
d. The property or life insured; following are not complied with.
e. The interest of the insured in property
insured, if he is not the absolute owner Form of Insurance Contracts
thereof; a. No policy, certificate or contract of
f. The risks insured against; and insurance shall be issued or delivered
g. The period during which the insurance is within the Philippines unless in the form
to continue. (Section 50, Insurance previously approved by the
Code) Commissioner; and
b. No application form shall be used with,
Kinds of Policies and no rider, clause, warranty or
Open or Unvalued Policy endorsement shall be attached to,
Value of thing insured is not agreed upon, but left printed or stamped upon such policy,
to be ascertained in case of loss;(ex. Marine and certificate or contract unless the form of
Fire Insurances) . (Section 60, Insurance Code) such application, rider, clause, warranty
or endorsement has been approved by
In an open policy, the value of the property the Commissioner. (Insurance Code,
insured is not agreed upon, although the parties Sec. 232)
may agree on the maximum amount of recovery Delivery
or limit to the liability of the insurer. In case of loss, The BEST EVIDENCE that a contract has been
this amount must be considered, by agreement of entered into between the insurer and the insured
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is the DELIVERY of the policy by the insurer to Assurance Company v. Paz Khu, G.R. No.
the insured. 195176, 2016).
Requisites for Reinstatement of Lapsed Life Exception: No need to countersign if the rider
Insurance Policy or other attachment is applied for by the
a. Application shall be made within three insured or owner of the policy.
years from the date of lapse;
b. There should be a production of evidence A rider containing an “Automatic Increase
of the good health of the insured: Clause” – one that increases the coverage
c. If the rate of premium depends upon the subject to the attainment of a certain age of the
age of the Beneficiary, there should insured – is not a separate contract. It is part of
likewise be a production of evidence of the original policy which is in the nature of a
his or her good health; conditional obligation (CIR v. Lincoln Philippine
d. There should be presented such other Life Insurance Company, G.R. No. 119176,
evidence of insurability at the date of March 19, 2001).
application for reinstatement;
e. There should be no change which has NOTE: If there is inconsistency between the
taken place in such good health and policy and the rider, the rider prevails, it being a
insurability subsequent to the date of more deliberate expression of the agreement.
such application and before the policy is
reinstated; and Cover Note
f. All overdue premiums and other It is a contract for temporary insurance for a
indebtedness in respect of the policy, reasonable time until the policy or policies can be
together with interest at six per cent, written or issued by the insurer.
compounded annually, should first be Also called: Binding Receipt or Slip, Interim,
paid. (Andres v. Crown Life Insurance Temporary or Provisional Policy
Co., G.R. No. L-10874, 1958)
Rules on Cover Notes:
Insular Life’s argument was that the two-year a. Insurance companies doing business in
contestability period of the reinstated insurance the Philippines may issue cover notes to
policy had not lapsed inasmuch as the insurance bind insurance temporarily, pending the
policy was reinstated only on December 27, issuance of the policy.
1999. The Court NOTEs that the reinstatement b. A cover note shall be deemed to be a
was conditioned upon the payment of additional contract of insurance within the meaning
premium not only prospectively, that is, to cover of Section 1(1) of the Code.
the remainder of the annual period of coverage, c. No cover note shall be issued or renewed
but also retroactively, that is for the period starting unless in the form previously approved
June 22, 1999. An insurance contract is a by the Insurance Commission.
contract of adhesion which must be construed d. A cover note shall be valid and binding
liberally in favor of the insured (The Insular Life for a period not exceeding sixty (60) days
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from the date of its issuance, whether or Every corporation, partnership, or association,
not the premium therefor has been paid, duly authorized to transact insurance business as
but such cover note may be cancelled by elsewhere provided in this Code may be an
either party upon at least seven (7) days’ insurer. (Section 6, Insurance Code)
notice to the other party.
e. If a cover note is not so cancelled, a The term doing an insurance business or
policy of insurance shall, within sixty (60) transacting an insurance business, within the
days after the issuance of such cover meaning of this Code, shall include:
note, be issued in lieu thereof. Such (1) Making or proposing to make, as insurer,
policy shall include within its terms the any insurance contract;
identical insurance bond under the cover (2) Making or proposing to make, as surety,
note and the premium. any contract of suretyship as a vocation
f. Cover notes may be extended or and not as merely incidental to any other
renewed beyond such sixty (60) days legitimate business or activity of the
with the written approval of the surety;
Commissioner if he determines that such (3) Doing any kind of business, including a
extension is not contrary to and is not for reinsurance business, specifically
the purpose of violating any provisions of recognized as constituting the doing of
this Code. The Commissioner may an insurance business within the
promulgate rules and regulations meaning of this Code;
governing such extensions for the (4) Doing or proposing to do any business in
purpose of preventing such violations substance equivalent to any of the
and may by such rules and regulations foregoing in a manner designed to evade
dispense with the requirement of written the provisions of this Code.
approval by him in the case of extension
in compliance with such rules and In the application of the provisions of this Code,
regulations. (Section 52, Insurance the fact that no profit is derived from the making
Code) of insurance contracts, agreements or
g. Insurance companies may impose on transactions or that no separate or direct
cover notes a deposit premium consideration is received therefor, shall not be
equivalent to at least 25% of the deemed conclusive to show that the making
estimated premium of the intended thereof does not constitute the doing or
insurance coverage but in no case less transacting of an insurance business. (Section
than P500.00. (Ins. Cir. Letter, Jan. 17, 2(b), Insurance Code)
1980.) (De Leon, The Insurance Code of
the Philippines Annotated [2014]) Rights and Obligations of Insurer
An insurer is the party who assumes or accepts
The fact that no separate premium was paid on the risk of loss in an insurance contract. An
the cover note before the loss insured against insurer undertakes for a consideration to
occurred, does not militate against its binding indemnify the insured or to pay him a certain sum
effect as an insurance contract. By their nature, on the happening of a specified contingency or
cover notes do not contain particulars that would event.
serve as basis for the computation of the
premiums and consequently, no separate As such, an insurer has the right to receive
premiums are intended or required to be paid premiums to be paid by the insured.
therefor (Pacific Timber Export Corp. v. CA, G.R. • Notwithstanding any agreement to the
No. L-38613, 1982 contrary, no policy or contract of
insurance issued by an insurance
company is valid and binding unless and
C. RIGHTS AND OBLIGATIONS OF until the premium thereof has been paid,
PARTIES except in the case of a life or an industrial
life policy whenever the grace period
a. Insurer provision applies, or whenever under the
broker and agency agreements with duly
Meaning of Insurer
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b. Insured c. Beneficiary
Anyone except a public enemy may be insured. Any person may be designated as beneficiary in
(Section 7, Insurance Code) a life insurance contract even though he is a
stranger and has no insurable interest in the life
Public Enemy of the insured.
Public enemy is a nation at war with the
Philippines, and also every citizen or subject of Exception: Those who are forbidden by law to
such nation. Such term does not include robbers, receive donations from the insured:
thieves, and riotous mobs. a. Those made between persons who are
guilty of adultery or concubinage at the
Rights and Obligations of Insured time of the donation;
An insurer is entitled to payment of premium as b. Those made between persons found
soon as the thing insured is exposed to the peril guilty of the same criminal offense in
insured against. (Section 77, Insurance Code) consideration thereof; and
• An acknowledgment in a policy or c. Those made to a public officer or his wife,
contract of insurance or the receipt of descendants and ascendants, by reason
premium is conclusive evidence of its of his office.
payment, so far as to make the policy
binding, notwithstanding any stipulation Though the general principle stands, it is still
therein that it shall not be binding until the necessary that such designation of a beneficiary
premium is actually paid. (Section 79, be made in good faith without fraud or intent to
Insurance Code) enter into a wagering contract.
• An insurer may also contract and accept (Philippine Commercial Laws: The Insurance
payments, in addition to regular Code Vol. 1 Commentary, Hernando B. Perez)
premium, for the purpose of paying future
premiums on the policy or to increase the Rights and Obligations of Beneficiary
benefits thereof. (Section 84, Insurance A beneficiary is the one to whom the insurance is
Code) payable, or who is entitled to the proceeds of the
policy on the occurrence of the event designated.
Furthermore, since contracts of insurance are
contracts uberrimae fidei (i.e. good faith), the On the matter of consent
insurer has a right to depend on the utmost good In cases of a revocable beneficiary, the
faith of the insured regarding the nature of the risk policyowner is given the right to change
to be assumed. The doctrines of warranties, beneficiaries at any time before the insured’s
representation, and concealment are predicated death, and without the consent of the beneficiary.
upon the principle of good faith. (Philippine On the other hand, the policyowner may not
Commercial Laws: The Insurance Code Vol. 1 change an irrevocable beneficiary, nor may the
Commentary, Hernando B. Perez) insured add other beneficiaries without the
irrevocable beneficiary's consent.
On the other hand, as a matter of right, an insured a. The insured also cannot obtain a policy
is the person whose loss is the occasion for the loan or cash surrender value on the policy
without the consent of the irrevocable
beneficiary because the latter’s vested
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right extends to all benefits accruing to the or rejecting the application. (Great Pacific Life v.
policy. CA)
b. Should the insured discontinue paying
premiums, the beneficiary may continue Rights and Obligations of Agent
paying it and be entitled to automatic An agent must exercise the required degree of
extended term or paid-up insurance diligence in performing his duties so as to avoid
options. committing an act of negligence. This entails the
(Philippine Commercial Laws: The Insurance timely collection of premiums to avoid situations
Code Vol. 1 Commentary, Hernando B. Perez) of non-payment by the insured.
Furthermore, the interest of a beneficiary in a life An insurer is not liable for a loss caused by the
insurance policy shall be forfeited when the willful act or though the connivance of the insured;
beneficiary is the principal, accomplice, or but he is not exonerated by the negligence of the
accessory in willfully bringing about the death of insured, or of the insurance agents or others.
the insured. (Section 89, Insurance Code)
• In such a case, the share forfeited shall
pass on to the other beneficiaries, unless In case of industrial life insurance, the policy shall
otherwise disqualified. not lapse for non-payment of premium if such
• In the absence of other beneficiaries, the non-payment was due to the failure of the insurer
proceeds shall be paid in accordance to send its representative or agent to the insured
with the policy contract. at the residence of the insured or someplace
• If the policy contract is silent, the indicated by him for the purpose of collecting such
proceeds shall be paid to the estate of the premium.
insured. (Section 12, Insurance Code)
NOTE: However, this does not apply when the
d. Agent or Trustee premium on the policy remains unpaid for a
period of 3 months or 12 weeks after the grace
Agent or Trustee period has expired.
Insurance agents are the legal representatives of
insurers, the principals. A contract of insurance e. Partner or Co-Owner
must be assented to by both parties either in
person or by their agents. Insurance Procured by Partner
A partner has an insurable interest in the property
Insurance Procured by Agent of the partnership which will support a separate
When property is in the possession of an agent, policy for his benefit.
the principal may insure the same as owner, while
the agent who is responsible for such property When a partner takes a policy on the partnership
may likewise insure the same. property in his own name, it includes his separate
interest alone, unless the “terms of the policy
If insurance is procured by an agent and intended should be such as are applicable to the joint or
to cover interest of the principal, this fact must be common interest.”
stated in the policy.
Reason why interest of others not included: the
If the agent secures the policy in his name alone, policy procured by them shall be applied
it covers only the interest of the agent and the exclusively to the proper interest of the person in
principal has no right of action against the insurer. whose name or for whose benefit it is made
unless otherwise specified.
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f. Assignee
EXTENT OF RECOVERY
Meaning of Assignee
Cannot recover that Cannot recover that
An assignee merely acquires the rights of the
which exceeds the which (1) exceeds
insured. Thus, if the insured procured the policy
full amount of loss. the amount of credit
by fraud or misrepresentation, then the assignee
at the time of loss
of the policy cannot be entitled to the proceeds as
AND (2) exceeds the
well.
value of the property
mortgaged.
g. Mortgagor and Mortgagee
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3. Any act which, under the insurance, is to mortgagor’s interest, and the mortgagor
be performed by the mortgagee with the continues to be a party to the contract, while
same effect as if it has been performed mortgagee is simply a beneficiary of the
by the mortgagor. insurance to the extent of the unpaid
indebtedness and does not make the mortgagee
4. Upon concurrence of the loss, the a party to the contract.
mortgagee is entitled to recover to the
extent of his credit and the balance, if Open Mortgage Clause
any, is payable to the mortgagor since If an insurer assents to the transfer of an
such policy is for the benefit of both the insurance from a mortgagor to a mortgagee, and,
mortgagor and the mortgagee. at the time of his assent, imposes further
obligations on the assignee, making a new
The mortgagee is the proper party to contract with him, the acts of the mortgagor
prosecute an action for a loss sustained cannot affect the rights of said assignee. (Section
under a policy of insurance where the 9, Insurance Code)
loss was made payable to him, and such
action may be brought by the mortgagee Essentially, when the mortgagor insures the
even without including the mortgagor as property mortgaged and makes the loss payable
party. to the mortgagee, the mortgagor does not cease
to be a party to the contract and thus, any act of
5. Upon recovery by the mortgagee to the his which would avoid the policy shall have the
extent of his credit from the insurer, the same effect.
mortgagor is released from his
indebtedness. Union Mortgage Clause
A union mortgage clause, or its equivalent,
Policy Assignment to ME Not a Payment creates the relation of insured and insurer
In case the mortgagor insures the mortgaged between the mortgagee and the insurance
property and assigns the policy to the mortgagee, company independent of the contract with the
such assignment is merely to afford the mortgagor.
mortgagee a greater security for the settlement of
the mortgagor’s obligation and should not be If an insurer assents to the transfer of an
construed as payment. insurance from the mortgagor to the mortgagee,
at the time of his assent, imposes further
By such assignment, the mortgagee obligations on the assignee, making a new
indebtedness is not extinguished until such time contract with him, the act of the mortgagor cannot
as the mortgagee has collected the proceeds of affect the rights of said assignee.
the policy from the insurer after the occurrence of
the loss.
D. RESCISSION OF INSURANCE
Effect of “Mortgagee Redemption” Insurance CONTRACTS
(MRI) Procured by the Mortgagor
“Mortgagee redemption” insurance is a kind of life 1. OVERVIEW OF GENERAL
insurance procured by the mortgagor with the GROUNDS
mortgagee as beneficiary up to the extent of the
mortgage indebtedness. Primary Concerns of the Insurer
• Correct estimation of risk which enables
In case the mortgagor-insured dies, the proceeds insurer to determine if he will approve the
of such insurance will be applied to the payment policy application and if so, at what
of the mortgage debt to the mortgagee, thereby premium rate;
relieving the heirs of the mortgagor of the burden
• Delimitation of the risk;
of paying debt.
• Control of risk to guard against increase
in risk;
Where the mortgagor pays the insurance
premium under the MRI, making the loss payable • Determine if loss occurs and if so, the
amount thereof.
to the mortgagee, the insurance is still on the
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Devices of Insurer in Ascertaining and the [insured], its concealment must of itself
Controlling Risks necessarily be a fraud." When one knows a
a. Concealment material fact and conceals it, "it is difficult to see
b. Representation how the inference of a fraudulent intent or
c. Warranties intentional concealment can be avoided.” Thus, a
i. Statements or promises by the concealment, regardless of actual intent to
insured, whether expressed, defraud, "is equivalent to a false representation."
implied, affirmative or (Insular Life vs Heirs of Alvarez, G.R. No.
promissory, set forth in the policy 207526)
itself or incorporated in it by
proper reference, the untruth or Exception: When the concealment is made by
non-fulfilment of which in any the insured in relation to the falsity of a warranty,
respect, and without reference to the non-disclosure must be intentional and
whether the insurer was in fact fraudulent in order that the contract may be
prejudiced by such untruth or rescinded. (Section 29, Insurance Code)
non-fulfilment renders the policy
voidable by the insurer. Effect of Concealment
d. Conditions General Rule: Concealment, whether intentional
e. Exceptions or not, entitles the injured party to rescind a
i. Stipulations excluding certain contract of insurance (Section 27, Insurance
specified risks that otherwise Code, even if the death or loss is due to a cause
would be included under the not related to the concealed matter. (Sunlife v.
general language describing the CA, G.R. No. 105135, 1995)
risks assumed.
Exceptions:
a. Incontestability Clause (Insurance Code,
2. CONCEALMENT Secs. 48 and 233[b])
b. Concealment made after the contract has
Definition become effective;
A neglect to communicate that which a party c. Waiver or estoppel;
knows and ought to communicate (Section 26, d. In marine insurance, in situations where
Insurance Code) concealment does not vitiate the entire
contract, but merely exonerates the
Requisites of Concealment (KDNA) insurer from a loss resulting from the risk
a. A party knows the fact which he neglects concealed (Section 112, Insurance
to communicate or disclose to the other; Code).
b. Such party concealing is duty bound to
disclose such fact to the other; Instances When Concealment Made by an
c. Such party concealing makes no Agent Procuring Insurance Binds Principal
warranty of the fact concealed; and a. Where it was the duty of the agent to
d. The other party has not the means of acquire and communicate information of
ascertaining the fact concealed. the facts in question;
b. Where it was possible for the agent, in
Proof of Fraud in Concealment the exercise of reasonable diligence, to
General Rule: Fraud need not be proven in order have made the communication before
to prove concealment. the making of the insurance contract.
Good faith is not a defense. (Saturnino vs Phil. Failure on the part of the insured to disclose such
American Life Insurance, G. R. No. L-16163, facts known to his agent, or wholly due to the fault
1963) of the agent, will avoid the policy, despite the
good faith of the insured.
Proof of fraudulent intent is unnecessary for the
rescission of an insurance contract on account of
concealment. It is because in insurance
contracts, concealing material facts is inherently
fraudulent: "if a material fact is actually known to
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However, in a marine insurance, information of The Insurance Code dispenses with proof of
the belief or expectation of a third person, in fraudulent intent in cases of rescission due to
reference to a material fact, is material. (Section concealment, but not so in cases of rescission
110, Insurance Code) due to false representations. Concealment of
material facts is fraudulent in and of itself. (The
Adoption of Misrepresentation Insular Life Assurance Co., Ltd. v. Heirs of
An insured who signed the pension plan Alvarez, G.R. Nos. 207526 & 210156, 2018)
application, adopted as his own the written
representations and declarations embodied in it
(Ma. Lourdes S. Florendo vs. Philam Plans, Inc., 4. BREACH OF WARRANTY
Perla Abcede, et al., G.R. No. 186983, 2012).
Definition
Effect of Misrepresentation A statement or promise set forth in the policy or
If there is misrepresentation, the injured party is by reference incorporated therein, the untruth or
entitled to rescind from the time when the nonfulfillment of which in any respect, and without
representation becomes false. (Section 45, reference to whether insurer was in fact
Insurance Code) prejudiced by such untruth or non-fulfillment,
renders the policy VOIDABLE by the insurer.
Test of Materiality
The injured party can rescind the contract: Kinds
a. When the representation fails to 1. Express – An agreement contained in
correspond with the facts (Insurance the policy or clearly incorporated therein
Code, Sec. 44); and as part thereof whereby the insured
b. When it is false in a material point stipulates that certain facts relating to the
(Insurance Code, Sec. 45) risk are or shall be true or certain acts
relating to the same subjects have been
NOTE: The materiality of a representation is or shall be done.
determined by the same rules as the materiality 2. Implied – Warranties that are deemed
of concealment. (Section 46, Insurance Code) included in the contract, although not
expressly mentioned. They are found
Concealment vs Misrepresentation usually in marine insurance.
3. Affirmative – Asserts the existence of a
CONCEALMENT MISREPRESENTATION fact or condition at the time it is made;
4. Promissory – The insured stipulates that
The insured The insured makes certain facts or conditions shall exist or
withholds information erroneous thin shall be done or omitted.
of material facts from statements of facts
the insurer. with the intent of Warranty v. Representations
inducing the insurer
to enter into the WARRANTY REPRESENTATION
insurance contract.
Part of the contract. Collateral
Passive form of the Active form of the inducement.
act. act.
Written on the policy Need not be written.
Usually occurs prior May be made at the or in a valid rider or
to making of the time of the attachment. (except
insurance contract. insurance of the for implied
contract. warranties)
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Other Insurance Clause – This is a clause in the Defenses Not Barred by the Incontestability
policy that provides that the policy shall be void if Clause
the insured procures additional insurance without a. Person taking the insurance lacked
the consent of the insurer. The purpose is to insurable interest as required by law;
prevent over-insurance and thus to avert the b. Cause of the death of the insured is
possibility of a perpetration of fraud. It is a excepted risk;
warranty that entitles the insurer to rescind in c. Premiums have not been paid;
case of breach. d. Conditions of the policy relating to
military or naval service have been
The “other insurance clause” may be subject to violated;
waiver but the waiver must either be express or if e. The fraud is of a particularly vicious type,
it is to be implied from conduct mainly, said wherein:
conduct must be clearly indicative of a clear intent i. The policy was taken in
to waive such right. There must be clear showing furtherance of a scheme to
that the insurer knew about the violation of the murder the insured;
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ii. The insured instituted another Requisites for Cancellation by Insurer (Other
person for the medical Than Life Insurance Contracts)
examination; and, a. Prior notice of cancellation to insured;
iii. The beneficiary feloniously killed b. Notice must be based on the occurrence
the insured; after effective date of the policy of one or
f. Beneficiary failed to furnish proof of more of the grounds mentioned;
death or to comply with any condition c. Notice must be in writing, mailed or
imposed by the policy after the loss has delivered to the insured at the address
happened; or, shown in the policy; and
g. Action was not brought within the time d. Notice must state the grounds relied
specified. upon and upon request of insured, to
furnish facts on which cancellation is
Insurer is Liable if: based.
a. Loss, the proximate cause of which is the
peril insured against; Prior Notice is required to prevent the
b. Loss, the immediate cause of which is the cancellation of the policy, without allowing the
peril insured against except where insured ample opportunity to negotiate for other
proximate cause is an excepted peril; insurance in its stead for his own protection
c. Loss through the negligence of insured (Saura Import & Export v. Phil. International
except where there was gross Surety, G.R. No. L-15184, 1963).
negligence amount to willful act; and
d. Loss caused by efforts to rescue the thing b. Notice
from peril insured against – if during the
course of rescue, the thing is exposed to When Insurer is Liable for Loss
a peril not insured against, which a. Unless otherwise provided by the policy,
permanently deprives the insured of its an insurer is liable for a loss of which a
possession, in whole or in part. peril insured against was the proximate
cause, although a peril not contemplated
Insurer is Not Liable if: by the contract may have been a remote
a. Loss by insured’s willful act or gross cause of the loss (Insurance Code, Sec.
negligence; 86)
b. Loss due to connivance of the insured; b. The thing insured is rescued from a peril
c. Loss where the excepted peril is the insured against that would otherwise
proximate cause. have caused a loss, if, in the course of
such rescue, the thing is exposed to a
peril not insured against, which
6. CANCELLATION OF NON-LIFE permanently deprives the insured of its
INSURANCE possession, in whole or in part; or where
a loss is caused by efforts to rescue the
a. Grounds for Cancellation of a thing insured from a peril insured against
(Insurance Code, Sec. 87)
Non-Life Policy by the Insurer: c. The proximate cause of which is the peril
insured against
1. Non-payment of premium; d. Immediate cause of which is the peril
2. Conviction of a crime out of acts insured against except where proximate
increasing the hazard insured against; cause is an excepted peril;
3. Fraud or material misrepresentation; e. Loss through the negligence of insured
4. Willful or reckless acts or omissions except where there was gross
increasing the risk insured against; negligence amount to willful act; and
5. Physical changes in the property insured f. Loss caused by efforts to rescue the thing
making it uninsurable; and from peril insured against – if during the
6. Determination by the Insurance course of rescue, the thing is exposed to
Commissioner that the policy would a peril not insured against, which
violate the Insurance Code. (Sec. 64, permanently deprives the insured of its
Insurance Code) possession, in whole or in part.
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When Insurer is Not Liable for Loss NOTE: A notice of claim under Compulsory Motor
a. Loss of which the peril insured against Vehicle Insurance must be filed within 6 months
was only a remote cause. (Insurance from the date of the accident.
Code, Sec. 86)
b. Loss caused by the willful act or through Periods For The Filing Of Actions
the connivance of the insured; but he is A condition, stipulation, or agreement in any
not exonerated by the negligence of the policy of insurance, limiting the time for
insured, or of the insurance agents or commencing an action thereunder to a period of
others (Insurance Code, Sec. 89) less than one (1) year from the time when the
c. Loss by insured’s willful act or gross cause of action accrues, is void. (Section 63,
negligence; Insurance Code)
d. Loss due to connivance of the insured;
e. Loss where the excepted peril is the Any person having any claim upon the policy
proximate cause. issued pursuant to Compulsory Motor Vehicle
Liability Insurance shall, without any unnecessary
Mandatory Requirement of Notice of Loss and delay, present to the insurance company
Proof of Loss concerned a written notice of claim setting forth
The requirement of the notice of loss and the nature, extent and duration of the injuries
obligation to file a proof of loss are conditions with sustained as certified by a duly licensed
which the insured MUST comply before there is physician.
any liability on the part of the insurer. a. Notice of claim must be filed within six (6)
months from the date of accident,
When to Give Notice of Loss otherwise, the claim shall be deemed
Without unnecessary delay or within a waived.
reasonable time. b. Action or suit for recovery of damage due
to loss or injury must be brought, in
A requirement of the policy that notice of loss be proper cases, with the Commissioner or
given immediately or forthwith requires the giving the courts within one (1) year from denial
of notice within a reasonable time. (Bachrach v. of the claim, otherwise, the claimant’s
Britain Am. Assur. Co., G.R. No. L-5715, 1910) right of action shall prescribe.
(Section 397, Insurance Code)
Form of Notice or Proof of Loss
In case of loss upon fire insurance, the law Payment Of Proceeds
requires written notice. (Section 90, Insurance Life Insurance
Code) The proceeds shall be paid immediately upon the
For other kinds of insurance, absent any maturity of the policy (survival benefits) if there is
stipulation in the policy, notice or proof may be such a maturity date.
given orally or in writing. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
When Defects in Notice of Loss are Waived claim and filing of the proof of the death of the
All defects in a notice of loss, or in preliminary insured.
proof thereof, which the insured might remedy,
and which the insurer omits to specify to him, Property Insurance
without unnecessary delay, as grounds of Proceeds shall be paid within thirty (30) days after
objection, are waived. (Section 92, Insurance proof of loss is received by the insurer and
Code) ascertainment of the loss or damage is made
either by agreement or by arbitration.
When Delay in the Presentation of Notice or If no ascertainment is made within 60 days after
Proof of Loss is Deemed Waived receipt of proof of loss, the loss shall be paid
Delay in the presentation to an insurer of notice within 90 days.
or proof of loss is waived if caused by any act of
him, or if he omits to take objection promptly and
specifically upon that ground. (Section 93,
Insurance Code)
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c. Renewal
-- end of topic --
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1. CONCEPT
Carriage of Passengers
Carrier
Party who binds himself to transport persons,
goods, or both. It may be a common carrier or a
private carrier.
Passenger
One who travels in a public conveyance by virtue of
an express or implied contract with the common
carrier, paying fare or what is the equivalent thereof
(Jesusa Vda. de Nueca v. Manila Railroad
Company, G.R. No. 31731-R, 1968)
Carriage of Goods
Shipper
Person who delivers the goods to the carrier for
transportation and pays the consideration, or on
whose behalf the payment is made
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and one who does such carrying of goods only merely arranging for their transportation, it
as an ancillary activity. (A.F. Sanchez Brokerage becomes liable as a common carrier for loss or
Inc. v. CA, 488 Phil. 430) damage to goods. (Unsworth Transport v. CA,
• The Civil Code does not distinguish between a G.R. No. 166250, 2010)
person or enterprise offering transportation
services on a regular or scheduled basis and one Person, Partnership, Firm or Corporation NOT
offering such service on an unscheduled basis. as a Common Carrier
(De Guzman v. CA, 250 Phil. 613) • A travel agency is NOT a common carrier. Its
• The Civil Code does not distinguish between a covenant with its customers is simply to make
carrier offering its services to the general travel arrangements in their behalf. The
population and one who offers its services only relationship between the travel agency and the
from a narrow segment of the general population passenger is, at most, one of agency
(Id.) (Crisostomo v. CA, G.R. No. 138334, 2003)
• The Civil Code makes no distinction as to the • An exclusive contractor and hauler, rendering or
means of transportation as long as it is done offering its services to an individual or entity
through land, water, or air. (First Philippine (FGU Insurance v. G.P. Sarmiento Trucking,
Industrial Corporation v. CA, 360 Phil. 852) G.R. No. 141910, 2002)
• A carrier will be considered a common carrier
regardless of whether it owns the vehicle it used 3. DILIGENCE REQUIRED
or has to actually hire one as long as the entity
holds itself out to the public for transport of goods Extraordinary Diligence or Responsibility of
as a business. (Torres-Madrid Brokerage, Inc. v. Common Carriers Regarding Passengers and
FEB Mitsui Marine Insurance Co., 789 Phil. 413) Goods
Common carriers are required to exercise
Certificate of Public Convenience extraordinary diligence both over the goods and
It is not a requisite to incur liability under the Civil over the safety of the passengers they are
Code provisions governing common carriers. (De transporting, according to all the circumstances of
Guzman v. CA, 250 Phil. 613) each case. (Civil Code, Art. 1733)
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• Heavy seas and rains are not Caso Fortuito, but d. The character of the goods or
normal occurrences that an ocean-going vessel defects in the packing or in the
would encounter (Id.) containers.
• Mechanical defects are not force majeure if the
same were discoverable by regular and
Conditions to Avail of Defense:
adequate inspections (Necesito v. Paras, G.R.
(a) Exercise of due diligence to forestall or
No. L-10605, 1958)
• A tire blow-out is not considered a fortuitous prevent loss
event, as there are human factors involved in the (b) Immediate protest by the carrier if the
situation (Yobido v. CA, G.R. No. 113003, 1997) problem with the goods or the packing or
• Hijacking is not an exempting cause under Art. containers is visible; otherwise, carrier may
1734. However, common carriers are not held be in estoppel
liable for the acts or events which cannot be
foreseen or are inevitable, provided that they This particular exempting cause only refers to cases
exercised extraordinary diligence (De Guzman when goods are lost or damaged while in transit as
v. CA, G.R. No. L-47822, 1988) a result of:
• If the common carrier negligently incurs in delay (a) Natural decay of perishable goods;
in transporting the goods, a natural disaster shall (b) Fermentation or evaporation of substances
not free such carrier from responsibility. (Civil liable therefor;
Code, Art. 1740) (c) Necessary and natural wear and tear of
• This defense cannot be availed of when the goods in transport;
carrier is negligent. (d) Defects in the packages; or
(e) Natural propensities of animals. (Belgian
b. Act of the public enemy in war,
Overseas Chartering and Shipping N.V. v.
whether international or civil.
Philippine First Insurance Co., Inc., 432
Phil. 567)
Conditions to Avail of Defense
(a) Act was the proximate & only cause
If the improper packaging is known to the carrier or
(b) Exercise of diligence to prevent or minimize his/her/its employees or the improper packaging is
loss before, during and after the act apparent under ordinary observation but
(c) No delay (Civil Code, Art. 1740) nevertheless accepts it without protest, Art. 1734,
paragraph 4 will not relieve the carrier from any
c. Act or omission of the shipper liability (Calvo v. UCPB General Insurance Co., Inc.,
or owner of the goods. 429 Phil. 244)
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Order or act of Said public authority had the Declaration of Passenger of Contents of a
competent public power to issue the order Package which Injured Other Passengers
The carrier is not liable. It exercised extraordinary
authority
The order or act of the diligence. It is to be presumed that a passenger will
competent public authority not take with him anything dangerous to the life and
needs to be a legal or lawful limbs of his co-passengers, not to speak of his own.
order or act. It cannot be Not to be considered lightly is the right to privacy to
illegal nor unlawful. which each passenger is entitled. (Nocum v. Laguna
(Ganzon v CA) Tayabas Bus Co., G.R. No. L-23733, 1969)
Liability for Baggage of Passengers NOTE: The Supreme Court ruled in Fortune
Distinctions between Hand-Carried Baggage and Express v. CA (G.R. No. 119756, 1999) that: “Under
Checked-In Baggage the circumstances, simple precautionary measures
HAND-CARRIED CHECK-IN to protect the safety of passengers, such as frisking
passengers and inspecting their baggages,
LEGAL NATURE OF BAGGAGE preferably with non-intrusive gadgets such as metal
For hand-carried baggage, The checked-in detectors, before allowing them on board could have
the responsibility of the baggage is been employed without violating the passenger’s
carrier will be governed by considered constitutional rights. In Gacal v. Philippine Air Lines,
the Civil Code provisions on “goods” and the Inc., a common carrier can be liable for failing to
hotelkeepers and passenger is prevent a hijacking by frisking passengers and
innkeepers. Hand-carried considered the inspecting their baggages.”
baggage are considered shipper/consignee.
items of necessary deposit. Requisites for Common Carrier’s Liability for
Common carriers shall be Hand-Carried Baggage (Necessary Deposit)
treated as depositaries. (a) Notice was given to the common carrier, or
IN CUSTODY OF to their employees, of the baggage brought
Passenger Carrier by the passengers; and
(b) Passenger took precautions which the
APPLICABLE RULE common carrier advised relative to the care
Civil Code, Arts. 1998, 2000- Civil Code, Arts. and vigilance of their baggage (Civil Code,
2003 1733-1753 Art. 1998)
DILIGENCE BY COMMON CARRIER
Diligence of a depositary Extraordinary
(ordinary diligence) diligence
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Instances When Common Carrier is Not • One who rides any part of the vehicle which is
Responsible for the Loss and Injury to unsuitable or dangerous or which he knows is
Passengers’ Hand-Carried Baggage not designed or intended for passengers
(a) Those which may proceed from any Force
Majeure (Civil Code, Art. 2000) Presumption of Negligence
(b) Loss due to the act of passenger or his If the passenger is injured or killed, there is a
agents or if the loss arises from the presumption of negligence against a carrier. (Civil
character of the things (Civil Code, Art. Code, Art. 1756)
2000); and
It is presumed that a person driving a motor vehicle
(c) Acts of thief or robber, done with the use of
has been negligent if at the time of the mishap, he
arms or through irresistible force (Civil was violating a traffic regulation, unless there is
Code, Art. 2001) proof to the contrary. (Sps. Estrada v. Philippine
Rabbit, G.R. 203902, 2017)
The relationship between the consignee and the
arrastre operator is bailor-bailee or depositor- Presumption of negligence applies so long as:
depositary. An arrastre operator does not render • A contract exists between the passenger and the
any service of a maritime nature. (Unknown Owner common carrier; and
of MV China vs. Asian Terminals, G.R. No 195661, • The injury or death took place during the
2015) existence of the contract (Sulpicio Lines, Inc. v.
Sesante, G.R. No. 172682)
Thus, an arrastre operator should adhere to the
same degree of diligence as that legally expected of Defenses Available to Common Carrier:
a warehouseman or a common carrier as set forth (a) Fortuitous event
in Warehouse Receipts Act and Article 1733 of the
(b) Extraordinary diligence
Civil Code. As custodian of the shipment discharged
from the vessel, the arrastre operator must take (c) Passenger is the proximate cause of death
good care of the same and turn it over to the party or injury
entitled to its possession. (Marina Port Service, Inc. (d) Employees could not have prevented by
v. American Home Assurance Corporation, G.R. ordinary diligence the willful act or
201822, 2015) negligence of other passengers or strangers
(which caused the death)
(e) If the contract of carriage is gratuitous and
2. SAFETY OF PASSENGERS there is no willful act or negligence on the
part of the carrier, a stipulation limiting
Passenger
liability is valid
One who travels in a public conveyance by virtue of
an express or implied contract with the common
carrier paying fare or what is equivalent thereof. a. Liability for Acts of Others
(Jesusa Vda. De Nueca v. Manila Railroad
Company, G.R. No. 31731-R, 1968) Employees
Common carriers are liable even if the employees
The following are NOT passengers may have acted beyond the scope of their authority
or in violation of the orders of the common carrier.
• One who has not yet boarded any part of a
vehicle regardless of whether or not he has a
ticket; NOTE: If the cause of action alleged by the plaintiff
passenger in the complaint is based on culpa
• One who remains on a carrier for an
contractual or breach of contract, the defendant
unreasonable length of time after he has been
carrier may not use the defense of diligence in the
afforded every safe opportunity to alight;
selection or supervision of employees. However, if
• One who has boarded by fraud, stealth, or
the cause of action alleged by the plaintiff passenger
deceit;
in the complaint is based on culpa aquiliana or
• One who attempts to board a moving vehicle, quasi-delict, the defendant carrier may use the
although he has a ticket, unless he attempt be defense of diligence in the selection or supervision
with the knowledge and consent of the carrier; of employees.
• One who has boarded a wrong vehicle, has been
properly informed of such fact, and on alighting, The driver and the owner of the vehicle, regardless
is injured by the carrier; or of relationship, are solidarily liable to the injuries
caused to a victim of an accident involving the
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vehicle owner and driven by 2 different persons. In order to prove the exercise of extraordinary
(Dela Cruz v. Octaviano, G.R. 219649, 2017) diligence, the carrier must do more than merely
showing the possibility that some other party could
Passengers be responsible for the damage. (Calvo v. UCPB
Common Carriers are liable if its employees could General Insurance, Co., Inc., 429 Phil. 244)
have prevented by ordinary diligence the willful act
or negligence of other passengers or strangers. 2. DUE DILIGENCE IN THE SELECTION
AND SUPERVISION OF
b. Liability for delays in the EMPLOYEES
commencement of voyage
The defense of the exercise of all the diligence of a
If the departure of a vessel is delayed, the good father in the selection and supervision of their
passengers have the right to: employees is appropriate only in quasi-delict or
(a) Remain on board; and culpa aquiliana. Such defense is not available in
(b) Be furnished with food for the account of the culpa contractual and therefore, a common carrier
vessel. (Code of Commerce, Art. 698) cannot raise such defense in action brought by its
passengers based on contract.
These rights will not be present if the delay is due to
an accidental cause or force majeure. (Code of The driver and the owner of the vehicle, regardless
Commerce, Art. 698) of relationship, are solidarily liable to the injuries
caused to a victim of an accident involving the
If the delay exceeds ten days, the passengers are vehicle owner and driven by 2 different persons.
entitled to: (Dela Cruz v. Octaviano, G.R. 219649, 2017)
(a) The return of the passage, should the
passengers request it; and 3. FORTUITOUS EVENT
(b) Demand indemnity for losses and damages,
if the delay is caused exclusively by the Conditions To Avail of Defense
captain or agent. (Code of Commerce, Art. (a) Natural disaster was the proximate & only
698) cause
(b) Exercise of diligence to prevent or minimize
c. Liability for defects in loss before, during and after the occurrence
equipment and facilities of the natural disaster
(c) No delay (Civil Code, Art. 1740)
The carrier will be liable for the accident if the cause
of the accident is a mechanical defect of the Requisites for Caso Fortuito Which Would
conveyance or the fault of the equipment which was Exempt the Carrier from Liability
easily discoverable if the vehicle had been (a) The event must be independent of human will
subjected to more thorough or rigid inspections. (La (b) The occurrence must render it impossible for
Mallorca v. De Jesus, 123 Phil. 857) the debtor to fulfill the obligation in a normal
manner
(c) The obligor must be free of participation in, or
C. DEFENSES AVAILABLE TO A
aggravation of, the injury to the creditor, and
COMMON CARRIER (d) The event must have been impossible to
foresee, or if it could be foreseen, must have
1. PROOF OF NEGLIGENCE
been impossible to avoid.
Common carriers are presumed to be or negligent if
the goods transported by them are lost, destroyed,
4. CONTRIBUTORY NEGLIGENCE
or deteriorated. This also applies to deaths and
injuries caused to passengers. (Civil Code, Art. General Rule: If the shipper/owner contributed to
1735 & Art. 1756) the loss, destruction, or deterioration of the goods
caused proximately by the common carrier, the
To overcome this presumption, the common carrier carrier’s liability shall be equitably reduced. (Civil
must prove that he exercised extraordinary diligence Code, Art. 1741)
in transporting the goods and/or passengers.
Exception: In collision cases (moving object strikes
another moving object) and allision cases (moving
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object strikes a stationary object). In such cases, the Rule on Moral Damages
parties are liable for their own damage. General Rule: Moral damages are not recoverable
in actions for damages predicated on a breach of
5. DOCTRINE OF LAST CLEAR contract of carriage.
CHANCE
Exceptions: Moral Damages may be awarded in a
That the person who has the last fair chance to breach of contract caused by the common carrier
avoid the impending harm and fails to do so is where:
chargeable with the consequences, without • There is death of a passenger (Civil Code, Art.
reference to the prior negligence of the other party. 1764)
(Picart v. Smith, G.R. No. L-12219, 1918) • In breach of contract of carriage, there must be
fraud, bad faith, or death (Sps. Estrada v.
The doctrine of last clear chance states that where Philippine Rabbit Bus Lines, G.R. No. 203902,
both parties are negligent but the negligent act of 2017)
one is appreciably later than that of the other, or • The carrier was guilty of fraud or bad faith even
where it is impossible to determine whose fault or if there is no death. Only injured passengers are
negligence caused the loss, the one who had the entitled to moral damages due to injuries In case
last clear opportunity to avoid the loss but failed to of death, only compulsory heirs are entitled to
do so is chargeable with the loss. (Lapanday claim moral damages. (Sulpicio Lines, Inc. v.
Agricultural and Development Corporation v. Curso, G.R. No. 157009)
Angala, G.R. No. 153076, 2007)
NOTE: Attorney’s Fees are considered as actual
The rule is that the antecedent negligence of a damages. There are two kinds of attorney’s fees –
person does not preclude recovery of damages one for the client and one for the attorney. In
caused by the supervening negligence of the latter, transportation law, what is relevant is attorney’s fees
who had the last fair chance to prevent the for the client and not for the attorney.
impending harm by the exercise of due diligence.
(PNR v. Vizcara, G.R. No. 190022, 2012) MARITIME TRANSPORTATION
I. Maritime Contracts (Bills of Lading and Charter
NOTE: Last Clear Chance Doctrine does not apply Parties)
in maritime law. Neither does the concept of
contributory negligence. (Reason: Code of Bill of Lading
Commerce provides for specific rules on allocation A written acknowledgment of the receipt of the
of liabilities – see Art. 827) goods and an agreement to transport and deliver
them at a specified place to a person named or on
his/her order. It is signed by the captain and shipper,
D. EXTENT OF LIABILITY and furnished to the consignee (Saludo v. CA, G.R.
No. 95536)
1. RECOVERABLE DAMAGES
NOTE: It is not indispensable to the creation of a
Common Carriers and Civil Code contract of carriage. The contract itself arises from
Damages can be awarded in cases of injuries the moment the goods are delivered by the shipper
suffered by or deaths of passengers in accordance to the carrier and the carrier agrees to carry them.
with the provisions of the Civil Code on Damages.
(Civil Code, Art. 1764) Contents
(a) The name, registry, and tonnage of the
Kinds of Damages vessel;
(a) Actual or Compensatory Damages (b) The name of the captain and the captain’s
(b) Moral Damages domicile;
(c) Exemplary Damages (c) The port of loading and unloading;
(d) Nominal Damages (d) The name of the shipper;
(e) Temperate Damages (e) The name of the consignee, if the bill of
(f) Liquidated Damages lading is issued to order;
(f) The quantity, quality, number of packages,
and marks of the merchandise; and
(g) The freight and the primage stipulated
(Code of Commerce, Art. 706)
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This obligation will not apply if the goods suffered CAN BE Claims should be filed upon
damage or impairment: ASCERTAINED the receipt of the package;
Due to accidents; A.
Due to force majeure; or CANNOT BE Claims should be filed within
By virtue of the nature or defect of the goods ASCERTAINED twenty-four (24) hours
(Code of Commerce, Art. 363 & Code of following the receipt of the
Commerce, Art. 361) goods.
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(b) Captain or Master — the person in charge of the (d) Expenses for repairs on the vessel before its loss
vessel and navigates it. The captain also acts as (Luzon Stevedoring v CA, G.R. No. L-58897,
the general agent of the ship owner. 1987)
(c) Other officers of the vessel (i.e. sailing mate,
second mate, third mate, marine engineer) Who Can Exercise the Right of Abandonment
(d) Supercargo — the person specially employed by General Rule: Only the ship owner and the ship
the owner of cargo to take charge of and sell to agent can make an abandonment.
the best advantage merchandise which has
Exception: In cases of co-ownership of a vessel, a
been shipped, and to purchase returning
co-owner may exempt himself from liability by the
cargoes and to receive freight abandonment of the part of the vessel belonging to
him.
Basic Functions of a Captain
A master or captain, for purposes of maritime Abandonment may be done to avoid liability in
commerce, is one who has command of a vessel. A the following cases:
captain commonly performs three (3) distinct roles: (a) For civil liability to third persons arising from the
(a) he is a general agent of the shipowner; conduct of the captain in the vigilance over the
(b) he is also commander and technical director of goods which the vessel carried;
the vessel; and (b) For the proportionate contribution of co-owners
(c) he is a representative of the country under of the vessel to a common fund for the results of
whose flag he navigates. (Inter-Orient Maritime the acts of the captain referred to in Art. 587 of
Enterprises, Inc. vs NLRC, G.R. No. 115286, the Code of Commerce; and
1994). (c) For the civil liability incurred by the ship owner in
case of collision.
Liability for acts of captain
The ship owner and ship agent shall be civilly liable Exemption of Agent
for the: The ship agent shall also be civilly liable for the
(a) Acts of the captain; and indemnities in favor of third persons which arose
(b) The obligations contracted by the captain to from the conduct of the captain in the care of the
repair, equip, and provision the vessel, provided goods. However, the agent may exempt himself
the creditor proves that the amount claimed was from this liability by abandoning the vessel with all
invested therein. (Code of Commerce, Art. 586) her equipment and the freight he may have earned
during the voyage. (Code of Commerce, Art. 587)
When Ship Owner/Ship Agent is NOT Liable
The ship owner and ship agent shall NOT be liable IV. Maritime Accidents – General Average,
for obligations contracted by the captain which Arrivals under Stress, Collisions, Shipwreck and
exceeds the powers and privileges granted to the Salvage
latter. However, the owner and agent will be again
liable if the amounts claimed were used for the Averages
benefit of the vessel. (Code of Commerce, Art. 588) 1. All extraordinary or accidental expenses which
may be incurred during the navigation for the
III. Limited Liability Rule preservation of the vessel or cargo, or both; or
General Rule: The liability of the ship owner is 2. All damage or deterioration the vessel may suffer
limited to the value of the vessel, its equipment, and from the time she puts to sea from the port of
freight. The rule is “no vessel, no liability.” (Code of departure until she casts anchor in the port of
Commerce, Art. 837) destination, and those suffered by the
merchandise from the time it is loaded in the port
Exceptions: of shipment until it is unloaded in the port of
(a) The injury or death is due either to the fault of the consignment. (Code of Commerce, Art. 806)
shipowner or to the concurring negligence of the
shipowner and captain Averages shall either be:
(b) The vessel is insured 1. Simple or Particular Average – The expenses
and damages caused to the vessel or to her
(c) Workmen’s Compensation Cases (Chua Yek
cargo which have not redounded to the benefit
Hong v. Intermediate Appellate Court, 248 Phil. of all persons interested in the vessel and her
422) cargo. (Code of Commerce, Art. 809)
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This shall be borne by the owner of the goods which (a) the lack of provisions
gave rise to the expense or suffered the damage. (b) well-founded fear of seizure, privateers or pirates
(Code of Commerce, Art. 810) (c) by reason of any accident of the sea disabling
her to navigate
2. General or Gross Average – The expenses and
damages which are deliberately caused in order The captain shall assemble the officers and shall
to save the vessel, her cargo, or both at the same call the persons interested in the cargo who may be
time, from a real known risk. (Code of present, and who may attend the meeting without
Commerce, Art. 811) the right to vote; and if, after examining the
circumstances of the case, the reasons should be
This shall be borne by all persons having an interest considered well founded
in the vessel and cargo at the time of the occurrence (a) it shall be decided to make the nearest and most
of the average. (Code of Commerce, Art. 812)
convenient port
To incur the expenses and cause of damages as (b) drafting and entering in the logbook the proper
general/gross average, there must be: minutes, which shall be signed by all.
(a) A resolution of the captain, adopted after
deliberation with the sailing mate and other The captain shall have the deciding vote and the
officers of the vessel; and persons interested in the cargo may make the
(b) A hearing with the persons interested in the objections and protests they may deem proper,
which shall be entered in the minutes in order that
cargo who may be present. (Code of
they may make use thereof in the manner they may
Commerce, Art. 813) consider advisable. (Code of Commerce, Art. 819)
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salvaged vessel for its interest or rights with with part of the crew, in which case, the captain shall
share the remuneration appear before the nearest authority and make a
pursuant to the sworn statement of the facts.
contract. Only the
owner of the tugboat Salvage - it is the compensation allowed to persons
will receive by whose voluntary assistance a ship at sea or her
compensation in cargo or both have been saved in whole or in part
towage. from an impending peril, or such property recovered
Salvor takes Tower has no from actual peril or loss.
possession and may possessory lien; only
retain possession until an action for recovery In case of shipwreck, derelict, or recapture; a
he is paid of sum of money. service which one person renders to the owner of a
Court has power to Court has no power to ship or goods by his own labor, preserving the
reduce the amount of change amount in goods or ship which the owner or those entrusted
remuneration if towage even if with the care of them either abandoned in distress
unconscionable unconscionable at sea or are unable to protect and secure.
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(c) To and from Philippine ports In such instances, the Civil Code rules on
(d) In foreign trade prescription shall apply.
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action against the the accident or the resulted from its fault or that of its servants or
last carrier delay occurred agents.
3. Further, each may Exception: (d) If the carrier admits the loss of the checked
take action against By express agreement, baggage, or if the checked baggage has not
the carrier which the first carrier has arrived at the expiration of twenty-one days after
performed the assumed liability for
the date on which it ought to have arrived, the
carriage during the whole journey.
passenger is entitled to enforce against the
which the
destruction, loss, carrier the rights which flow from the contract of
damage or delay carriage.
took place.
These carriers will be Damage to Cargo (Article 18)
jointly and severally General Rule: The carrier is liable for damage
liable to the passenger sustained in the event of the destruction or loss of,
or to the consignor or or damage to, cargo upon condition only that the
consignee. event which caused the damage so sustained took
place during the carriage by air.
Combined Carriage
In the case of combined carriage performed partly Exception: Not liable if and to the extent it proves
by air and partly by any other mode of carriage, the that the destruction, or loss of, or damage to, the
provisions of this Convention shall, subject to cargo resulted from one or more of the following:
paragraph 4 of Article 18, apply only to the carriage (a) inherent defect, quality or vice of that cargo;
by air, provided that the carriage by air falls within (b) defective packing of that cargo performed
the terms of Article 1. (Article 38) by a person other than the carrier or its
servants or agents;
Prima facie evidence (c) an act of war or an armed conflict;
The air waybill or the cargo receipt is prima facie (d) an act of public authority carried out in
evidence of the conclusion of the contract, of the connection with the entry, exit or transit of
acceptance of the cargo and of the conditions of
the cargo.
carriage mentioned therein. (Article 11, par 1)
Carriage by air
Damage to Baggage (Article 17) Period during which the cargo is in the charge of the
Baggage carrier.
Baggage means both checked baggage and
unchecked baggage. (Article 17, par 4) NOTE: The period of the carriage by air does not
extend to any carriage by land, by sea or by inland
Liabilities of carrier: waterway performed outside an airport. If, however,
(a) Liable for damage sustained in case of death or such carriage takes place in the performance of a
bodily injury of a passenger upon condition only contract for carriage by air, for the purpose of
that the accident which caused the death or loading, delivery or transshipment, any damage is
presumed, subject to proof to the contrary, to have
injury took place on board the aircraft or in the
been the result of an event which took place during
course of any of the operations of embarking or the carriage by air. If a carrier, without the consent
disembarking. of the consignor, substitutes carriage by another
(b) Liable for damage sustained in case of mode of transport for the whole or part of a carriage
destruction or loss of, or of damage to, checked intended by the agreement between the parties to
baggage upon condition only that the event be carriage by air, such carriage by another mode
which caused the destruction, loss or damage of transport is deemed to be within the period of
took place on board the aircraft or during any carriage by air.
period within which the checked baggage was in
the charge of the carrier. However, the carrier is Delay (Article 19)
General Rule: The carrier is liable for damage
not liable if and to the extent that the damage
occasioned by delay in the carriage by air of
resulted from the inherent defect, quality, or vice passengers, baggage, or cargo.
of the baggage. Exception: If it proves that it and its servants and
(c) In the case of unchecked baggage, including agents took all measures that could reasonably be
personal items, the carrier is liable if the damage required to avoid the damage or that it was
impossible for it or them to take such measures.
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Defenses Available to Carrier (Article 20) Exception: The passenger has made, at the time
If the carrier proves the following, the carrier shall be when the checked baggage was handed over to the
wholly or partly exonerated from its liability to the carrier, a special declaration of interest in delivery at
extent of damage contributed: destination and has paid a supplementary sum if the
If the carrier proves that the damage was caused or case so requires. In that case the carrier will be
contributed to by the negligence or other wrongful liable to pay a sum not exceeding the declared sum,
act or omission of the person claiming unless it proves that the sum is greater than the
compensation, or the person from whom he or she passenger’s actual interest in delivery at destination.
derives his or her rights
When by reason of death or injury of a passenger (c) In the carriage of cargo, the liability of the
compensation is claimed by a person other than the carrier in the case of destruction, loss,
passenger damage or delay
(b) In the carriage of baggage, in case of Additional compensation (Article 22, par 6)
destruction, loss, damage or delay The limits prescribed in Articles 21 and 22 shall not
prevent the court from awarding, in accordance with
General Rule: Liability is limited to limited to 1 000 its own law, in addition, the whole or part of the court
Special Drawing Rights for each passenger costs and of the other expenses of the litigation
incurred by the plaintiff, including interest.
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RECEIPT Prima facie evidence that the Registered Owner Rule Still Applies Even in
WITHOUT same has been delivered in good Sales / Leases
COMPLAINT condition and in accordance with The Registered Owner is not allowed to escape
the document of carriage or with responsibility by proving that a 3rd person is the
the record preserved actual and real owner (Villanueva v. Domingo, G.R.
No. 144274, 2004)
DAMAGE Complain to the carrier forthwith
after the discovery of the
damage
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Kabit System
Kabit system is an arrangement whereby a person
who has been granted a certificate of public
convenience allows other persons who own motor
vehicles to operate under his license sometimes for
a fee or percentage of the earnings.
• This is contrary to public policy and therefore
void and inexistent under Art. 1409 of the Civil
Code. This arrangement is a circumvention of
the requirement for license.
• Registered owner and buyer who enter into said
transaction are in pari delicto. Therefore, the
courts will not help either of them. (Clean hands
doctrine)
Apportioning Of Liability
While the Court ruled in previous cases that the
registered owner or operator of a passenger vehicle
is jointly and severally liable with the driver of the
said vehicle for damages incurred by passengers or
third persons as a consequence of injuries or death
sustained in the operation of the said vehicle, in no
case is the actual owner of the passenger vehicle
exempted from liability. In fact, the registered owner
or operator has the right to be indemnified by the
real or actual owner of the amount that he may be
required to pay as damage for the injury caused.
(R Transport vs. Luisito Yu, G.R. No 174161, 2015)
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F. CAPITAL STRUCTURE
1. Shares of stock
a. Nature of shares of stock
b. Consideration for shares of stock
c. Watered stock
d. Situs of the shares of stock
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1 2
For purposes of this part of the reviewer, unless otherwise NOTE: There is no 5 person minimum anymore for the
specified, all references refer to the Revised Corporation number of organizers (i.e., incorporators) of a Corporation
Code, Republic Act no. 11232. (hereinafter RCC) under the RCC. (see discussion at page 15, Subheading 5.A)
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purposes connected with the public good in the Philippines directly or through its instrumentalities
administration of the civil government either wholly or, where applicable as in the case of
stock corporations, to the extent of at least a majority
PUBLIC PRIVATE of its outstanding capital stock
CORPORATION CORPORATION (R.A. No. 10149)
Government holds the Government may hold
controlling interest the controlling interest NOTE:
• A GOCC when organized under the
Created by its charter Created under the Corporation Code is still a private
Corporation Code corporation. But being a GOCC makes it
subject to laws and provisions applicable to
However, GOCCs the Government or its entities and subject to
may also be created the control of the Government (Cervantes v.
by special charter Auditor General, G.R. No. L-4043, 1952).
Created for a public Generally created for • The GOCC Governance Act (R.A. 10149),
purpose profit generation which governs compensation and position
classification systems within the GOCC
Exists primarily for the
Sector, does not distinguish between
government of a
chartered and non-chartered GOCCs, and
portion of the state
its provisions apply equally to both. (GSIS
Subject to control and
Family Bank Employees Union v.
supervision by the
Villanueva, G.R. No. 210773, 2019).
State or its agency
• In order to qualify as a GOCC, one must be
organized either as a stock or non-stock
NOTE:
corporation. Section 31 defines a stock
• Ownership of the government of the majority corporation as one whose “capital stock is
of the shares of a corporation does not by divided into shares and ... authorized to
itself constitute such an entity as a public distribute to the holders of such shares
corporation. (National Coal Co., v. Collector dividends.” Although BCDA has an
of Internal Revenue, G.R. No. L-22619, authorized capital of P100 Billion, however,
1994). it is not divided into shares of stock; it has no
• When the law vests corporate powers in a voting shares; and has no provision which
government instrumentality, it does not authorizes the distribution of dividends and
necessarily become a corporation; a GOCC allotment of surplus and profits to BCDA’s
must be organized as a stock or non-stock stockholders. It cannot qualify also as a non-
corporation. (MIAA v. CA, G.R. No. 155650, stock corporation because its primary
2006) purpose do not fall within the purposes
• Test to determine whether a corporation is enumerated under Section 88. (BCDA v.
public or private: If the corporation is created CIR, G.R. No. 205925, 20 June 2018)
by the State as the latter’s own agency or • However, there is now formal administrative
instrumentality to help it in carrying out its and statutory recognition of “government
governmental functions, then that instrumentalities with corporate
corporation is considered public; otherwise it powers/government corporate entities,”
is private. (Philippine Society for the which may not fall within the definition of
Prevention of Cruelty to Animals v. COA, stock and non-stock corporations, but are
G.R. No. 169752, 2007) government instrumentalities that are vested
with corporate powers. (LRTA v. Quezon
c. Quasi-public corporation - A species of private City, G.R. No. 221626, 2019)
corporations created by special law and required to • Under the Constitution, the COA has audit
render public service or supply public wants; Usually jurisdiction over both GOCCs with original
covers school districts, water districts and the like. charters (subject to COA pre-audit) and
those without original charters (those
d. Government owned and controlled corporations organized under the Corporation Code—
(GOCCs) - Created under a special law or charter, or subject to post-audit). (Alejandrino v. COA,
any agency organized as a stock or non-stock G.R. No. 245400, 2019)
corporation, vested with functions relating to public
needs whether governmental or proprietary in nature,
and owned by the Government of the Republic of the
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3
Emphasis on no. 2 & 3 for they are expressly indicated in the
bar syllabus.
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In order to determine the nationality of a corporation, Mere legal title is not enough. Full beneficial
the following steps should apply: ownership of 60 percent of the outstanding capital
stocks, coupled with 60 percent of the voting rights,
1st Step: The nationality of a corporation is is constitutionally required for the State's grant of
determined by the country under whose laws it is authority to operate a public utility. Thus, voting rights
incorporated (Place of Incorporation Test). of stocks which have been assigned or transferred to
aliens cannot be considered held by Philippine
2nd Step: If the corporation is applying for a (2nd) citizens or nationals (cannot give proxies to vote).
franchise for public utility and etc. which requires a (Roy III v. Herbosa, et al., G.R. No. 207246, 2016)
certain percentage of control of stock, the Test of
Controlling Ownership (i.e., the Control Test) would The definition of “beneficial owner or beneficial
be applied. ownership in the SRC-IRR, which is in consonance
with the concept of “full beneficial ownership” in the
3rd step: If there is doubt as to the domestic control FIA-IRR, is relevant in resolving only the question of
of the percentage of stock in a corporation with who is the beneficial owner or has beneficial
corporate stockholders, Grandfather test would be ownership of each “specific stock” of the public utility
applied (Narra Nickel Mining and Development Corp. whose stocks are under review. If the Filipino has the
v. Redmont Consolidated Mines Corp., G.R. No. voting power of the “specific stock”, i.e., he can vote
195580, 2014) the stock or direct another to vote for him, or the
Filipino has the investment power over the “specific
a. Control Test stock”, i.e., he can dispose of that “specific stock” or
direct another to vote or dispose it for him, then such
In cases involving properties, business or industries Filipino is the “beneficial owner” of that “specific
reserved for Filipinos, in addition to the place of stock.” Being considered Filipino, that “specific stock”
incorporation test, the nationality of a corporation is is then to be counted as part of the 60% Filipino
determined by the nationality of the “controlling ownership requirement under the Constitution. The
stockholders”. right to the dividends, jus fruendi—a right emanating
from ownership of that “specific stock” necessary
Absent any doubt, the Control Test shall be used in accrues to its Filipino “beneficial owner.” (Roy III v.
determining the nationality of a corporation specially Herbosa, G.R. No. 207246 (Resolution), 18 April
in cases where foreign ownership restrictions apply. 2017.)
(SEC OGC Opinion No. 16-19)
General Rule: The Control Test requires compliance
[T]here are two cases in determining the nationality with the Place of Incorporation Test.
of the Investee Corporation. The first case is the
‘liberal rule’, later coined by the SEC as the Control Exception: A corporation organized abroad and
Test in its 30 May 1990 Opinion, and pertains to the registered as doing business in the Philippines under
portion in said Paragraph 7 of the 1967 SEC Rules the Corporation Code, whose capital outstanding
which states, ‘(s)hares belonging to corporations or stock and entitled to vote is wholly owned by Filipinos
partnerships at least 60% of the capital of which is is a Philippine National. (SEC Opinion No. 04-14 in
owned by Filipino citizens shall be considered as of reference to the Foreign Investments Act)
Philippine nationality.’ Under the liberal Control Test,
there is no need to further trace the ownership of the Some instances wherein the Control Test
60% (or more) Filipino stockholdings of the Investing applies:
Corporation since a corporation which is at least 60% a. Exploitation of natural resources (> 60%)
Filipino-owned is considered as Filipino. (Narra ● Sec 2, Art XII, 1987 Constitution – policy of
Nickel Mining and Development Corp. v. Redmont the State is to ensure that the exploitation of
Consolidated Mines Corp., G.R. No. 195580, 2014). natural resources or the pursuit of the
activities deemed to be of public or national
The required percentage of Filipino ownership interest are in the control of the Filipinos
shall be applied to both:
● The State may directly undertake such
a. The total number of outstanding shares of stock
activities, or it may enter into co-production,
entitled to vote in the election of directors, and
joint venture, or production sharing
b. The total number of outstanding shares of stock,
agreements with:
whether or not entitled to vote in the election of
o Filipino citizens; or
directors. (SEC Memorandum Circular No. 8, s.
o Corporations or associations, at
2013, Sec. 2)
least 60% owned by such citizens
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organization, capital structure, the rights and A corporate officer who caused the tort act to be
liabilities of directors, officers, and shareholders committed in the name of the corporation is also
towards each other and to creditors and third personally liable as a joint-tortfeasor.
persons.
The failure of the corporate employer to comply with
a legal duty, such as under the Labor Code to grant
2. DOCTRINE OF SEPARATE separation pay to employees constitutes tort and its
JURIDICAL PERSONALITY stockholder who was actively engaged in the
management of the business should be held
General Rule: The Corporation has a separate and personally liable (Naguiat v. NLRC, G.R. No. 116123,
1997).
distinct juridical personality from its directors, officers,
trustees and shareholders (Doctrine of Separate A corporation can be held liable for the tortious acts
Juridical Personality). of a corporate officer, in the absence of a prior
express direction from the BOD, if such was
Exception: When the corporation is used as a cloak connected to the business of the corporation.
for fraud, illegality, or in other certain circumstances,
the courts may disregard the separate and distinct The remedy of the corporation is to recover damages
personality of the corporation and treat the against the acting corporate officer responsible for
corporation as a mere collection of individuals the tortious act.
undertaking business as a group (Doctrine of
b) Crimes
Piercing the Veil of Corporate Fiction).
General rule: Corporations cannot commit felonies
under the RPC for it is incapable of the requisite
A corporation is a juridical entity with a legal intent to commit these crimes.
personality separate and distinct from those acting
for and on its behalf, and, in general, from the people It also cannot commit crimes that are punishable
comprising it; the obligations incurred by the under special laws because crimes are personal in
corporation, acting through its directors, officers and nature requiring personal performance of overt acts.
employees are its sole liabilities (Santos v NLRC,
G.R. No. 101699, 1996). A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by
While a share of stock represents a proportionate or imprisonment.
aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right Exceptions: If the crime is committed by a
or title to any of the corporate property, his interest in corporation, the directors, officers, employees or
such property being equitable or beneficial in nature. other officers thereof responsible for the offense shall
Shareholders are in no legal sense the owners of be charged and penalized for the crime, precisely
corporate property, which is owned by the because of the nature of the crime and the penalty
corporation as a distinct legal person (Magsaysay- therefore. However, the corporation may be charged
Labrador v CA, G.R. No. 58168, 1989). and prosecuted for a crime if the imposable penalty
is fine (Ching v. Secretary of Justice, G.R. No.
CORPORATE LIABILITY 164317, 2006).
I. Liability for Torts and Crimes When a law expressly provides that a corporation
may be proceeded against criminally, the responsible
a) Torts officer will be held personally liable for the crimes
A corporation is civilly liable in the same manner as committed by the corporation. However, such liability
natural persons for torts, because the rules governing will only attach to the officer when the corporation is
the liability of a principal for a tort committed by an directly required by law to do an act in a given
agent are the same whether the principal be a natural manner, and the same law makes the person who
person or a corporation, and whether the agent be a fails to perform the act in the prescribed manner
natural or artificial person. That a principal is liable for expressly liable criminally (Sia v. Court of Appeals,
every tort which he expressly directs or authorizes, is G.R. No. 108222, 1997). For example:
just as true of a corporation as a natural person (PNB 1) Under the Anti-Money Laundering Act,
v. CA, G.R. No. L-27155, 1978). juridical persons are also defined as
offenders.
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2) The RCC provides situations where ● The State can freely open the books of the
corporations are liable for criminal corporation to ensure that it does not exceed
sanctions: its powers
a) SEC. 161. Violation of Duty to Implications of the Existence of the Corporate
Maintain Records, to Allow their Veil or a Separate and Distinct Juridical
Inspection or Reproduction; Personality
b) SEC. 165. Fraudulent Conduct of
Business; A. Controlling interest of and/or dealings in
c) SEC. 166. Acting as Intermediaries shareholdings
for Graft and Corrupt Practices;
Ownership of a majority of capital stock and the fact
d) SEC. 167. Engaging Intermediaries
for Graft and Corrupt Practices that majority of directors of a corporation are the
directors of another corporation creates no employer-
II. Recovery of Moral Damages employee relationship with the latter’s employees
(DBP v. NLRC, G.R. No. 86932, 1990; Francisco, et
General rule: A corporation cannot recover moral al. v. Mejia, G.R. No. 141617, 2001).
damages as it cannot suffer physical suffering and
mental anguish (Prime White Cement v IAC, G.R. The mere fact that a stockholder sells his shares of
No. L-68555, 1993). stock in the corporation during the pendency of a
collection case against the corporation, does not
Exception: A corporation with a good reputation, if
besmirched, is allowed to recover moral damages make such stockholder personally liable for the
upon proof of existence of factual basis of damage corporate debt, since the disposing stockholder has
(actual injury) and its causal relation (Crystal v. BPI, no personal obligation to the creditor, and it is the
G.R. No. 172428, 2008). inherent right of the stockholder to dispose of his
shares of stock anytime he so desires (Remo, Jr. v.
The following Constitutional rights apply to a
IAC, G.R. No. L-67626, 1989).
corporation:
a. Due process
Mere substantial identity of the incorporators of the
The due process clause is universal in its
two corporations does not necessarily imply fraud,
application to all persons without regard to any
nor warrant the piercing of the veil of corporate
differences of race, color, or nationality. Private
corporations, likewise, are “persons” within the fiction. In the absence of clear and convincing
scope of the guaranty insofar as their property is evidence to show that the corporate personalities
concerned.” (Smith Bell & Co. v. Natividad, G.R. were used to perpetuate fraud, or circumvent the law,
No. 15574, 1919). the corporations are to be treated as distinct and
b. Equal protection of the law (Smith Bell & Co. separate from each other (Laguio v. NLRC, G.R. No.
v. Natividad, G.R. No. 15574, 1919) 108936, 1996).
c. Unreasonable searches and seizures
(Stonehill v. Diokno, G.R. No. L-19550, 1967). B. Transaction amongst the corporation
and stockholders
In organizing itself as a collective body, the
corporation waives no constitutional immunities The transfer of the corporate assets to the
applicable to it. Its property cannot be taken without stockholder is not in the nature of a partition but is a
compensation; can only be proceeded against by due conveyance from one party to another (Stockholders
process of law; and is protected against unlawful of F. Guanzon and Sons, Inc. v. Register of Deeds of
discrimination (Bache & Co. (Phil.), Inc. v. Ruiz, G.R.
Manila, G.R. No. L-18216, 1962).
No. 32409, 1971, citing Hale v. Henkel, 201 U.S. 43,
50 L.Ed. 652.).
NOTE: A corporation may not be made to answer for
NOTE: The right against self-incrimination has no acts or liabilities of its stockholders or those of the
application to juridical persons. (Bataan Shipyard v. legal entities which it may be connected and vice-
PCGG, G.R. No. 75885, 1987) versa (ARB Constructions Co., Inc. v. Court of
● The right against self-incrimination refers Appeals, G.R. No. 126554, 2000).
only to testimonial compulsion;
● A corporation cannot testify; and
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The corporate debt or credit is not the debt or credit Being merely an equitable remedy, employment of
of the stockholder nor is the stockholder’s debt or the piercing doctrine can only be for the “protection
credit that of the corporation (Traders Royal Bank v. of the interests of innocent third persons dealing
CA, G.R. No. L-78412, 1989). with the corporate entity which the law aims to
protect by this doctrine” (Traders Royal Bank v. Court
Stockholders have no personality to intervene in a of Appeals, G.R. No. 93397, 1997).
collection case covering the loans of the corporation
on the ground that the interest of shareholders in Classification of piercing cases:
corporate property is purely inchoate (Saw v. CA, a. Fraud piercing – when a corporate entity is
G.R. No. 90580, 1991). used to commit fraud or justify a wrong or to
defend a crime.
The interests of payees in promissory notes cannot b. Alter-ego piercing – when a corporate entity is
be off-set against the obligations between the used to defeat public convenience or is merely
corporations to which they are stockholders absent a farce since the corporation is merely the alter
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except those conveyed to or by the parent (Sibagat Timber Corp. v. Garcia, G.R. No.
corporation. 98185, 1992)
● The papers of the parent corporation or in the h) Thinly-capitalized corporations (McConnel v.
statements of its officers, the subsidiary is Court of Appeals, G.R. No. L-10510, 1961).
described as a department or subdivision of the i) Parent-subsidiary relationship. (Koppel (Phil.),
parent corporation, or its business or financial Inc. v. Yatco, G.R. No. L-47673,1946; Philippine
responsibility is referred to as the parent Veterans Investment Development Corporation
corporation’s own. v. CA, G.R. No. 85266, 1990)
● The parent corporation uses the property of the j) Affiliated companies (Guatson International
subsidiary as its own. Travel and Tours, Inc. v. NLRC, G.R. No.
● The directors or executives of the subsidiary do 100322, 1994)
not act independently in the interest of the
subsidiary but take their orders from the parent NOTE: While each of the above situations resulted in
corporation. the Court piercing the veil of corporate fiction, the
● The formal legal requirements of the subsidiary elements – control, injury to others, etc. – were also
are not observed (Phil. National Bank v. Ritratto present and likewise determinants.
Group, Inc., GR No. 142616, 2001).
Summary of Probative Factors
NOTE: Mere ownership by a single stockholder or by (Philippine National Bank vs. Ritratto Group, Inc., et
another corporation of all or substantially all of the al., G.R. No. 142616, 2001; Concept Builders, Inc. v.
capital stock of the corporation does not justify the NLRC, G.R. No. 108734, 1996)
application of the doctrine (Francisco v. Mejia, G.R. Whether the separate personality of the corporation
No. 141617, 2001). should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a
Example of situations wherein the Doctrine of corporation is the alter ego of the individual
Piercing the Corporate Veil was used: stockholders is insufficient. The presumption is that
a) Where the stock of a corporation is owned by the stockholders or officers and the corporation are
one person whereby the corporation functions distinct entities. The burden of proving otherwise is
only for the benefit of such individual owner, the on the party seeking to have the court pierce the veil
corporation and the individual should be deemed of corporate entity (Ramoso v. CA, G.R. No. 117416,
the same (Arnold v. Willets and Patterson, Ltd., 2000).
G.R. No. L-20214, 1923).
b) When the corporation is merely an adjunct, For Equity Cases:
business conduit or alter ego of another These are cases, where there is no fraud or alter ego
corporation, the fiction of separate and distinct circumstances that can warrant the piercing of the
corporation entities should be disregarded (Tan corporate veil. This mainly used to render justice in
Boon Bee & Co. v. Jarencio, G.R. No. L-41337, the situation at hand, or to brush aside technical
1988). defenses.
c) Employment of same workers; single place of
business, etc. (La Campana Coffee Factory v. For example:
Kaisahan ng Manggagawa, G.R. No. L-5677, (a) When used to confuse legitimate issues
1953). (Telephone Engineering and Service Co., Inc. V.
d) Use of nominees (Marvel Building v. David, G.R. WCC, G.R. No. L-28694, 1981).
No. L-508, 1951) (b) When used to raise issues relating only to
e) Avoidance of tax. (Yutivo Sons Hardware v. technicalities (Emilio Cano Ent. v. CIR, G.R. No.
Court of Tax Appeals, G.R. No. L-13203, 1961; L-20502, 1965).
Liddell& Co. v. Collector of Internal Revenue,
G.R. No. L-9687, 1961). The veil may not always be pierced, especially in
f) Mixing of bank deposit accounts. (Ramirez the following circumstances:
Telephone Corp. v. Bank of America, G.R. No. L-
22614, 1969). (a) Piercing is a remedy of last resort and is not
g) Where it appears that two business enterprises available when other remedies are still
are owned, conducted, and controlled by the available (Umali v. CA, G.R. No. 89561, 1990).
same parties, both law and equity will, when (b) One cannot successfully invoke the piercing
necessary to protect the rights of third persons, doctrine when it was proven that the act done
disregard the legal fiction that two corporations was contrary to the existing rules, which were
are distinct entities and treat them as identical well-known to the officers of the one invoking
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it (Traders Royal Bank v. Court of Appeals, G.R. filed under Section 5(e) of Pres. Decree No. 902-
No. 93397, 1997). A, on the ground that the petitioning individuals
(c) Piercing is forbidden unless the remedy sought should be treated as the real petitioners to the
is to make the stockholder, officer or another exclusion of the petitioning corporate debtor
corporation pecuniarily liable for corporate (Union Bank v. CA, G.R. No. 131729, 1998).
debts (Umali v. CA, G.R. No. 89561, 1990; (h) Changing of the petitioner’s subsidiary liabilities
Indophil Textile Mill Workers Union-PTGWO v. by converting them to guarantors of bad debts
Calica, G.R. No. 96490, 1992). cannot be done by piercing the veil of corporate
identity (Ramoso v. CA, G.R. No. 117416, 2000)
NOTE: However, piercing in alter ego cases may (i) Piercing doctrine is meant to prevent fraud, and
prevail even when no monetary claims are cannot be employed to perpetrate fraud or a
sought to be enforced against the stockholders wrong (Araneta, Inc. v. Tuason, G.R. No. L-
or officers of the corporation. (e.g. piercing for 2886, 1952).
other purposes such as laborer’s rights) (j) Corporate persons are entitled to due process
protection. Thus, failure to implead a
(d) Piercing is forbidden when the personal corporation in a suit for recovery of ill-gotten
obligations of an individual are sought to be wealth against its stockholders cannot bind
enforced against the corporation (Robledo v. the corporation itself; otherwise, its
NLRC, G.R. No. 110358, 1994). fundamental right to due process will be violated.
(COCOFED v. Republic, G.R. No. 177857-58,
NOTE: As an exception to this rule, the Supreme 2016)
Court allowed such piercing by applying the (k) Mere ownership of all or nearly all of the capital
concept of “reverse piercing”. In a traditional stocks of a corporation is not in itself a sufficient
veil-piercing action, a court disregards the reason for disregarding the fiction of separate
existence of the corporate entity so a claimant corporate personalities. The probate court
can reach the assets of a corporate insider. In a applied doctrine of piercing the corporate veil
reverse piercing action, however, the plaintiff since Rosario had no other properties that
seeks to reach the assets of a corporation to comprise her estate other than her shares.
satisfy claims against a corporate insider." Although the intention to protect the shares from
dissipation is laudable, it is still an error to order
Reverse Piercing has two (2) types: tenants to remit payments to the estate. Also, the
1. Outsider reverse piercing - occurs when a court has not acquired jurisdiction over Primrose
party with a claim against an individual or and its properties. Piercing applies to the
corporation attempts to be repaid with assets of determination of liability not of jurisdiction. It
a corporation owned or substantially controlled is not available to confer jurisdiction over a
by the defendant. party not impleaded in a case. (Mayor v. Tiu,
2. Insider reverse piercing - the controlling G.R. No. 203770, 2016)
members will attempt to ignore the corporate
fiction in order to take advantage of a benefit
available to the corporation, such as an interest B. DE FACTO CORPORATION VERSUS
in a lawsuit or protection of personal assets. CORPORATIONS BY ESTOPPEL
(International Academy of Management and
Economics vs. Litton and Company, G.R. No. As To Legal Status
191525, 2017). a. De jure corporation
● Corporation organized in accordance with
(e) To disregard the separate juridical personality of
a corporation, the wrongdoing must be clearly requirements of law;
and convincingly established. It cannot be ● Every corporation is deemed to be a de jure
presumed (DBP vs. CA, G.R. No. 126200, 2001). until proven otherwise
(f) Piercing of the veil of corporate fiction is not
allowed when it is resorted to justify under a b. De facto corporation (Sec. 19)
theory of co-ownership the continued use ● A corporation claiming in good faith to be a
and possession by stockholders of corporate corporation under the Corporation Code but
properties (Boyer-Roxas v. Court of Appeals, where there exists a flaw in its incorporation
G.R. No. 100866, 1992). or it falls short of the requirements provided
(g) The piercing doctrine cannot be availed of in by law.
order to dislodge from the jurisdiction of the
SEC the petition for suspension of payments
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The following are some of the instances when a. First type: Acts done beyond the powers of the
majority vote of the Board is needed: corporation as provided for in the law or its
a. Extension or shortening of the corporate term articles of incorporation (Sec. 44)
b. Increase or decrease of capital stock or the b. Second type: Acts or contracts entered into on
creation of bonded indebtedness behalf of the corporation by persons without
c. Sale or other disposition corporate assets corporate authority, even though the contract is
d. Sale or other dispositions of all or substantially within the powers of the corporation (Manila
all corporate assets (with 2/3 stockholders or Metal Container Corp. v. PNB, G.R. No. 166862,
members authorization, Sec 39) 2006) and
e. Acquisition of its own shares c. Third type: Acts or contracts, which are per se
f. Investment of corporate funds in any corporation illegal as being contrary to law.
or business or for any purpose other than its
primary purpose (with 2/3 stockholders Consequences of Ultra Vires Acts
ratification, Sec. 41) Executed contract – Courts will generally not set
g. Declaration of cash, property, and stock aside or interfere with such contracts;
dividends (if stock dividends, it must be joined Executory contracts – No enforcement even at the
with 2/3 vote of shareholders, sec. 42) suit of either party (void and unenforceable);
h. Entering into management contracts Partly executed and partly executory – Principle
(accompanied by the approval of the against unjust enrichment shall apply.
shareholders or members, Sec. 43)
Ultra vires test: It is a question, therefore, in each
By the Officers case, of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one
The officers shall manage the corporation and which is lawful in itself, and not otherwise prohibited,
perform such duties as may be provided in the is done for the purpose of serving corporate ends,
bylaws and/or as resolved by the board of directors. and is reasonably tributary to the promotion of those
(Sec. 24) ends, in a substantial, and not in a remote and
fanciful, sense, it may fairly be considered within
Executive Committee (Sec. 34) charter powers. The test to be applied is whether the
General rule: If the bylaws so provide, the board act in question is in direct and immediate furtherance
may create an Executive Committee composed of at of the corporation’s business, fairly incident to the
least three (3) directors. The Executive Committee express powers and reasonably necessary to their
may act, by majority vote, on specific matters within exercise. If so, the corporation has the power to do it;
the competence of the board as delegated to it. Such otherwise, not. (University of Mindanao, Inc. v.
an Executive Committee may be established if the Bangko Sentral ng Pilipinas, G.R. 194964-65, 2016)
bylaws so provide.
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Coverage of the Trust Fund Doctrine General Express Powers under the Corporation
Code (Sec. 35)
1. In case of Solvency: The coverage of the trust a. Sue and be sued in its corporate name;
fund doctrine is only up to the extent of the b. Succession;
“subscribed capital stock” of the corporation. In c. Adopt and use a corporate Seal;
this sense, the unrestricted retained earnings do d. Amend Articles of Incorporation
not constitute part of the capital stock. Hence, e. Adopt, amend or repeal By-laws;
the corporation is at liberty to pay out assets to f. For stock corporations – Issue stocks to
the stockholders by way of dividends up to the subscribers and to sell treasury stocks; for non-
extent of the unrestricted retained earnings. stock corporations – admit members;
g. Purchase, receive, take, or grant, hold, convey,
2. In case of Insolvency: The trust fund doctrine is sell, lease, pledge, mortgage and otherwise deal
not limited to reaching the stockholders’ unpaid with real and personal property, pursuant to its
subscriptions. The scope of the doctrine when lawful business;
the corporation is insolvent encompasses h. Enter into Partnership, joint venture, merger,
not only the capital stock, but also other consolidation, or any other commercial
property and assets generally regarded in agreement with natural and juridical persons;
equity as a trust fund for the payment of i. Reasonable Donations for public welfare,
corporate debts. Thus, the Trust Fund Doctrine hospital, charitable, cultural, scientific, civil or
extends to all assets (not just subscribed capital similar purposes (Prohibited for foreign
stock) when a corporation becomes insolvent. corporations: for partisan political activity;
(Halley v. Printwell, G.R. No. 157549, 2011) j. Establish pension, retirement and other Plans for
the benefit of directors, trustees, officers and
3. Releasing Subscribers: where the corporation employees; and
released the subscribers to the capital stock from k. Other powers essential or necessary to carry out
their subscriptions without valuable its purposes.
consideration. (Ong Yong v. Tiu, G.R.
No.144476, 2003) B. Specific Powers: Theory of Specific
Capacity
CORPORATE POWERS
The specific capacity theory maintains that the
A. General Powers: Theory of General corporation cannot exercise powers except those
Capacity expressly/impliedly given.
The general capacity theory maintains that a Some of the Specific Powers Granted by the
corporation is said to hold such powers as are not RCC:
prohibited or withheld from it by general law. 1) Power to extend or shorten corporate term
(Sec. 36)
a. Express powers – Those expressly authorized 2) Power to increase or decrease capital stock
by the Corporation Code and other laws, and its or incur, create, increase bonded
Articles of Incorporation or Charter indebtedness (Sec. 37)
b. Implied/necessary powers – Those that can be 3) Power to deny pre-emptive rights (Sec. 38)
inferred from or necessary for the exercise of the 4) Power to sell or dispose corporate assets
express powers or for the pursuit of its purposes (Sec. 39)
as provided in the Charter. Examples are powers 5) Power to acquire own shares (Sec. 40)
related to the same line of business (e.g. 6) Power to invest corporate funds in another
stevedoring services to unload coal to its pier for corporation or business (Sec. 41)
corporations supplying electric power) 7) Power to declare dividends (Sec. 42)
c. Incidental/inherent powers – Those that are 8) Power to enter into management contract
deemed to be within the capacity of corporate (Sec. 43)
entities. These “necessarily flow” from the
business and attach at the moment of creation
without regard to express powers or primary
purpose.
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There shall be no increase or decrease of capital General rule: Stockholders have the pre-emptive
stock unless: right to subscribe to all issues or disposition of shares
● Approved by majority of the board by the corporation of any class in proportion to their
● Approved by at least two – thirds (2/3) of the shareholdings
Outstanding Capital Stock in a meeting
● With notice of the proposal and meeting Exception:
given to stockholders- given personally or ● Denied by the Articles of Incorporation or
through electronic means if allowed amendment thereto;
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● Shares are issued in compliance with laws in the post office with postage prepaid, or when
requiring minimum stock ownership by the allowed by the by-laws or done with the consent of
public the stockholder, sent electronically
● Shares issued in good faith in exchange for Dissenting stockholders have appraisal rights.
property for corporate purposes approved
by 2/3 of the OUTSTANDING CAPITAL After authorization or approval by the
STOCK stockholders/members, the Board may however,
● Shares in payment of previously contracted abandon proposed action without prior
debts approved by 2/3 of OUTSTANDING authorization/approval of stockholders/members,
CAPITAL STOCK subject to rights of 3rd parties
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Investment by a sugar central in the equity of a jute- General Rule: Contract may not exceed 5 yrs per
bag manufacturing company used in packing sugar, term
falls within the implied powers of the sugar central as
part of its primary purpose (De La Rama v. Ma-ao Exception: Contracts relating to exploration,
Sugar Central, G.R. No. L-17504, 1969) development, exploitation or utilization of natural
resources, where pertinent laws or regulations will
I. Power to Declare Dividends (Sec. 42) govern
General Rule: Only Board action is needed A management contract is not an agency contract,
and therefore is not revocable at will (Nielson v.
Exception: Stock dividends where stockholder Lepanto, G.R. No. L-21601, 1968)
action is needed
1. Cash dividends due on delinquent stock This needs approval of:
should first be applied to unpaid balance 1. Board of Directors of both managing and
plus cost and expenses managed corporation
2. Stock dividends shall be withheld from 2. Majority of outstanding shares or members
delinquent stockholders until the unpaid of both managed and managing corporation
subscription is fully paid 3. But 2/3 vote of outstanding stock/members
3. Stock dividends need two – thirds (2/3) of of managed corporation necessary in the ff:
Outstanding Capital Stock a. Where stockholders of both managing
4. Dividends are payable out of unrestricted and managed corporation (the common
retained earnings stockholders) own or control more than
5. Stock corporations cannot retain surplus 1/3 or the outstanding stock of
profits more than 100% of paid-in capital managing corporation
stock unless: b. Where majority of directors in both
a. Needed for corporate expansion corporations are the same
projects approved by the board
b. Or prohibited by loan agreement K. Doctrine of Individuality of Subscription
which prohibits declaration of
dividends without financial No certificate of stock shall be issued to a subscriber
institution’s consent until the full amount of the subscription together with
c. Or needed under special interest and expenses (in case of delinquent shares),
if any is due, has been paid. (Sec. 63)
circumstances
6. Unless otherwise provided in the articles of
The foregoing provision sets forth the Doctrine of
incorporation, distribution of dividends is Indivisibility/Individuality of Subscription. This
done on a pro rata basis. doctrine espouses that the subscription contract is
one, entire, indivisible and whole contract which
The power to declare dividends under [Sec. 42 of cannot be divided into portions. It cannot be divided
RCC] is with the Board of Directors, and can be into portions so that no stockholder shall be entitled
declared only out of its unrestricted retained to a certificate of stock until said stockholder has paid
earnings. Assuming that a corporate director was the entire value of the shares subscribed, including
authorized by the Board to fix the monthly dividends, the interest and expenses. The Doctrine of
dividends can be declared only out of unrestricted Indivisibility of Subscription is absolute since the
retained earnings of a corporation, which earnings above-quoted Section 64 speaks of no exception.
cannot obviously be fixed and predetermined 5 years
in advance. (Ongkingco v. Sugiyama, G.R. No. The purpose of the prohibition is to prevent the partial
217787, 2019). disposition of a subscription which is not fully paid,
because if it is permitted, and the subscriber
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to deny ratification (Premiere Development Bank vs. Each director/trustee shall hold office until the
CA, G.R. No. 159352, 2004). successor is elected and qualified.
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I. Cumulative Voting and Straight Voting At all elections of directors or trustees, there must be
present, either in person or through a representative
a. Straight voting – Every stockholder may vote authorized to act by written proxy:
the number of outstanding capital stock in his ● Stock Corporation – owners majority of
own name for as many persons as there are outstanding capital stock (i.e., total shares
directors to be elected; or in non-stock of stock issued under binding subscription
corporations, members may cast as many votes contracts to subscribers or stockholders,
as there are trustees to be elected but may not whether fully or partially paid, except
cast more than one vote for one candidate. (In treasury shares)
straight voting, the votes are spread out evenly ● Non-stock Corporation – majority of
among all the elective positions) members entitled to vote
b. Cumulative voting for one candidate – a
stockholder may accumulate his shares and give NOTE: When so authorized in the bylaws or by a
one candidate as many votes as the number of majority of the board of directors, the stockholders or
directors to be elected multiplied by the number members may also vote through remote
of his shares shall equal; communication or in absentia. The right to vote
through such modes may be exercised in
c. Cumulative voting by distribution – a
corporations vested with public interest,
stockholder may also cumulate his shares by
notwithstanding the absence of a provision in the by-
multiplying the number of his shares by the laws of such corporations. (sec. 23)
number of directors to be elected and distribute
the same among as many candidates as he shall Who Elects Directors or Trustees
see fit ● By the stockholders/members as
provided in the by-laws (traditionally during
Methods of Voting in Relation to Type of annual SH/M meetings
Corporation ● By the board, if still constituting quorum for
vacancies in the interim (i.e. between
A. Stock Corporations
annual meetings) due to causes other than
Stockholders entitled to vote shall have the right to
removal or expiry of term (Sec. 28)
vote the number of shares of stock standing in their
own names in the stock books of the corporation at ● If the vacancies are due to removal or
the time fixed in the bylaws or where the bylaws are expiry of term, the directors/trustees must
silent, at the time of the election be elected by the stockholders/members
at a meeting for this purpose (special
The stockholder may use: meeting)
1. Straight Voting
2. Cumulative voting for one candidate How Elected
3. Cumulative voting by distribution ● By owners of majority of outstanding capital
stock or by members in annual
NOTE: The total number of votes cast shall not stockholders’/members’ meeting
exceed the number of shares owned by the ● Stockholders/members may be present in
stockholders as shown in the books of the person or by written proxy
corporation multiplied by the whole number of ● For stock corporations: Number of votes =
directors to be elected; and that no delinquent stock (no. of shares) x (no. of directors to be
shall be voted.
elected)
● By straight voting or cumulative voting,
B. Non-stock Corporations
General Rule: Members of nonstock corporations which is all votes may be cast for a
may use Straight Voting, i.e. cast as many votes as candidate or distributed among the
there are trustees to be elected but may not cast candidates
more than one (1) vote for one (1) candidate. ● For non-stock corporations: Unless
otherwise provided in the articles of
Exception: Unless otherwise provided in the articles incorporation or in the by-laws, members of
of incorporation or in the bylaws. (Sec. 23) non-stock corporations may cast as many
votes as there are trustees to be elected but
may not cast more than one vote for one
II. Quorum candidate.
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● Viva voce (live voice) or must be by ballot if Report Of Election of Directors, Trustees and
requested Officers
● Delinquent shares and treasury shares Within thirty (30) days after the election of the
cannot vote directors, trustees and officers of the corporation, the
● Candidates with highest number of votes secretary, or any other officer of the corporation, shall
submit to the SEC, the names, nationalities,
will be declared elected
shareholdings, and residence addresses of the
directors, trustees, and officers elected. (Sec. 25)
Election Rules on Stock and Non-Stock
Corporations
Only the directors and officers of the corporation
STOCK NON-STOCK whose names appear in the report submitted to the
CORPORATION CORPORATION SEC are deemed legally constituted to bind the
Owners of a majority A majority of the corporation in bringing a suit on behalf of the
of outstanding capital members, either in corporation (Premium Marble Resources v. CA, G.R.
stock, either in person person or by No. 96551, 1996).
or by representative representative
authorized to act by authorized to act by Non-holding of Election
written proxy, must be written proxy, must be The non-holding of elections and the reasons shall
present at the election present at the election be reported to the SEC within thirty (30) days from
of the directors of the trustees the date of the scheduled election. The report shall
Cumulative voting or Cumulative voting is specify a new date for the election, which shall not be
Straight voting can be not available, unless later than sixty (60) days from the scheduled date.
used; a matter of right allowed by the articles
granted by law to or by-laws. If no new date has been designated, or if the
each stockholder with rescheduled election is likewise not held, the SEC
voting rights. The Board may be may, upon the application of a stockholder, member,
elected by region. director or trustee, and after verification of the
Directors are elected unjustified non-holding of the election, summarily
at large. order that an election be held.
Alien Membership in Board of Directors The SEC shall have the power to issue such orders
P.D. No. 715: "election of aliens as members of the as may be appropriate, including:
board of directors of governing body of corporations a. orders directing the issuance of a notice
or associations engaging in partially nationalized stating the time and place of the election,
activity shall be allowed in proportion to their b. designated presiding officer, and
allowable participation or share in the capital of such
c. the record date or dates for the
entities."
determination of stockholders or members
Non-Filipino citizens may become members of the entitled to vote.
board of directors of a bank to the extent of the
foreign participation in the equity of said bank. Notwithstanding any provision of the articles of
(General Banking Law, Sec. 15) incorporation or bylaws to the contrary, the shares of
stock or membership represented at such meeting
Filling Vacancies in Board - Permissive and entitled to vote shall constitute a quorum for
The filling of vacancies in the board by the remaining purposes of conducting an election under this
directors or trustees constituting a quorum as section. (Sec. 25)
provided for by Section [28] is merely permissive, not
mandatory, and the vacancies may still be filled-up Cessation from Office
by the stockholders of members in a regular or Should a director, trustee or officer die, resign or in
special meeting called for the purpose. However, any manner cease to hold office, the secretary, or the
when the by-laws of the corporation contain a specific director, trustee or officer of the corporation, or in
mode of filling- up existing vacancies in the board, the case of death, the officer’s heirs shall, within seven
same is mandatory (Tan v. Sycip, G.R. No. 153468, (7) days from knowledge thereof, report in writing
2006). such fact to the SEC. (Sec. 25)
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How Elections should be held: This vacancy shall be filled only by an election at a
In all elections to fill vacancies under this section, the regular or at a special meeting of stockholders or
procedure set forth in Sections 23 and 25 of this Code members duly called for the purpose, or in the same
shall apply. meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting.
When Elections may be held:
a. Due to term expiration- the election shall be 4. DUTIES, RESPONSIBILITIES AND
held no later than the day of such LIABILITIES FOR UNLAWFUL ACTS
expiration at a meeting called for that
purpose. a. Rules on Fiduciaries’ Duties and
b. Result of removal- the election may be held Liabilities
on the same day of the meeting authorizing
the removal and this fact must be so stated Three-Fold Duties of Directors (Strategic Alliance
in the agenda and notice of said meeting. Development Corporation v. Radstock, G.R. No.
c. In all other cases, the election must be held 178158, 2009)
no later than forty-five (45) days from the
a. Duty of Obedience (Basis: Sec. 24)
time the vacancy arose.
To direct the affairs of the corporation only in
accordance with the purposes for which it was
Vacancy NOT by removal or expiration of term organized
May be filled by:
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b. Duty of Loyalty (Basis: Secs. 30 & 33) intended to attach penal sanctions to said sections, it
Directors or trustees shall not acquire any personal could have expressly stated such intent in the same
or pecuniary interest in conflict with their duty as such manner it did for Section 74 of the same Code that
directors or trustees. the violation thereof is likewise considered an offense
under Section 144. (Ient v. Tullet, Inc., G.R. No.
Disloyalty: Sec. 30(2) vs. Sec. 33 189158, 2016)
SEC. 30(2) SEC. 33
Applicable to directors, Applicable to b. Solidary Liabilities for Damages
trustees, and officers directors only
Liability under Sec. 30(1)
No ratification allowed Allows ratification of Directors or trustees who willfully and knowingly:
a transaction by the a. vote for or assent to patently unlawful acts of
director the corporation
Covers stock and non- Covers stock b. are guilty of gross negligence or bad faith in
stock corporations corporations only directing the affairs of the corporation
c. acquire any personal or pecuniary interest in
c. Duty of Diligence (Basis: Sec. 30) conflict with their duty as such directors or
Directors and/or trustees shall not willfully and trustees
knowingly vote for or assent to patently unlawful acts shall be liable jointly and severally for all damages
of the corporation or act in bad faith or with gross resulting therefrom suffered by the corporation, its
negligence in directing the affairs of the corporation. stockholders or members and other persons.
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5. He is made, by a specific provision of law, to within the fourth civil degree of consanguinity or
personally answer for his corporate action affinity is voidable at the option of such corporation,
(Tramat Mercantile, Inc. v. CA, G.R. No. 111008, unless the following are present:
1994). a. The presence of such director/trustee in the
Board meeting in which the contract was
Case law states that to hold a director or officer approved was not necessary to constitute a
personally liable for corporate obligations, two quorum.
requisites must concur: b. The vote of such director or trustee was not
1. it must be alleged in the complaint that the necessary for the contract’s approval.
director or officer assented to patently c. The contract is fair and reasonable
unlawful acts of the corporation or that the d. In case of corporations vested with public
officer was guilty of gross negligence or bad interest, material contracts are approved by at
faith; and least two-thirds (2/3) of the entire membership of
2. there must be proof that the officer acted in the board, with at least a majority of the
bad faith. (Freyssinet Filipinas Corp. v. independent directors voting to approve the
Lapuz, G.R. No. 226722, 2019) material contract; and
e. In case of an officer, the contract with him has
been previously authorized by the Board.
c. Responsibility for Crimes
Where any of the first three (3) conditions set forth in
General rule: The Board being generally a policy- the is absent such contract may be ratified by:
making body, directors as such cannot be held liable a. the vote of the stockholders representing at
under a criminal statute making those in charge of the least two-thirds (2/3) of the outstanding capital
management of the corporation liable for the criminal stock or of at least two-thirds (2/3) of the
acts done in pursuit of corporate operations. members in a meeting called for the purpose;
and
The members of the Board generally do not concern
themselves with the day-to-day affairs of the b. Full disclosure of the adverse interest of the
corporation, except those corporate officers who are directors or trustees involved is made at such
charged with the running of the business of the meeting and the contract is fair and reasonable
corporation and are concomitantly members of the under the circumstances.
Board, like the President. (Federated Dealers Assn.
v. Del Rosario, G.R. No. 202639, 2016). II. Contracts Between Corporations with
Interlocking Directors (Sec. 32)
Exception: To be held criminally liable for the acts of
a corporation, there must be a showing that its A contract between two (2) or more corporations
officers, directors, and shareholders actively having interlocking directors shall not be invalidated
participated in or had the power to prevent the on that ground alone. These are valid so long as
wrongful act. (SEC v. Price Richardson Corp., G.R. there is no fraud and the contract is fair and
No. 197032, 2017) reasonable. However, if the director’s interest is
3. Special Fact Doctrine nominal in one of the contracting corporations (not
Under the Special Facts Doctrine, although a director exceeding 20% of the outstanding capital stock), then
does not stand in fiduciary relation to the stockholder, the contract must comply with the requisites provided
he is under legal obligation to make fair and full supra, Sec. 31, otherwise voidable.
disclosure of pertinent official information where
special circumstances exist, giving rise to the
obligation to disclose. (Soledad M. Cagampang, The 5. EXECUTIVE AND OTHER SPECIAL
Fiduciary Duties of Corporate Directors Under COMMITTEES
Philippine Law, 46 Phil. L. J., 513, 562 [1971])
I. Creation
d. Contracts
If the bylaws so provide, the board may create an
I. By Self-Dealing Directors with the executive committee composed of at least three (3)
Corporation (Sec. 31) directors. Said committee may act, by majority vote
of all its members, on such specific matters within the
A contract of the corporation with its director/s or competence of the board, as may be delegated to it
trustee/s or officer/s, or their spouses and relatives in the bylaws or by majority vote of the board.
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The SEC upon petition of a stockholder/ member, determining the existence of a quorum during
and on the showing of good cause therefore, may member’s meetings. Dead members shall not be
issue an order directing the petitioner to call a counted (Tan v. Sycip, G.R. No. 153468, 2006).
meeting of the corporation by giving proper notice
required by this Code or the bylaws, with the Quorum of Board
petitioner presiding thereat until at least a majority of General Rule: A majority of the directors or trustees
stockholders/ members present have chosen a as stated in the articles of incorporation shall
presiding officer. (Sec. 49). constitute a quorum to transact corporate business
Who presides over the meetings Exception: Unless the articles of incorporation or the
General Rule: The chairman by-laws provides for a greater majority (Sec. 52)
Exceptions:
1. In the absence of the chairman, the Valid Corporate Acts
president shall preside at all meetings of the General Rule: Every decision reached by at least a
directors or trustees as well as of the majority of the directors or trustees constituting a
stockholders or members, unless the bylaws quorum are considered valid.
provide otherwise.
2. In the following cases: Exception: The election of officers shall require the
(1) there is no person designated by the by- vote of a majority of all the members of the
board.(Sec. 52)
laws to call a meeting, or
(2) the person authorized unjustly refuses to
NOTE: A director or trustee who has a potential
call a meeting,
interest in any related party transaction must recuse
The petitioning stockholders / member shall
from voting on the approval of the related party
preside until at least a majority of
transaction without prejudice to compliance with the
stockholders/ members present have
requirements of Section 31 of this Code.
chosen a presiding officer. (Sec 49)
.
Rule on Abstention
IV. Quorum
In case of abstention during a board meeting on a
General rule: Majority of the outstanding capital
vote taken on any issue, the general rule is that an
stock, or of the members, shall constitute a quorum
abstention is counted in favor of the issue that won
(Sec. 51)
the majority vote; since by their act of abstention, the
abstaining directors are deem to abide by the rule of
Outstanding Capital Stock
the majority. (Lopez v. Ericta, G.R. No. L-32991,
The total shares of stock issued under binding
1972)
subscription agreements to subscribers or
stockholders, whether or not fully or partially paid,
V. Minutes and agenda of meetings
except treasury shares
Minutes of the meeting
Exceptions: 1. Records of all business transactions and
a. The bylaws provides for a greater majority minutes of all meetings shall be kept and
(Sec. 51) carefully preserved at a corporation’s
b. If the rescheduled election of principal office
directors/trustees is held, the voting shares 2. It shall set forth in detail:
of stock or membership represented at the a. The time and place of the meeting held
meeting ordered by the SEC shall constitute b. How it was authorized
a quorum for purposes of conducting an c. The notice given
election under this Section 25. d. The agenda therefor
c. In cases where greater vote for an act or e. Whether the meeting was regular or
business is required by law as when the special, its object if special
required vote is 2/3 of the outstanding capital f. Those present and absent, and
stock, or membership as the case may be. g. Every act done or ordered done at the
meeting.
NOTE: For stock corporations, the “quorum” referred h. Upon the demand of any director,
to in Section 52 of the Corporation Code is based on trustee, stockholder or member, the
the number of outstanding voting stocks. For non- time when any director, trustee,
stock corporations, only those who are actual, living stockholder or member entered or left
members with voting rights shall be counted in
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2. Manner of exercise of right (Sec 81, RCC) Also, a corporation shall furnish a stockholder or
1. A written demand on the corporation within member, within 10 days from receipt of their written
30 days after the vote was taken (failure to request, its most recent financial statement (Sec.
do so means waiver);(Sec. 81) 74).
2. From the time of demand, all rights accruing
to such shares including voting and The first three are the formulation of the old code.
dividend rights shall be suspended except Under the Revised Corporation Code, inspection
rights covers a’’ “corporate records, regardless of
the right of such stockholder to receive
the form in which they are stored” (see Sec. 73)
payment of the fair value of stockholder’s
shares. (Sec. 82) Stock and transfer book
3. Ten (10) days from demand, the dissenting Record of:
stockholder must submit his certificates of 1. All stocks in the names of the stockholders
stocks for notation that such certificates alphabetically arranged;
represent dissenting shares. (Sec. 85) 2. The installment paid and unpaid on all stock for
4. The price to be paid is the fair value of the which subscription has been made, and the
shares on the date the vote was taken; date of payment of any installment;
(Sec. 81) 3. A statement of every alienation, sale or transfer
5. The fair value shall be agreed upon by the of stock made; and
corporation and the dissenting stockholders 4. Such other entries as the by-laws may
within 60 days from the date the vote was prescribe.
taken. In case there is no agreement, the
fair value shall be determined by a majority NOTE:
of the 3 distinguished persons one of whom Section [73], while specific in the kinds of records
shall be named by the stockholder another that must be maintained, is not limiting, thus, the
by the corporation and the third by the two inspection right is applicable to the stock and
who were chosen; (Sec. 81) transfer book (Yujuico v. Quiambao, G.R. No.
6. The right of appraisal is extinguished when: 180416, 2014)
(Sec. 83)
a. He withdraws the demand with the The corporate secretary is the officer who is duly
authorized to make entries on the stock and transfer
corporation’s consent;
book (Gokongwei v. SEC, GR No. 45911, 1979).
b. The proposed action is
abandoned; All transfers of shares not entered in the stock and
c. The SEC disapproves of such transfer book of the corporation are invalid as to
action where approval is attaching or execution creditors of the assignors, as
necessary well as to the corporation and to subsequent
d. The SEC determines that such purchasers in good faith and to all persons
dissenting stockholder is not interested, except the parties to such transfers: “All
entitled to the appraisal right. transfers not so entered on the books of the
7. If the dissenting stockholder is not paid corporation are absolutely void; not because they
within 30 days from the award, he shall are without notice or fraudulent in law or fact, but
automatically be restored to all his rights as because they are made so void by statute (Uson vs.
Diosomito, G.R. No. 42135, 1935).
stockholder. (Sec. 82)
The entries are considered prima facie evidence
b. Right To Inspect only and may be subject to proof to the contrary
(Bitong v. CA, G.R. No. 123553, 1998).
Records that can be inspected
Corporate records, regardless of the form in which The stock and transfer book of the corporation
they are stored, shall be open to inspection by any cannot be used as the sole basis for determining the
director, trustee, stockholder or member of the quorum as it does not reflect the totality of shares
corporation in person or by a representative at which have been subscribed, and more so when the
reasonable hours on business days, and a demand articles of incorporation show a significantly larger
in writing may be made by such director, trustee or amount of shares issued and outstanding as
stockholder at their expense, for copies of such compared to that listed in the stock and transfer
records or excerpts from said records. (Sec. 73).
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book (Lanuza v. Court of Appeals, G.R. No. 131394, for purposes of blackmail or extortion.
2005). (Terelay Investment and Development
Grounds for Not Allowing Inspection by a Corp. v. Yulo, G.R. No. 160924, 2015)
Stockholder
a. If the person demanding to examine the The Right to Inspect Corporate Records is
records has improperly used any Subject to Confidentiality rules
information secured for prior examination,
b. He is not acting in good faith, The inspecting or reproducing party shall remain
c. A requesting party who is not a stockholder bound by confidentiality rules under prevailing laws,
or member of record, or is a competitor such as:
1. Trade secrets or processes under Republic
shall have no right to inspect or demand
Act No. 8293, or the “Intellectual Property
reproduction of corporate records. (Sec.
Code of the Philippines”, as amended,
73)
2. Republic Act No. 10173, or the “Data
Competitor- competitor, director, officer, controlling Privacy Act of 2012”,
stockholder or otherwise represents the interests of 3. Republic Act No. 8799, or “The Securities
a competitor shall have no right to inspect or Regulation Code”, and
demand reproduction of corporate records. (Sec. 4. the Rules of Court. (Sec. 73)
73)
Doctrinal Rulings on Right to Inspect
In one case, the Supreme Court clarified that the 1. The demand for inspection should cover
right of inspection may only be exercised by a only reasonable hours on business days;
stockholder of record. As such, the corporation may 2. The stockholder, member, director or
validly set up the defense in its refusal to grant a trustees demanding the right is one who
claim of the right of inspection on the ground that the has not improperly used any information
person is not a stockholder of record. (Puno v. Puno secured through any previous examination
Enterprises Inc., GR No. 177066, September 11, of the records;
2009)
3. The demand must be accompanied with
statement of the purpose of the inspection,
In Terelay Investment and Development Corp. v.
Yulo, the court ruled that although the corporation which must show good faith or legitimate
may deny a stockholder's request to inspect purpose.
corporate records, the corporation must show that 4. Illegitimate purposes include to obtain
the purpose of the shareholder is improper by way corporate secrets (formula), nuisance suit,
of defense. or to embarrass the company. (Africa v.
PCGG, G.R. No. 83831, 1992)
The purposes held to justify a demand for 5. If the corporation or its officers contest such
inspection are the following: purpose or contend that there is evil motive
1. To ascertain the financial condition of the behind the inspection, the burden of proof
company or the propriety of dividends; is with the corporation or such officer to
2. The value of the shares of stock for sale or show the same.
investment;
6. The RTC, and not the Sandiganbayan, has
3. Whether there has been mismanagement;
4. In anticipation of shareholders' meetings to jurisdiction over a stockholder’s suit to
obtain a mailing list of shareholders to enforce its right to inspect under the
solicit proxies or influence voting; Corporation Code where the case does not
5. To obtain information in aid of litigation with involve a sequestration-related incident, but
the corporation or its officers as to an intra-corporate controversy (Abad v.
corporate transactions. PHILCOMSAT, G.R. No. 200620, 2015)
7. A stockholder’s right to inspect corporate
The improper purposes which may warrant the records subsists during the period of
denial of the right of inspection: liquidation (three year period for dissolution
1. Obtaining of information as to business per Sec. 145). (Chua v. SEC, G.R. No.
secrets or to aid a competitor; 216146, 2016)
2. To secure business "prospects" or
8. An action for injunction and, consequently,
investment or advertising lists;
a writ of preliminary injunction filed by a
3. To find technical defects in corporate
transactions in order to bring "strike suits" corporation is generally unavailable to
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prevent stockholders from exercising their ● The one requesting to inspect was not acting in
right to inspection…[C]orporations may good faith or for a legitimate purpose in making
raise their objections to the right his demand
of inspection through affirmative defense in Criminal sanctions under Sec. 161
an ordinary civil action for specific Refer to discussion at the respective topic below
performance or damages, or through a
comment (if one is required) in a petition c. Pre-Emptive Right
for mandamus. (Philippine Associated
Smelting and Refining Corp. v. Lim, G.R. The shareholders’ right to subscribe to all issues or
No. 172948, 2016) dispositions of shares of any class in proportion to
his present stockholdings, the purpose being to
enable the shareholder to retain his proportionate
Remedies If Right to Inspect is Denied
control in the corporation and to retain his equity in
Mandamus
the surplus.
Refusal to allow stockholders (or members of a non-
stock corporation) to examine books of the company
Instances When Preemptive Right Is Not
is not a ground for appointing a receiver (or creating
Available
a mgt. committee) since there are other adequate
a. Shares to be issued to comply with laws
remedies, such as mandamus. (Ao-as v. CA, G.R.
No. 128464, 2006) requiring stock offering or minimum stock
ownership by the public;
Damages b. Shares issued in good faith with approval of the
Administrative Sanction (Sec. 158) stockholders representing 2/3 of the
Requisites for Section [158] to Apply (Ang-Abaya v. outstanding capital stock in exchange for
Ang, G.R. no. 178511, 2008) property needed for corporate purposes;
c. Shares issued in good faith with approval of the
● A director, trustee, stockholder or member has stockholders representing 2/3 of the
made a prior demand in writing for a copy of outstanding capital stock issued in payment of
excerpts from the corporations records or previously contracted debts;
minutes; d. In case the right is denied in the Articles of
● Any officer or agent of the concerned Incorporation;
corporation shall refuse to allow the said e. Waiver of the right by the stockholder;
director, trustee, stockholder or member of the f. If the shares of a corporation are offered and not
corporation to examine and copy said excerpts; subscribed and purchased by the stockholders,
● If refusal is made per a resolution or order of the and the shares are being offered again, there is
board of directors or trustees, the liability under no pre-emptive right with respect to the latter
this section for such action shall be imposed offer of shares (Benito v. SEC, G.R. No. L-
upon the directors or trustees who voted for 56655, 1983)
refusal;
● Where the officer or agent of the corporation d. Right of First Refusal
sets up the defense that the person demanding
to examine and copy excerpts from the The right of first refusal provides that a stockholder
corporation’s records and minutes has who may wish to sell or assign his shares must first
improperly used any information secured offer the shares to the corporation or to the existing
through any prior examination of the records or stockholders of the corporation, under terms and
conditions which are reasonable; and that only when
minutes of such corporation or of any other
the corporation or the other stockholders do not or
corporation, or was not acting in good faith or fail to exercise their option, is the offering
for a legitimate purpose in making his demand, stockholder at liberty to dispose of his shares to third
the contrary must be shown or proved. parties.
● The person demanding to examine has
improperly used any information secured Pre-Emptive Right v. Right of First Refusal
through any prior examination of the records or PRE-EMPTIVE RIGHT OF FIRST
minutes of such corporation or for any other RIGHT REFUSAL
corporation; and Generally may be Arises only by virtue
exercised, subject to of contractual
stipulations or by law
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NOTE:
A corporation has no power to prevent or restrain
transfers of its shares, unless such power is
expressly conferred in the Articles of Incorporation
or the law. (Fleischer v. Botica Nolasco Co., G.R.
No. L-23241, 1925)
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recognize such right as it is mandated by law to c. No appraisal rights are available for the act or
recognize arises (Ponce v. Alsons Cement, G.R. acts complained of; and
No. 139802, 2002). d. The suit is not a nuisance or harassment suit
(Interim Rules of Procedure for Intra-Corporate
NOTE: In Andaya v. Rural Bank of Cabadbaran, Controversies, A.M. No. 01-2-04-SC, 2001).
Inc., G.R. No. 188769, 2016, the Court ruled that the
registration of a transfer of shares of stock is a As a general rule, corporate litigation must be
ministerial duty on the part of the corporation. commenced by the corporation itself, with the
Aggrieved parties may then resort to the remedy of imprimatur of the board of directors, which, pursuant
mandamus to compel corporations that wrongfully to the law, wields the power to sue. Therefore, since
or unjustifiably refuse to record the transfer or to the derivative suit is a remedy of last resort, it must
issue new certificates of stock. This remedy is be shown that the board, to the detriment of the
available even upon the instance of a bona fide corporation and without a valid business
transferee who is able to establish a clear legal consideration, refuses to remedy a corporate wrong.
right to the registration of the transfer. A derivative suit may only be instituted after such an
omission. Simply put, derivative suits take a back
Obligations of a Stockholder seat to board-sanctioned litigation whenever the
a. Liability to the corporation for unpaid corporation is willing and able to sue in its own
subscription; name. (Ago Realty & Dev. Corp. v. Ago, G.R. No.s
b. Liability to the creditors of the corporation for 210906 & 211203, 2019)
unpaid subscription;
c. Liability to the corporation for interest on
unpaid subscription if so required by the by- 5. INTRA-CORPORATE DISPUTES
laws;
d. Liability for watered stock; Individual vs. Representative vs. Derivative
e. Liability for dividends unlawfully paid; Suits (Ching v. Subic Bay, G.R. No. 174353, 2014)
INDIVIDUAL Those brought by the
SUIT shareholder in his own
4. REMEDIAL RIGHTS name against the
corporation when a wrong
One or more stockholders/members in the name is directly inflicted against
and on behalf of the corporation may bring a him
derivative suit to redress wrongs committed against REPRESENT - Those brought by the
it, or protect/vindicate corporate rights whenever the ATIVE stockholder on behalf of
officials of the corporation refuse to sue, or the ones CLASS SUIT himself and all other
to be sued, or has control of the corporation. (Ching stockholders similarly
v. Subic Bay, G.R. No. 174353, 2014) situated when a wrong is
committed against a group
Requisites of Derivative Suit of stockholders.
a. He (Plaintiff) was a stockholder or member at
the time the acts or transactions subject of the DERIVATIVE Those brought by one or
action was filed; SUIT more
b. He exerted all reasonable efforts, and alleges stockholders/members in
the same with particularity in the complaint, to the name and on behalf of
exhaust all remedies available under the the corporation to redress
articles of incorporation, by-laws, laws or rules wrongs committed against
governing the corporation or partnership to it, or protect/vindicate
obtain the relief he desires; corporate rights whenever
the officials of the
The exhaustion of intra-corporate remedies corporation refuse to sue,
cannot be dispensed even if the company is a or the ones to be sued, or
family corporation (Yu v. Yukayguan, G.R. No. has control of the
177549, 2009; Ang v. Sps. Ang, G.R. No. corporation.
201675, 2013)
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NOTE: A lawyer engaged as counsel for a determined by the stockholders or the board of
corporation cannot represent members of the Board directors, subject to the approval of the
in a derivative suit against them. To do so would be Commission.
tantamount to conflicting interest between the Board
and the corporation (Hornilla v. Salunat, A.C. 5804, Shares of stock shall not be issued in exchange for
2003). promissory notes or future service. The same
considerations provided in this section, insofar as
applicable, may be used for the issuance of bonds
F. CAPITAL STRUCTURE by the corporation.
1. SHARES OF STOCK The issued price of no-par value shares may be
fixed in the articles of incorporation or by the board
a. Nature of Shares of Stock of directors pursuant to authority conferred by the
articles of incorporation or the bylaws, or if not so
Shares of stock are intangible personal property fixed, by the stockholders representing at least a
with an intrinsic pecuniary value. They represent majority of the outstanding capital stock at a meeting
aliquot parts of the corporation’s capital and are duly called for the purpose.
symbolized by a stock certificate.
c. Watered Stock
They do not represent proprietary rights of
shareholders to the assets or properties of the Watered stocks are issued for less than the par
corporation. value or issued value or for a consideration other
than cash, valued in excess of its fair value.
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Articles, Board may fix terms. It is ALWAYS Since Section 7 makes no distinction (and is found
with a stated par value. under General Provisions), then it must mean that
founders’ shares may be applied to both stock and
ii. Par Value and No-Par Value nonstock corporations. Although [Section 88 of the
● Par value shares - with a pre-stated Revised Corporation Code] allows in a nonstock
amount or denomination corporation to limit, broaden or deny the right of
members of any class, the specific provision of
● Non- par value - no pre-stated value
Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or
Non-par value shares are deemed fully paid and
define the voting rights of its members, but with
non-assessable so holders of such are not liable to
respect to founders’ share, the exclusive right to
the corporation or its creditors.
vote and be voted for of the founders’ share should
expire after five years from the approval of the SEC.
The consideration received is treated as capital and
(Forest Hills and Country Club, Inc. v. Kings
cannot be declared as dividends.
Properties Corp., G.R. No. 212833, 2019).
Because they are vested with public interest, the
b. Redeemable shares – Expressly provided
following types of corporations may only issue
in articles; may be purchased/taken up
par value shares:
a. Banks upon expiration of the period of said shares
b. Trust Companies purchased whether or not there are
c. Insurance Companies unrestricted retained earnings; may be
d. Public Utilities deprived of voting rights.
e. Building and Loan Associations. c. Treasury stocks – stocks previously
issued and fully paid for and reacquired by
iii. Voting and Non- Voting Shares the corporation through lawful means
● Voting share with complete voting rights (purchase, donation, etc.); not entitled to
● Non - voting shares are preferred or vote and no dividends could be declared
redeemable shares that have limited voting thereon as corporations cannot declare
rights. dividends to itself.
Non-Voting Shares Have Voting Rights In The Escrow shares – those held by a third person to be
Following Matters: released only upon the performance of a condition
a. Amendment of Articles or the happening of a certain event contained in the
agreement.
b. Adoption/ Amendment of By- Laws
c. Sale, lease, exchange, mortgage, pledge or
Preferred cumulative participating share of
dispose of all or substantially all of corporate stock - Share entitling its holder to preference in
property the payment of dividends ahead of common
d. Incur, create, increase bonded indebtedness stockholders and to be paid the dividends due for
e. Increase, decrease capital stock prior years and to participate further with common
f. Merger/ consolidation with another corporation stockholders in dividend declarations.
g. Investment of funds in another corporation
h. Dissolution of corporation Over-Issued Stock – Stock issued in excess of
authorized capital stock; null and void.
Other Classes of Shares: (Secs. 7, 8, 9)
a. Founder’s shares – Given rights and
privileges not enjoyed by owners of other 2. CERTIFICATE OF STOCK
stocks; exclusive right to vote/be voted in
the election of directors shall not exceed 5 a. Nature of the Certificate (Sec.
years. 62)
NOTE: such exclusive right shall not be
allowed if its exercise will violate the A stock certificate is a written instrument signed by
“Anti-Dummy Law”; the “Foreign the proper corporate officers stating or
Investments Act of 1991”; and other acknowledging that the person named in the
pertinent laws. document is the owner of a designated number of
shares of its stock. (Lao v. Lao, G.R. No. 170585,
2008)
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A stock certificate is not necessary to render one a under the law, except only insofar as such rights or
shareholder in a corporation; nevertheless, it is the defenses are subject to the limitations imposed by
paper representative or tangible evidence of the the principles governing estoppel. (Delos Santos v.
share itself and the various interests therein. The Republic, G.R. No. L-4818, 1955)
stock certificate expresses the contract between the
corporation and the shareholder, but it is not The rule is that the endorsement of the stock
essential to the existence of a share in or the certificate by the owner or his attorney-in-fact or any
creation of the relationship with the shareholder. other person legally authorized to make the transfer
(Tan v. SEC, G.R. No. 95696, 1992) shall be sufficient to effect the transfer of shares
only if the same is coupled with delivery. The
A stock certificate could not be considered issued in delivery of the stock certificate duly endorsed by the
contemplation of law unless signed by the president owner is the operative act of transfer of shares from
or vice-president and countersigned by the the lawful owner to the new transferee. But to be
secretary or assistance secretary. (Bitong v. Court valid against third parties, the transfer must be
of Appeals, G.R. No. 102726, 1994) recorded in the corporate books. (Bitong v. Court of
Appeals, G.R. No. 102726, 1994)
Certificates of stock are not the actual shares of
stock in the corporation and merely expresses the Since physical delivery of stock certificates is one of
contract between the corporation and the the essential requisites for the transfer of ownership
shareholder. Therefore, when a buyer of shares of the stocks purchased, then the failure of the
gives notice to original seller for the latter’s exercise seller-registered owner to delivery the stock
of his right of first refusal and the original seller failed certificates would constitute a material breach that
to respond, there was already the valid offer by the warrants the rescission of the sale of the shares
buyer that triggered the running of the period for the upon the option of the buyer. (Fil-Estate Golf v.
exercise of the right of first refusal in spite of the fact Vertex Sales and Trading, G.R. No. 202079, 2013)
that no certificate of stock had been issued yet in the
name of the buyer. (Makati Sports Club v. Cheng, d. Issuance (Sec. 63)
G.R. No. 178523, 2010)
No certificate of stock shall be issued to a subscriber
The shares evidenced by said certificates, until the full amount of the subscription together with
meanwhile, are regarded as property and the owner interest and expenses (in case of delinquent
of such shares may, as a general rule, dispose of shares), if any is due, has been paid.
them as he sees fit, unless the corporation has been
dissolved, or unless the right to do so is properly e. Lost or Destroyed Certificates
restricted, or the owner's privilege of disposing of his (Sec. 72)
shares has been hampered by his own action. (Teng
v. SEC, G.R. No. 184332, 2016) The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu
b. Uncertified Shares (Sec. 62) of those which have been lost, stolen or destroyed:
a. The registered owner of a certificate of
The Commission may require corporations whose stock in a corporation or such person’s
securities are traded in trading markets, and which legal representative shall file with the
can reasonably demonstrate their capability to do so corporation an affidavit in triplicate
to issue their securities or shares of stocks in setting forth, if possible:
uncertificated or scripless form in accordance with i. The circumstances as to how the
the rules of the Commission. certificate was lost, stolen or
destroyed,
c. Negotiability; Requirements for ii. The number of shares represented
Valid Transfer of Stocks by such certificate,
iii. The serial number of the certificate
Quasi-Negotiable Character of Certificate of and the name of the corporation
Stock which issued the same.
A stock certificate is merely a quasi-negotiable iv. The owner of such certificate of
instrument in the sense that it may be transferred by stock shall also submit such
endorsement, coupled with delivery; but it is not other information and evidence
negotiable because the holder thereof takes it as may be deemed necessary;
without prejudice to such rights or defenses as the and
registered owners or transferor’s creditors may have
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b. After verifying the affidavit and other owners of shares for purposes of liquidation. It is
information and evidence with the books of well-settled that unless proven otherwise, the “stock
the corporation, the corporation shall and transfer book” is the best evidence to establish
publish a notice in a newspaper of general stock ownership.
circulation in the place where the
corporation has its principal office, once a 3. DISPOSITION AND ENCUMBRANCE
week for three (3) consecutive weeks at the OF SHARES
expense of the registered owner of the
certificate of stock which has been lost, a. Sale of Shares
stolen or destroyed.
c. The notice shall state the name of the General Rule: Shares are not owned or are the
corporation, the name of the registered assets of the corporation—they are owned by the
owner, the serial number of the certificate, shareholders of record. Based on the Doctrine of
the number of shares represented by such Free Transferability of Shares, the sale of shares
certificate, and shall state that after the may be made by shareholders as this is their
expiration of one (1) year from the date of property right.
the last publication, if no contest has been
presented to the corporation regarding
Exception: Right of First Refusal
the certificate of stock, the right to make
such contest shall be barred and the
Under Sec. 62 of RCC, certain minimum requisites
corporation shall cancel the lost, destroyed
must be complied with for there to be a valid
or stolen certificate of stock in its books.
transfer of stocks:
d. In lieu thereof, the corporation shall issue a
(a) there must be delivery of the stock
new certificate of stock, unless the
certificate;
registered owner files a bond or other
(b) the certificate must have been endorsed by
security as may be required, effective for
the owner or his attorney-in-fact or other
a period of one (1) year, for such amount
persons legally authorized to make the
and in such form and with such sureties as
transfer; and to be valid against third parties,
may be satisfactory to the board of
the transfer must be recorded in the corporate
directors, in which case a new certificate
books.
may be issued even before the expiration
of the one (1) year period provided herein.
e. If a contest has been presented to the No transfer, however, shall be valid, except as
corporation or if an action is pending in between the parties, until the transfer is recorded in
court regarding the ownership of the the books of the corporation showing the names of
certificate of stock which has been lost, the parties to the transaction, the date of the
stolen or destroyed, the issuance of the transfer, the number of the certificate or certificates,
new certificate of stock in lieu thereof and the number of shares transferred. (Sec. 62)
shall be suspended until the court renders
a final decision regarding the ownership of No shares of stock against which the corporation
the certificate of stock which has been lost, holds any unpaid claim shall be transferable in the
stolen or destroyed. books of the corporation. (Sec. 62)
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upon prior five (5) day notice to hear the incorporators, directors, trustees,
objections; shareholders, or members necessary to
9. Judgment shall be rendered dissolving the request for dissolution.
corporation and directing the disposition of 2. Upon receipt of a withdrawal of request for
assets; the judgment may include dissolution, the SEC shall withhold action
appointment of a receiver. on the request for dissolution and shall,
10. The dissolution shall take effect only upon after investigation:
issuance by the SEC of a certificate of a. Make a pronouncement that the
dissolution* (Sec. 135) request for dissolution is deemed
withdrawn;
C. BY SHORTENING CORPORATE TERM b. Direct a joint meeting of the board
of directors or trustees and the
Procedure on voluntary dissolution by stockholders or members for the
shortening of the corporate term (Sec. 36): purpose of ascertaining whether to
1. A private corporation may extend or proceed with dissolution; or
shorten its term by amending the the c. Issue such other orders as it may
articles of incorporation when approved by deem appropriate. (Sec. 137)
a majority vote of the board of directors or
trustees, and ratified at a meeting by the Procedure on Withdrawal of Petition for
stockholders or members representing at Dissolution
least two-thirds (2/3) of the outstanding A withdrawal of the petition for dissolution shall be
capital stock or of its members. in the form of a motion and similar in substance to a
2. Written notice of the proposed action and withdrawal of request for dissolution but shall be
the time and place of the meeting shall be verified and filed prior to publication of the order
sent to stockholders or members setting the deadline for filing objections to the
3. In case of extension of corporate term, a petition. (Sec. 137
dissenting stockholder may exercise the
b. Involuntary
right of appraisal under the conditions
provided in this Code. (Sec. 137)
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
NOTE: Under Sec. 11, the RCC now allows the interested party. (Sec. 138)
revival of a the corporate existence of an Expired
Corporation. Grounds for dissolution of the corporation:
a. Non-use of corporate charter as provided
If a corporation’s term has expired, it may apply for
under Section 21 of this Code;
a revival of its corporate existence, together with
b. Continuous inoperation of a corporation as
all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts provided under Section 21 of this Code;
and liabilities existing prior to its revival. Upon c. Upon receipt of a lawful court order
approval by the SEC, the corporation shall be dissolving the corporation;
deemed revived and a certificate of revival of d. Upon finding by final judgment that the
corporate existence shall be issued, giving it corporation procured its incorporation
perpetual existence, unless its application for through fraud;
revival provides otherwise. (Sec. 11) e. Upon finding by final judgment that the
corporation:
D. WITHDRAWAL OF DISSOLUTION 1. Was created for the purpose of
committing, concealing or aiding
Procedure on Withdrawal of Request for the SEC of securities violations,
Dissolution:
smuggling, tax evasion, money
1. Withdrawal of Request of Dissolution: Not
laundering, or graft and corrupt
later than 15 days from the receipt by SEC
practices;
of the request for dissolution, the
2. Committed or aided in the SEC of
withdrawal thereof shall be made in writing,
securities violations, smuggling,
duly verified by any incorporator, director,
tax evasion, money laundering, or
trustee, shareholder, or member and
graft and corrupt practices, and its
signed by the same number of
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mandated by the Corporation Code should have apply provided the designation of the trustee is
been strictly complied with” (Vesagas v. Court of made within said period.
Appeals, G.R. No. 142924, 2001)
c. Through Receiver – created by means of
When the period of corporate life expires, the judicial or quasi-judicial appointment of the
corporation ceases to be a body corporate for the receiver. The receiver is actually an officer of
purpose of continuing the business for which it was the court and must therefore be accountable to
organized (PNB v. Court of First Instance of Rizal,
the court.
Pasig, Br. XXI, G.R. No. 63201, 1992).
NOTE: If there is no Board of Directors or Trustees,
A party’s stockholding in a corporation, whether
those having pecuniary interest in the assets,
existing or dissolved, is a property right which he
including not only the shareholders but likewise the
may vindicate against another party who has
creditors of the corporation, acting for and in its
deprived him thereof.
behalf, may liquidate (Alabang Dev’t v. Alabang Hills
Village Ass’n, G.R. No. 196950, 2014)
Stockholders may convey their respective
shareholdings toward the creation of a new
corporation to continue the business of the old or Liquidation after Three Years
If full liquidation can only be effected after the 3-year
they may reincorporate by filing new articles of
period and there is no trustee, the directors may be
incorporation and by-laws.
permitted to complete the liquidation by continuing
as trustees by legal implication (Reburiano v. CA,
Liquidation
G.R. No. 102965, 1999).
Process by which all the assets of the corporation
are converted into liquid assets in order to facilitate
The trustee may continue to prosecute a case
the payment of obligations to creditors, and the
commenced by the corporation within three years
remaining balance if any is to be distributed to the
from its dissolution until rendition of the final
stockholders.
judgment, even if such judgment is rendered beyond
the three-year period allowed by Section [139].
NOTE: There is no time limit within which the
However, an already defunct corporation cannot
trustees must complete a liquidation placed in their
initiate a suit after the lapse of the three-year period.
hands (Vigilla et.al. v. Philippine College of
(Alabang Dev’t v. Alabang Hills Village Ass’n, G.R.
Criminology, G.R. No. 200094, 2013).
No. 196950, 2014)
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(a) If shares of stock of a close corporation are have to either rescind the transfer or
issued or transferred to any person who is recover the stock under any express or
not eligible to be a holder thereof under any implied warranty. (Sec. 98)
provision of the articles of incorporation,
and if the certificate for such stock NOTE: Even if the transfer of shares is made in
conspicuously shows the qualifications of violation of the restrictions enumerated under [Sec.
the persons entitled to be holders of record 98 of RCC], such transfer is still valid if it has been
thereof, such person is conclusively consented to by all the shareholders of the close
presumed to have notice of the fact of corporation and the corporation cannot refuse to
the ineligibility to be a stockholder. register the transfer of shares in the name of the
(b) If the articles of incorporation of a close transferee. (Florete, Sr. v. Florete, Jr., G.R. No.
corporation states the number of persons, 223321, 2018)
not exceeding twenty (20), who are entitled
to be stockholders of record, and if the Need for factual determination of close
certificate for such stock conspicuously corporation to apply
states such number, and the issuance or Before courts can allow the operation of Section 98
transfer of stock to any person would cause to a case, there must first be a factual determination
the stock to be held by more than such that the corporation is indeed a close corporation.
number of persons, the person to whom There needs to be a presentation of evidence on the
such stock is issued or transferred is relevant restrictions in the articles of incorporation
conclusively presumed to have notice of and by-laws of the corporation. (Rural Bank of
this fact. Andaya v. Cabadbaran, G.R. No. 188769, 2016)
(c) If a stock certificate of a close corporation
conspicuously shows a restriction on IV. When board meeting is unnecessary or
transfer of the corporation’s stock and the improperly held (Sec. 100)
transferee acquires the stock in violation of General Rule: Any action taken by the directors
such restriction, the transferee is without a board meeting shall be deemed INVALID.
conclusively presumed to have notice of Exception: The following shall nonetheless be valid
the fact that the stock was acquired in despite the lack of a valid board meeting, unless the
violation of the restriction. by-laws provide otherwise
(d) Whenever a person to whom stock of a 1. Before or after such action is taken, a
close corporation has been issued or written consent thereto is signed by all the
transferred has or is conclusively presumed directors; or
under this section to have notice of: 2. All the stockholders have actual or implied
(i) the person’s ineligibility to be a knowledge of the action and make no
stockholder of the corporation; or prompt objection in writing; or
(ii) that the transfer of stock would
3. The directors are accustomed to take
cause the stock of the corporation
informal action with the express or implied
to be held by more than the
number of persons permitted acquiescence of all the stockholders; or
under its articles of incorporation; 4. All the directors have express or implied
or knowledge of the action in question and
(iii) that the transfer violates a none of them makes a prompt objection in
restriction on transfer of stock, and writing.
the corporation may, at its option,
refuse to register the transfer in the An action within the corporate powers taken at a
name of the transferee. meeting held without proper call or notice, is
(e) The provisions of subsection (d) shall not deemed ratified by a director who failed to attend,
be applicable if the transfer of stock, though unless after having knowledge thereof, the
contrary to subsections (a), (b) or (c), has director promptly files his written objection with the
been consented to by all the stockholders secretary of the corporation.
of the close corporation, or if the close
corporation has amended its articles of V. Pre-Emptive Rights Of Stockholders In Close
incorporation in accordance with this Title. Corporations (Sec 101)
(f) The term “transfer”, as used in this section, General Rule: It shall extend to all stock to be
is not limited to a transfer for value. issued, including reissuance of treasury shares,
(g) The provisions of this section shall not whether for money, property or personal services, or
impair any right which the transferee may in payment of corporate debts
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but must be used for the furtherance of its purposes There can be May not include a
(People v. Menil, G.R. No. 115054-66, 1999). secondary purposes purpose which would
change or contradict
The incurring of profit or losses does not determine its nature in AOI
whether an activity is for profit or non-profit, and the KIND OF BOARD
courts will consider whether dividends have been Board of Directors Board of Trustees
declared or its members or that is property, effects
or profit was ever used for personal or individual
gain, and not for the purpose of carrying out the NUMBER OF BOARD MEMBERS
objectives of the enterprise (Manila Sanitarium and Must not be more May be more than
Hospital v. Gabuco, G.R. No. 13873, 1963). than 15 15
In a mutual life insurance corporation, organized as EXC: Special
a non-stock nonprofit corporation, the so-called corporations
“dividend” that is received by members- TERM OF BOARD MEMBERS
policyholders is not a portion of profits set aside for
1 year 3 years, but AOI or
distribution to the stockholders in proportion to their
subscription to the capital stock of a corporation. by-laws may provide
One, a mutual company has no capital stock to Constant terms otherwise
which subscription is necessary; there are no
stockholders to speak of, but only members. And, 5 years - educational
two, the amount they receive does not partake of the institutions
nature of a profit or income. The quasi-appearance
of profit will not change its character; it remains an Staggered terms
overpayment, a benefit to which the member- HOW BOARD MEMBERS ARE ELECTED
policyholder is equitably entitled (Republic v. Sunlife Elected by the Directly elected by
Assurance Company of Canada, GR No. 158085, stockholders (per the members, unless
2005). Corp. Code) AOI provides
otherwise
Delinquency in Membership Dues of Non-Stock MANNER OF VOTING
Corporations Straight or Straight voting,
A non-stock corporation may seize and dispose of cumulative voting unless AOI or by-
the membership share of a fully-paid member on
laws provide
account of his unpaid monthly dues, when such
otherwise
corporation is authorized to do so under the by-laws,
CAN MEMBERSHIP BE TRANSFERRED?
even when no provision on the matter appears in the
articles of incorporation, and in spite of the fact that Generally yes Generally no, EXC: if
Sec. 67 of Corporation Code on delinquency sale AOI or by-laws
pertains to payment of shares subscription. (Valley provide otherwise
Golf v. De Caram, G.R. No. 155805, 2000) CAN A STOCKHOLDER/MEMBER
DISENGAGE FROM THE CORPORATION?
Comparative Table: Stock v. Non-Stock Can sell to other Articles or by-laws
Corporations stockholders OR specifically provide
STOCK NON-STOCK exercise of appraisal for the method of
CORPORATION CORPORATION rights termination
CAN THEY EARN PROFIT?
Yes Yes Number of Trustees
A non-stock corporation may OR may not have
more than 15 trustees.
DISTRIBUTION OF DIVIDENDS
Yes No NOTE: However, SEC has adopted a policy of
requiring registrant corporations to submit an
explanation if its articles or by-laws provide for more
NAME OF “CONSTITUENTS”
than 15 members of the Board. (Sec. 91)
Stockholders Members
LIMITATION TO PURPOSE
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of distribution adopted pursuant to this or not organized for profit, as may be specified in
Chapter; a plan of distribution as adopted by the Board of
4. Assets other than those mentioned in the Trustees and ratified by the members.
preceding paragraphs, if any, shall be
distributed in accordance with the In a regular non-stock corporation it is possible for
provisions of the articles of incorporation or its net assets and accumulated “earnings” from its
operations, to inure to the benefit of private
the by-laws, to the extent that the articles of
individuals (e.g., its own members) or entities, but
incorporation or the by-laws, determine the only as a consequence of dissolution.
distributive rights of members, or any class
or classes of members, or provide for Suppletory Effect
distribution; and The provisions governing stock corporation, when
5. In any other case, assets may be pertinent, shall be applicable to non-stock
distributed to such persons, societies, corporations, except as may be covered by specific
organizations or corporations, whether or provisions of this Title.
not organized for profit, as may be specified
in a plan of distribution adopted pursuant to
this Chapter.(Sec. 93) 3. FOREIGN CORPORATIONS
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a. What constitutes “Doing progressive prosecution of, the purpose and object
Business” of its organization.
a. Isolated Transactions Test: where a foreign Taken together, “Doing Business In The Philippines”
must cover transactions and series of transactions
corporation needs to obtain a license and fails
in pursuit of the main business goals of the
to do so, whether it should be denied legal
corporation and done with the intent to continue the
standing to obtain remedies from local courts same in the Philippines.
and administrative agencies or not, depends
therefore on the issue whether it will engage in c. Contract Test: if the salient points of a contract
business in the Philippines. Not every activity do not find themselves in the Philippines,
undertaken in the Philippines amounts to doing Philippine authorities have no business
business as to require a foreign corporation to subjecting the parties to local registration and
obtain such license. licensing requirements (Pacific Vegetable Oil
Corp. v Singzon, G.R. No. 7917, 1955)
Single or isolated acts, contracts, or transactions of
foreign corporations are not regarded as a doing or “Doing Business” Under The Foreign
carrying on of business. Typical examples of these Investment Act and IRR
are the making of a single contract, sale, sale with
the taking of a note and mortgage in the state to “Doing Business” in the Philippines - Includes:
secure payment thereof, purchase, or note, or the a. Soliciting orders, service contracts, opening
mere commission of a tort. In these instances, there offices, whether called “liaison” offices or
is no purpose to do any other business within the
branches;
country (MR. Holdings, Ltd. V. Bajar, G.R. No.
138104, 2002). b. Appointing representatives or distributors
domiciled in the Philippines;
However, where a single act or transaction is not
merely incidental or casual but indicates the NOTE: Includes “appointing representatives or
foreign corporation's intention to do other distributors in the Philippines” but not when the
business in the Philippines, said single act or representative or distributor “transacts business in
transaction constitutes doing business (Far East its name and for its own account.” (Alfred Hahn v.
Int'l. v. Nankai Kogyo, G.R. No. 13525, 1962). CA, G.R. No.113074, 1997)
Need to Allege: The fact that a foreign corporation c. Participating in the management, supervision,
is not doing business in the Philippines must be or control of any domestic business, firm, entity,
alleged, if a foreign corporation desires to sue in or corporation in the Philippines; and
Philippines courts under the “isolated transactions d. Any other act or acts that imply a continuity of
rule” (Atlantic Mutual Inc. Co. v. Cebu Stevedoring commercial dealings or arrangements, and
Co., G.R. No. 18961, 1966); if not alleged, it can be contemplate to that extent the performance of
dismissed for lack of capacity to sue by the plaintiff acts or works, or the exercise of some of the
(Commissioner of Customs v. K.M.K. Gani, G.R. No. functions normally incident to, and in
73722, 1990). progressive prosecution of, commercial gain or
of the purpose and object of the business
b. Twin Characterization Test (Mentholatum Co.
organization
Inc v. Mangaliman G.R. No. 47701, 1941)
NOTE: “Doing business” was upheld against
Substance Test: Consider the body or Pioneer International for soliciting orders and
substance of the business or the enterprise for
service contracts in the performance of acts that
which it was ORGANIZED or whether it has imply continuity of commercial dealings. Pioneer
substantially retired from it and turned it over to International’s alleged acts in actively negotiating to
another.
employ Todaro to run its pre-mixed concrete
operations in the Philippines, which acts are
Continuity Test: That doing business implies a hypothetically admitted in Pioneer International’s
continuity of commercial dealings and
motion to dismiss, are not mere acts of a passive
arrangements and contemplates, to that extent, the
investor in a domestic corporation. Such are
performance of acts or works or the exercise of managerial and operational acts in directing and
some of the functions normally incidental to, and in establishing commercial operations in the
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Such filing shall not in itself enlarge or alter the Rules Regarding A Foreign Corporation’s Right
purpose or purposes for which such corporation is to Bring Suit in the Philippines
authorized to transact business in the Philippines. (Agilent Technologies v. Integrated Silicon, G.R. No.
(Sec. 147) 154618, 2004)
FOREIGN CORP CAN FC SUE IN PH
e. Personality to Sue and STATUS
Suability Doing business in Cannot sue before
Philippines without a Philippine courts
Section 35 of the RCC enumerates the express license
powers of a corporation, which includes the Not doing business in Can sue before
corporation’s ability to sue and be sued. the Philippines Philippine courts on
an isolated
The power of the corporation to sue and be sued in transaction or on a
any court is lodged with the board of directors that cause of action
exercises its corporate powers. (Bitong v. CA, G.R. entirely independent
No. 123553, 1998) of any business
transaction
Suability of Foreign Corporations Doing business in the Can sue before
Every foreign corporation Philippines without a Philippine courts due
a. Doing business in the Philippines with a license, but Philippine to estoppel
license may sue and can be sued in the citizen or entity has
Philippines contracted with said
b. Doing business in the Philippines without a corporation or derived
license cannot sue, but may be sued in the benefits from the
Foreign Corporation
Philippines
Doing business in the Can sue before
c. Not doing business in the Philippines, or on
Philippines and has Philippine courts on
isolated transactions may sue and can be the required license any transaction
sued (if jurisdiction can be acquired)
Capability to Sue and Suability of Foreign
Instances When Unlicensed Foreign Corporations W/N Doing Business
Corporations May Be Allowed To Sue: DOING BUSINESS IN THE NOT DOING
a. Isolated transactions; PHILIPPINES BUSINESS IN
b. Action to protect good name, goodwill, and THE
reputation of a foreign corporation; PHILIPPINES
c. The subject contracts provide that LICENSED UNLICENSED ISOLATED
Philippine Courts will be venue to TRANSACTIONS
controversies;
d. A license subsequently granted enables YES, can NO, cannot Yes, can sue;
the foreign corporation to sue on contracts sue sue;
executed before the grant of the license EXC: if
EXC: transactions
(Eriks Ltd. v. Court of Appeals, G.R. No.
estoppel exhibits intent to
118843, 1997); do business,
e. Recovery of misdelivered property; Foreign
f. Where the defendant is estopped. Corporation
needs license to
The Intellectual Property Code provides that any sue
foreign corporation not engaged in business in the YES, can YES, can be sued
Philippines and a national of a country which is a be sued
party to any convention, treaty or agreement relating Qualifier: as long as summons
to intellectual property rights or the repression of were properly served (to acquire
unfair competition, to which the Philippines is also a jurisdiction)
party or extends reciprocal rights, may sue in
trademark or service mark enforcement action 5. Grounds for Revocation of License
(Sehwani Inc v. In-n-Out Burger, G.R. No. 171053,
Section 151 provides that the SEC may cancel the
2007).
certificate or license of a foreign corporation on any
of the following grounds:
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a. Failure to file its annual report or pay any profession. EXC: unless otherwise
fees as required by Code; provided by special laws. (Sec. 116)
b. Failure to appoint and maintain a resident
agent; II. Capital stock requirement (Sec. 117)
c. Failure to inform SEC of the change of General Rule: A One Person Corporation is not
resident agent or the latter’s change of required to have a minimum authorized capital
stock.
address;
d. Failure to submit a copy of amended Exception: As otherwise provided by special law.
articles of incorporation or by- laws; or
articles of merger or consolidation; NOTE: Unless required by applicable laws or
e. A misrepresentation of any material regulations, no portion of the authorized capital is
matters in reports; required to be paid up at the time of incorporation.
f. Failure to pay any and all taxes, imposts, (SEC Circular No. 7, Series of 2019)
assessments or penalties;
g. Engaged in a business not authorized by III. Articles of incorporation and by-laws
SEC; Requirements for filing the Articles of Incorporation:
h. Acting as a dummy of a foreign corporation i. In accordance with Sec. 14 of the RCC.
not licensed to do business in the ii. If the single stockholder is a trust or an
estate - the name, nationality, and
Philippines; or
residence of the trustee, administrator,
i. Any other ground as would render it unfit to
executor, guardian, conservator, custodian,
transact business in the Philippines. or other person exercising fiduciary duties
together with the proof of such authority to
Law applicable to Foreign Corporations (Sec. act on behalf of the trust or estate
146) iii. Name, nationality, residence of the
General Rule: A foreign corporation lawfully doing nominee and alternate nominee, and the
business in the Philippines shall be bound by all extent, coverage and limitation of the
laws, rules and regulations applicable to domestic authority. (Sec. 118)
corporations of the same class
NOTE: OPCs are NOT required to file their
Exceptions: corporate bylaws. (Sec. 119)
1. Those which provide for the creation,
formation, organization or dissolution of IV. Corporate name
corporations or It should Indicate the letters “OPC” either below or
2. Those which fix the relations, liabilities, at the end of their corporate name. (Sec. 120)
responsibilities, or duties of stockholders,
members, or officers of corporations to V. Corporate structure and officers
each other or to the corporation. One Person Corporation (OPC) (Sec. 116)
A corporation with a single stockholder
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b. Trust – does not refer to a trust entity, but ACS SURETY BOND
the subject being managed by a trustee. If COVERAGE
the single stockholder is a trustee, 1 to 1,000,000 1,000,000
administrator, executor, guardian, 1,000,001 to 2,000,000
conservator, custodian, or other person 2,000,000
exercising fiduciary duties 2,000,001 to 3,000,000
i. Proof of authority to act on behalf 3,000,000
of the trust or estate must be
3,000,001 to 4,000,000
submitted at the time of
4,000,000
incorporation (SEC
4,000,001 to 5,000,000
Memorandum 7-2019)
5,000,000
c. Estate
5,000,001 and above Equal to the OPC’s
ACS
Who may NOT form?
1. Banks and quasi-banks, non-bank financial
institutions (SEC Memorandum 7-2019) • Bond shall be renewed every two (2) years
2. Pre-need, trust, insurance, public and or as often as may be required, upon review
publicly-listed companies of the Audited Financial Statements/
3. Non-chartered government-owned and - Financial Statements certified under oath
controlled by the company’s President/Treasurer
4. Natural person who is licensed to exercise • Bond is a continuing requirement as long as
a profession to form an OPC for the the single stockholder is the self-appointed
purpose of exercising such profession Treasurer of the OPC
• Bond may be cancelled upon proof of
Exception: as provided under special laws appointment of another person as the
Treasurer and Filing of Amended Form for
The single stockholder shall be the sole director Appointment of Officers
and president of the One Person Corporation. (Sec.
121) Special Functions of the Corporate
Secretary(Sec. 123)
When to appoint officers? (Sec. 122) In addition to the functions designated by the One
Within fifteen (15) days from the issuance of its Person Corporation, the corporate secretary shall:
certificate of incorporation 1. Be responsible for maintaining the minutes
book and/or records of the corporation
Who to appoint? 2. Notify the nominee or alternate nominee of
a. Treasurer the death or incapacity of the single
b. Corporate secretary stockholder
c. Other officers as may be deemed a. Notice shall be given no later than
necessary five (5) days from such occurrence
3. Notify the SEC of the death of the single
Who and when to notify? stockholder
Securities and Exchange Commission (SEC) a. Within five (5) days from such
a. within five (5) days from appointment occurrence !!
b. using the Appointment Form as may be b. State the names, residence
prescribed by the SEC (SEC Memorandum addresses, and contact details of
7-2019) all known legal heirs
4. Call the nominee or alternate nominee and
Single stockholder allowed? the known legal heirs to a meeting and
a. Corporate secretary – NO advise the legal heirs with regard to:
b. Treasurer – YES a. The election of a new director
b. Amendment of the articles of
Conditions: Give bond to the SEC in such a sum as incorporation
may be required c. Other ancillary and/or
consequential matters
BOND REQUIREMENT as per SEC Memorandum
7-2019: VI. Nominee
1. Designated by a single stockholder
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2. In the event of the single stockholder’s Minimum Capital Stock Required for One Person
death or incapacity, nominee takes the Corporation (Sec. 117)
place of the single stockholder as director General rule: No minimum authorized capital stock
and shall manage the corporation’s affairs Exception: As otherwise provided by special law
3. Written consent of both nominee and
alternate nominee (SEC Memorandum 7- Required Paid Up Capital (SEC Memorandum 7-
2019) – to be attached in the application of 2019)
incorporation General rule: No portion of authorized capital stock
a. May be withdrawn in writing any is required to be paid up at the time of incorporation
time before the death or incapacity Exception: As otherwise required by applicable
of the single stockholder laws or regulations
4. May be changed at any time
a. By submitting to the SEC the VII. Minutes and records
names of the new nominees and
their corresponding written A One Person Corporation shall maintain a minutes
consent book which shall contain all actions, decisions, and
b. Articles of Incorporation need NOT resolutions taken by the One Person Corporation.
be amended (SEC Memorandum (Sec. 127)
7-2019)
When action is needed on any matter, it shall be
What shall be contained in articles of sufficient to prepare a written resolution, signed and
incorporation with regard to the nominee and dated by the single stockholder, and recorded in the
alternate nominee? minutes book of the One Person Corporation. The
a. Names of Nominees and Alternate date of recording in the minutes book shall be
Nominees deemed to be the date of the meeting for all
b. Residence addresses purposes under this Code. (Sec. 128)
c. Contact details
d. Extent and limitations of their authority in VIII. Liability (Sec. 130)
managing the affairs of the One Person
Corporation. A sole shareholder claiming limited liability has the
burden of affirmatively showing that:
Term of Nominee and Alternate Nominee (Sec. 1. The corporation was adequately financed.
125) 2. The property of the One Person
Incapacity of the single stockholder Corporation is independent of the
TEMPORARY Until the stockholder, by self- stockholder’s personal property.
determination, regains the
The principles of piercing the corporate veil applies
capacity to assume such duties
with equal force to One Person Corporations as with
other corporations
DEATH OR Until the legal heirs of the single
PERMANENT stockholder have been lawfully IX. Conversion of corporation to OPC and vice-
determined, and the heirs have versa
designated one of them or have
agreed that the estate shall be the Conversion from an Ordinary Corporation to a
single stockholder of the One OPC (Sec. 131)
When a single stockholder acquires all the stocks of
Person Corporation
an ordinary stock corporation, the latter may apply
for conversion into a OPC, subject to the submission
of such documents as the SEC may require. If the
Alternate Nominee application for conversion is approved, the SEC
a. Shall sit as director and manage the One shall issue certificate of filing of amended articles of
Person Corporation in case of the incorporation reflecting the conversion.
nominee’s inability, incapacity, death, or
refusal to discharge the functions as Conversion from an OPC to an Ordinary Stock
director and manager of the corporation Corporation (Sec. 132)
b. For the same term and under the same A One Person Corporation may be converted into
conditions applicable to the nominee an ordinary stock corporation after due notice to the
SEC of such fact and of the circumstances leading
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to the conversion, and after compliance with all Merger or consolidation does not become effective
other requirements for stock corporations under this by mere agreement of the constituent corporations.
Code and applicable rules. Such notice shall be filed The approval of the SEC is required (PNB v.
with the SEC within sixty (60) days from the Andrada Electric & Engr. Co., Inc., G.R. No. 142936,
occurrence of the circumstances leading to the 2002)
conversion into an ordinary stock corporation. If all
requirements have been complied with, the SEC Mere Acquisition/Transfer (3 Levels)
shall issue an amended certificate of incorporation MERGER/CONSOLIDATION TRANSFER OF
reflecting the conversion. PROPERTY
Loss of separate existence A NEW
In case of death of the single stockholder, the by the absorbed corporation corporation is
nominee or alternate nominee shall transfer the (in mergers) or the created, and
shares to the duly designated legal heir or estate constituent corporations (in constituent
within seven (7) days from receipt of either an consolidation) corporations are
affidavit of heirship or self- adjudication executed by EXTINGUISHED.
a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify 1) ASSETS-ONLY LEVEL
the SEC of the transfer. Within sixty (60) days from General Rule: A corporation that purchases the
the transfer of the shares, the legal heirs shall notify assets of another will not be liable for the debts and
the SEC of their decision to either wind up and liabilities of the selling corporation provided the
dissolve the One Person Corporation or convert it former acted in good faith.
into an ordinary stock corporation.
Except, when the following circumstances are
NOTE: The Converted Corporations shall succeed present:
the former corporation and be legally responsible for 1. where the purchasers expressly or
all the latter’s outstanding liabilities as of the date of impliedly agrees to assume the debts
conversion. 2. where the selling corporation fraudulently
enters into the transactions to escape
liability for those debts
I. MERGERS AND CONSOLIDATIONS 3. where the purchasing corporation is merely
a continuation of the selling corporation
1. CONCEPT
4. where the transaction amounts to a
consolidation or merger of the corporations
Merger
A union whereby one or more existing corporations (Edward J. Nell Co. v Pacific Farms Inc., G.R.
are absorbed by another corporation that survives No. L-20850, 1965)
and continues the combined business (Villanueva,
2018). 2) BUSINESS ENTERPRISE LEVEL
Purchase of substantially all the assets of the
Consolidation corporation extending to its “going concern” (ability
The union of two or more existing corporations. A to do business and make money, goodwill, clientele,
new corporation is created, and consolidating stock-in-trade, etc). There is case law, based on
corporations are extinguished. (PNB v. Andrada equity, that holds the transferee liable for the
Electric & Engineering Co., G.R. No. 142936, [April debts and liabilities of the transferor. A “free and
17, 2002], 430 PHIL 882-903) harmless clause” holding the transferee free from
the liabilities of the transferor is binding only
Differentiating Merger from Consolidation between them and cannot prejudice creditors who
MERGER CONSOLIDATION are not parties thereto. (Y-I Leisure Philippines, Inc.
A corporation A NEW corporation is et al. v James Yu, G.R. No. 207161, 2015)
ABSORBS another created, and
corporation and constituent NOTE: The sale under [Sec. 39] does not
REMAINS IN corporations are contemplate an ordinary sale of all corporate assets;
EXISTENCE while the EXTINGUISHED.
the transfer must be of such degree that the
other is DISSOLVED transferor corporation is rendered incapable of
continuing its business or its corporate purpose. (Y-
The power to merge or consolidate is not within the I Leisure Philippines, Inc. et al. v James Yu, G.R.
inherent powers of the corporation. Therefore, it No. 207161, 2015)
must be expressly granted by law.
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However, not every transfer of the entire corporate b. Plan of Merger or Consolidation (Sec. 75)
assets would qualify under Section [39]. It does not The plan of merger or consolidation shall set forth
apply: the ff:
1. If the sale of the entire property and assets 1. The names of the constituent corporations;
is necessary in the usual and regular 2. The terms of the merger or consolidation
course of business of corporation, or and the mode of carrying the same into
2. If the proceeds of the sale or other effect;
disposition of such property and assets will 3. A statement of the changes, if any, in the
be appropriated for the conduct of its articles of incorporation of the surviving
remaining business.
corporation in case of merger; and, in case
Thus, the litmus test to determine the applicability of
of consolidation, all the statements required
Section [39] would be the capacity of the corporation
to continue its business after the sale of all or to be set forth in the articles of incorporation
substantially all its assets.(Y-I Leisure Philippines, for corporations organized under this Code;
Inc. et al. v James Yu, G.R. No. 207161, 2015) and
4. Such other provisions with respect to the
3) EQUITY LEVEL proposed merger or consolidation as are
Purchaser takes control of the business by deemed necessary or desirable.
purchasing the shareholdings. Purchasing
corporation is still protected by the limited liability NOTE: The plan of merger has to be approved by
feature but the same can be pierced. majority of the board of each constituent
corporation; it has to be approved by affirmative vote
In order to transfer ownership of shares of stock not of stockholders representing ⅔ of the outstanding
traded in the Stock Exchange, it is necessary to capital stock or ⅔ of the members in case of a non-
secure a Certificate of Authorizing Registration stock corporation.
(CAR) pursuant to the process laid down in RMO
No. 15-03. The receipts of the payment of the tax c. Articles of Merger or Consolidation (Sec. 78)
should also be filed with and recorded by the The articles must be signed by the president or vice
secretary of the corporation pursuant to Section 11 president and certified by the secretary or assistant
of RR. No. 06-08. secretary setting forth:
i. The plan of the merger or the plan of
a. Constituent and consolidated corporations consolidation;
CONSTITUENT CONSOLIDATED ii. As to stock corporations, the number of
CORPORATION CORPORATION shares outstanding, or in the case of
The corporations that The corporation non-stock corporations, the number of
shall cease to exist formed after the members;
after joining together consolidation of two iii. As to each corporation, the number of
through consolidation constituent shares or members voting for or
(Bank of Commerce v. corporations against such plan, respectively;
Radio Philippines iv. The carrying amounts and fair values
Network, Inc., G.R. of the assets and liabilities of the
No. 195615, [April 21,
respective companies as of the agreed
2014], 733 PHIL 491-
cut-off date;
581) names of the
corporations v. The method to be used in the merger
proposing to merge or or consolidation of accounts of the
consolidate, companies;
hereinafter referred to vi. The provisional or pro-forma values, as
as the constituent merged or consolidated, using the
corporations accounting method; and
vii. Such other information as may be
The constituent corporations shall become a single prescribed by the SEC.
corporation which, in case of merger, shall be the
surviving corporation designated in the plan of d. Procedure of Consolidation or Merger
merger; and, in case of consolidation, shall be the STEP 1: Drawing up of the Plan of Merger or
consolidated corporation designated in the plan of Consolidation (Sec. 75)
consolidation
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The board of constituent corporations shall draw up b. As to stock corporations, the number of
a plan of merger or consolidation. It shall contain the shares outstanding, or in the case of
following: non-stock corporations, the number of
a. The names of the constituent members;
corporations; c. As to each corporation, the number of
b. The terms of the merger or shares or members voting for or against
consolidation and the mode of carrying such plan, respectively;
the same into effect; d. The carrying amounts and fair values of
c. A statement of the changes, if any, in the assets and liabilities of the
the articles of incorporation of the respective companies as of the agreed
surviving corporation in case of cut-off date;
merger; and, in case of consolidation, e. The method to be used in the merger or
all the statements required to be set consolidation of accounts of the
forth in the articles of incorporation for companies;
corporations organized under this f. The provisional or pro-forma values, as
Code; and merged or consolidated, using the
d. Such other provisions with respect to accounting method; and
the proposed merger or consolidation g. Such other information as may be
as are deemed necessary or desirable. prescribed by the SEC.
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b. Consolidation: consolidated
corporation under Parties to a merger or acquisition agreement without
the plan of complying with the thresholds are prohibited from
consolidation consummating their agreement until thirty (30) days
2. Separate existence of constituent after providing notification to the Commission in the
corporations cease EXCEPT that of the form and containing the information specified in the
surviving or consolidated corporation regulations issued by the Commission. A
3. Surviving or consolidated corporation transaction that meets the thresholds and does not
possesses the rights privileges immunities; comply with the notification requirements and
and powers and is subject to all duties and waiting periods set out in Section 5 shall be
liabilities of a corporation organized under considered void and will subject the parties to an
this Code administrative fine of one percent (1%) to five
4. ALL of the following are deemed percent (5%) of the value of the transaction. (Sec.
transferred to and vested in such surviving 17 of R.A. no. 10667; PCA Rule 4, as amended by
or consolidated corporation: PCC Resolution No. 02-2020)
(BY OPERATION OF LAW)
a. Rights Thresholds for compulsory notification
b. Privileges M&A transactions whose definitive agreements are
c. Immunities executed on or after 1 March 2020 will be subject to
d. Franchises of each constituent mandatory notification to the PCC if they meet the
corporation ff. thresholds:
e. Real or personal property
f. Receivables due on whatever
SIZE OF PARTY (i) the aggregate annual
account (hence
gross revenues in, into or
surviving/consolidated corp has
from the Philippines, or (ii)
the power to file an action for
the value of the assets in the
recovery) including:
Philippines of the ultimate
i. subscriptions to shares
parent entity (UPE) of either
and other choses in
the acquiring or acquired
action
entities exceeds PhP 6 billion
ii. and every other interest
of, belonging to, or due to
SIZE OF The size of transaction will
each constituent
TRANSACTION be met if the transaction
corporation
value, as determined below,
5. Regarding liabilities and pending claims:
exceeds PhP 2.4 billion.
a. Liabilities and obligations of each
constituent corporation:
i. Surviving or consolidated Merger or acquisition agreements that substantially
corporation shall be prevent, restrict or lessen competition in the relevant
responsible market or in the market for goods or services as may
b. Pending claim, action or be determined by the Commission shall be
proceeding brought by or against prohibited. (Sec. 20 of R.A. no. 10667)
any constituent corporation
i. may be prosecuted by or Exemptions: Notwithstanding such prohibition, the
against the surviving or PCC would allow such merger or acquisition
consolidated corporation provided the parties prove the following:
c. The rights of creditors or liens (a) The concentration has brought about or is
upon the property of such likely to bring about gains in efficiencies that
constituent corporations are not are greater than the effects of any limitation on
impaired competition that result or likely to result from
d. Employee contracts the merger or acquisition agreement; or
(b) A party to the merger or acquisition agreement
Limitations of Merger or Consolidation is faced with actual or imminent financial
Under the Philippine Competition Act (R.A. no. failure, and the agreement represents the least
10667), the Philippine Competition Commission can anti-competitive arrangement among the
review the mergers and acquisitions of a known alternative uses for the failing entity’s
corporation/s based on the factors it deems to be assets.(Sec. 21 of R.A. no. 10667)
relevant. (Sec. 16 of R.A. no. 10667)
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2. Schemes, rules and methods of performing have jointly made an invention, the right to a patent
mental acts, playing games or doing business, shall belong to them jointly. (Sec. 28, IP Code)
and programs for computers;
First-to-File Rule
General Rule: Computer programs are If two (2) or more persons have made the invention
subjects of copyright. separately and independently of each other, the
Exceptions: The computer program is still right to the patent shall belong to the person who
subject of copyright protection; in addition, the filed an application for such invention, or where two
machine or article described below may be or more applications are filed for the same invention,
patentable if the computer program: to the applicant who has the earliest filing date or the
(1) is implemented by a particular machine in a earliest priority date. (Sec. 29, IP Code)
non-conventional and non-trivial manner,
or Invention Created Pursuant to a Commission
(2) transforms an article from one state to The person who commissions the work shall own
another, then it may be patentable. the patent, unless otherwise provided in the
contract. (Sec. 30, IP Code)
3. Methods for treatment of the human or animal
body by surgery or therapy and diagnostic If an employee made the invention in the course of
methods practiced on the human or animal his regular employment, the patent shall belong to:
body; 1. The employee, the inventive activity is not
part of his regular duties (even if the
NOTE: This prohibition, however, does not employee uses the time, facilities, and
apply to products and compositions for use in materials of the employer);
any of these methods. 2. The employer, if the invention is the result
of the performance of the employee’s
4. Plant varieties or animal breeds or essentially regular duties UNLESS there is an
biological process for the production of plants or agreement to the contrary.
animals;
Right of Priority
NOTE: This provision shall not apply to micro- An application for patent filed by any person who
organisms and non-biological and has previously applied for the same invention in
microbiological processes. Further, Congress another country which by treaty, convention, or law
may enact a law providing sui generis protection affords similar privileges to Filipino citizens, shall be
of plant varieties and animal breeds and a considered as filed as of the date of filing the foreign
system of community intellectual rights application, provided that:
protection. 1. The local application expressly claims
priority;
NOTE: Congress has already enacted the Plan 2. It is filed within twelve (12) months from the
Variety Protection Act which grants a Certificate date the earliest foreign application was
of Plant Variety Protection for varieties that are: filed; and
(a) new, (b) distinct, (c) uniform, and (d) 3. A certified copy of the foreign application
stable. (Sec. 4, Plant Variety Protection Act) together with an English translation is filed
within six (6) months from the date of filing
5. Aesthetic creations; and in the Philippines.
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NOTE: This criminal action is without prejudice to had known, or had reasonable grounds to
the institution of a civil action for damages, know of the patent.
The criminal action herein provided shall prescribe
in three (3) years from date of the commission of NOTE: It is presumed that the infringer had
the crime. (Sec. 84, IP Code) known of the patent if the words “Philippine
Patent” and the number of the patent
The burden of proof to substantiate a charge for appear on the patented product or on the
patent infringement rests on the plaintiff. (Smith container or package or the advertising
Kline Beckman Corp. v. Court of Appeals, G.R. No. material of the patented product or process.
126627, 2003)
Contributory Infringer – jointly and severally liable
Right to File an Infringement Action by a Foreign with the infringer if he:
National a. actively induces the infringement of a
Any foreign national or juridical entity who meets the patent; or
requirements of Section 3 (Rule on Reciprocity) and b. provides the infringer with a component of
not engaged in business in the Philippines, to which a patented product or of a product
a patent has been granted or assigned under this produced by a patented process knowing it
Act, may bring an action for infringement of patent, to be used for infringing the patented
whether or not it is licensed to do business in the invention.
Philippines under existing law. (Sec. 77, IP Code).
2. Criminal Action
1. Civil Action If infringement is repeated by the infringer or by
Any patentee, or anyone possessing any right, title anyone in connivance with him after finality of the
or interest in and to the patented invention, whose judgment against the infringer, the offenders shall,
rights have been infringed, may bring a civil action without prejudice to the institution of a civil action for
before a court of competent jurisdiction, to recover damages, be criminally liable. Upon conviction, the
from the infringer such damages sustained thereby, offenders shall suffer:
plus attorney’s fees and other expenses of litigation, a. imprisonment for the period of not less than
and to secure an injunction for the protection of his six months but not more than three years,
rights. (Sec. 76, IP Code). and/or
b. a fine of not less than P100,000 but not
Civil remedies for infringement: more than P300,000.
(1) recovery of damages, attorney’s fees, and
litigation costs; and c. Prescriptive Period
(2) injunction.
1. No damages can be recovered for acts of
Rules on Civil Remedies infringement committed more than four (4)
1. If the damages are inadequate or cannot be years before the institution of the action for
readily ascertained with reasonable infringement. (Sec. 79, IP Code)
certainty, the court may award by way of 2. The criminal action for repetition of infringement
damages a sum equivalent to reasonable shall prescribe in three (3) years from date of
royalty. the commission of the crime. (Sec. 84, IP Code)
2. The court may award damages in a sum
above the amount found as actual d. Defenses in Action for Infringement
damages sustained.
In an action for infringement, the defendant may
NOTE: The amount may award an amount
show the invalidity of the patent, or any claim
more than the actual damages but must not
thereof, on any of the following grounds:
exceed three (3) times the amount of actual
a. That what is claimed as the invention is not
damages.
new or patentable;
b. That the patent does not disclose the
3. The court may order that the infringing
invention in a manner sufficiently clear
goods, materials and implements
and complete for it to be carried out by any
predominantly used in the infringement be
person skilled in the art; or
destroyed without compensation.
c. That the patent is contrary to public order
4. Damages cannot be recovered for acts of
or morality.
infringement committed before the infringer
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NOTE: These are the same grounds for the Spectrum of Distinctiveness of Trademark
cancellation of a patent. (Zantarain’s Inc. v. Old Grove Smokehouse, 698
F.2d 786, 1983) (from weakest to strongest)
B. TRADEMARKS 1. Generic – refers to a particular genus or class
of which an individual article or service is a
Modern authorities on trademark law view member (e.g. escalator, cellophane, etc.)
trademarks as performing three distinct functions: a. It can never attain trademark
(1) they indicate origin or ownership of the protection.
articles to which they are attached; b. If a registered trademark becomes
(2) they guarantee that those articles come up generic as to a particular product or
to a certain standard of quality; and service, the mark’s registration is
(3) they advertise the articles they symbolize. subject to cancellation.
(Mirpuri v. Court of Appeals, G.R. No. 2. Descriptive – identifies a characteristic or
114508, 1999) quality of an article or service such as its color,
odor, function, dimensions, or ingredients
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Valley Enterprises, Inc. v. Court of Appeals, G.R. A certificate of registration may be renewed for
No. 78413, 1989) periods of 10 years at its expiration upon payment
of the prescribed fee and upon filing of a request.
The owner of the registered mark shall not be
entitled to recover profits or damages in any suit for 3. ACQUISITION OF OWNERSHIP OF
infringement, unless the acts have been committed TRADE NAME
with knowledge that such limitation is likely to cause
confusion, to cause mistake, or to deceive. Such Notwithstanding any laws or regulations providing
knowledge is presumed if the registrant gives notice for any obligation to register trade names, such
that his mark is registered by displaying with the names shall be protected, even prior to or without
mark the words “Registered Mark” or the letter R registration, against any unlawful act committed by
within a circle or if the defendant had otherwise third parties. (Sec. 165.2.a, IP Code)
actual notice of the registration. (Sec. 158, IP Code)
In particular, any subsequent use of the trade name
Doctrine of Secondary Meaning by a third party, whether as a trade name or a mark
A word or phrase originally incapable of exclusive or collective mark, or any such use of a similar trade
appropriation with reference to an article in the name or mark, likely to mislead the public, shall be
market (because it is geographically or otherwise deemed unlawful. (Sec. 165.2.b, IP Code)
descriptive) might nevertheless have been used for
so long and so exclusively by one producer with Doctrine of Secondary Meaning Applicable to
reference to his article that, in the trade and to that Trade Names
branch of the purchasing public, the word or phrase The doctrine’s application has been extended to
has come to mean that the article was his property. corporate names since the right to use a corporate
(Pearl & Dean (Phil.) v. Shoemart, G.R. No. 148222, name to the exclusion of others is based upon the
2003) same principle which underlies the right to use a
particular trademark or tradename. (Lyceum of the
Secondary meaning is established when a Philippines, Inc. v. Court of Appeals, G.R. No.
descriptive mark no longer causes the public to 101897, 1993)
associate the goods with a particular place but to
associate the goods with a particular source. (Shang Non-Registrable Marks
Properties Realty Corp. v. St. Francis Development A mark cannot be registered if it:
Corp., G.R. No. 190706, 2014) a. Consists of immoral, deceptive or
scandalous matter, or matter which may
Requirements for a Geographically-descriptive disparage or falsely suggest a connection
Mark to Acquire Secondary Meaning with persons, living or dead, institutions,
1. The secondary meaning must have arisen beliefs, or national symbols, or bring them
as a result of substantial commercial use of into contempt or disrepute;
a mark in the Philippines; and b. Consists of the flag or coat of arms or other
2. Such use must result in the distinctiveness insignia of the Philippines or any of its
of the mark insofar as the goods or the political subdivisions, or of any foreign
products are concerned. nation, or any simulation thereof;
NOTE: Proof of substantially exclusive and c. Consists of a name, portrait or signature
continuous commercial use in the identifying a particular living individual
Philippines for five (5) years before the date except by his written consent, or the name,
on which the claim of distinctiveness is signature, or portrait of a deceased
made is prima facie evidence of President of the Philippines, during the life
distinctiveness. (Sec. 123.2, IP Code) of his widow, if any, except by written
consent of the widow;
Duration and Renewal d. Is identical with a registered mark
A certificate of registration shall remain in force for belonging to a different proprietor or a mark
10 years: Provided, That the registrant shall file a with an earlier filing or priority date, in
declaration of actual use and evidence to that effect, respect of:
or shall show valid reasons based on the existence i. The same goods or services, or
of obstacles to such use, as prescribed by the
ii. Closely related goods or services,
Regulations, within 1 year from the fifth anniversary or
of the date of the registration of the mark. Otherwise, iii. If it nearly resembles such a mark
the mark shall be removed from the Register by the as to be likely to deceive or cause
Office. confusion;
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e. Is identical with, or confusingly similar to, or l. Consists of color alone, unless defined by
constitutes a translation of a mark which is a given form; or
considered by the competent authority of m. Is contrary to public order or morality. (Sec.
the Philippines to be well-known 123.1, IP Code)
internationally and in the Philippines,
whether or not it is registered here, as being
already the mark of a person other than the a. Concept of Actual Use
applicant for registration, and used for
identical or similar goods or services; Declaration of Actual Use
Within 3 years from the filing date of the application,
NOTE: In determining whether a mark is the applicant or the registrant shall file a declaration
well-known, account shall be taken of the of actual use of the mark with evidence to that effect.
knowledge of the relevant sector of the Failure to do so shall result to a refusal of the
public, rather than of the public at large, application or removal of the mark from the Register
including knowledge in the Philippines by the Director. (Section 124.2, IP Code)
which has been obtained as a result of the
promotion of the mark. A certificate of registration shall remain in force for
ten (10) years. (Section 145, IP Code)
f. Is identical with, or confusingly similar to, or
constitutes a translation of a mark Best Proof of Actual Use
considered well-known in accordance with The most convincing proof of use of a mark in
the preceding paragraph, which is commerce is testimony of such witnesses as
registered in the Philippines with respect to customers, or the orders of buyers during a certain
goods or services which are not similar to period. (Converse Rubber Corporation v. Universal
those with respect to which registration is Rubber Products, 147 SCRA 154, 1987)
applied for.
Abandonment of Mark
NOTE: Under this provision, (i) the use of Once a trademark is considered abandoned, the
the mark in relation to those goods or protection accorded by the IPC, or in this case the
services must indicate a connection old Trademark Law, is also withdrawn. (ABS-CBN v.
between those goods or services, and the Director of Bureau of Trademarks, GR. No. 217916,
owner of the registered mark; and (ii) the 2018)
interests of the owner of the registered
mark are likely to be damaged by such use. Internet Use of a Mark
Use of mark on the Internet must be shown to result
g. Is likely to mislead the public, particularly as into a within-State sale, or at the very least,
to the nature, quality, characteristics or discernibly intended to target customers that reside
geographical origin of the goods or in that country. This being so, the use of the mark
services; on an interactive website, for instance, may be said
h. Consists exclusively of signs that are to target local customers when they contain specific
generic for the goods or services that they details regarding or pertaining to the target State,
seek to identify; sufficiently showing an intent towards realizing a
i. Consists exclusively of signs or of within-State commercial activity or interaction. (W
indications that have become customary or Land Holding Inc. v. Starwood Hotels and Resorts
usual to designate the goods or services in Worldwide Inc., G.R. No. 222366. 2017)
everyday language or in bona fide and
established trade practice; b. Effect of Registration
j. Consists exclusively of signs or of
indications that may serve in trade to Administrative Confirmation
designate the kind, quality, quantity, Registration is only an administrative confirmation of
intended purpose, value, geographical the existence of the right of ownership of the mark,
origin, time or production of the goods or but does not perfect such right; actual use thereof is
rendering of the services, or other the perfecting ingredient. The registration of a
characteristics of the goods or services; trademark unaccompanied by actual use thereof in
k. Consists of shapes that may be the country accords the registrant only the standing
necessitated by technical factors or by the to sue for infringement in Philippine courts. (Philip
nature of the goods themselves or factors Morris v. Fortune Tobacco, G.R. No. 91332, 1993)
that affect their intrinsic value;
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A certificate of registration of a mark shall be prima been filed in or in respect of the Member
facie evidence of the validity of the registration, the State;
registrant’s ownership of the mark, and of the 2. that the mark is well known in, or that the
registrant’s exclusive right to use the same in mark has been registered, or that an
connection with the goods or services and those that application for registration of the mark has
are related thereto specified in the certificate. been filed in or in respect of, any jurisdiction
(Section 138, IP Code) other than the Member State;
3. that the mark is well known by the public at
4. WELL-KNOWN MARKS large in the Member State. (Part I, Art. 2.3,
1999 Joint Recommendation Concerning
The countries of the Union undertake, ex officio if Provisions on the Protection of Well-Known
their legislation so permits, or at the request of an Marks cited with approval in Sehwani v. In-
interested party, to refuse or to cancel the N-Out)
registration, and to prohibit the use, of a trademark
which constitutes a reproduction, an imitation, or a It is easily recognizable as the trade name and mark
translation, liable to create confusion, of a mark of Harvard University of Cambridge,
considered by the competent authority of the Massachusetts, U.S.A., internationally known as
country of registration or use to be well known in that one of the leading educational institutions in the
country as being already the mark of a person world. As such, even before Harvard University
entitled to the benefits of this Convention and used applied for registration of the mark Harvard in the
for identical or similar goods. These provisions shall Philippines, the mark was already protected under
also apply when the essential part of the mark Article 6b and Article 8 of the Paris Convention.
constitutes a reproduction of any such well-known (Fredco Manufacturing v. Harvard University, G.R.
mark or an imitation liable to create confusion No. 185917, 2011)
therewith. (Art. 6bis, Paris Convention)
Criteria for determining whether a mark is well-
NOTE: The essential requirement under this Article known:
is that the trademark to be protected must be “well- 1. Duration, extent and geographical area of
known” in the country where protection is sought. any use of the mark, in particular, the
The power to determine whether a trademark is duration, extent and geographical area of
well-known lies in the “competent authority of the any promotion of the mark, including
country of registration or use.” This competent advertising or publicity and the
authority would be either the registering authority, if presentation, at fairs or exhibitions, of the
it has the power to decide this, or the courts of the goods and/or services to which the mark
country in question if the issue comes before a applies;
court. (Sehwani, Inc. v. In-N-Out Burger, Inc., G.R. 2. Market share, in the Philippines and in
No. 171053, 2007) other countries, of the goods and/or
services to which the mark applies;
The question of whether or not respondent's 3. Degree of the inherent or acquired
trademarks are considered “well-known” is factual in distinction of the mark;
nature, involving as it does the appreciation of 4. Quality-image or reputation acquired by the
evidence adduced before the BLA-IPO. The settled mark;
rule is that the factual findings of quasi-judicial 5. Extent to which the mark has been
agencies, like the IPO, which have acquired registered in the world;
expertise because their jurisdiction is confined to 6. Exclusivity of registration attained by the
specific matters, are generally accorded not only mark in the world;
respect, but, at times, even finality if such findings 7. Extent to which the mark has been used in
are supported by substantial evidence. (Sehwani, the world;
Inc. v. In-N-Out Burger, Inc., G.R. No. 171053, 8. Exclusivity of use attained by the mark in
2007) the world;
9. Commercial value attributed to the mark in
Factors Which Shall NOT be Required in the world;
Determining Whether a Mark is a Well-known 10. Record of successful protection of the
Mark: rights in the mark;
1. that the mark has been used in, or that the 11. Outcome of litigations dealing with the
mark has been registered, or that an issue of whether the mark is a well-known
application for registration of the mark has mark; and
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12. Presence or absence of identical or similar who believes that he is or will be damaged by the
marks validly registered for or used on registration of a mark under this act as follows:
identical or similar goods or services and
owned by persons other than the person 1. Within 5 years from the date of registration
claiming that his mark is a well-known of the mark under;
mark. 2. at any time, if the registered mark becomes
the
(Rule 102, Rules and Regulations On a. generic name for the goods or
Trademarks, Servicemarks, Tradenames and services, or a portion thereof, for
Marked or Stamped Containers) which it is registered;
b. has been abandoned;
5. RIGHTS CONFERRED BY c. registration was obtained through
REGISTRATION fraud or contrary to the provisions
of the Act;
The owner of a registered mark shall have the
exclusive right: Registration through fraud or in
1. to prevent all third parties not having the bad faith should be sufficiently
owner’s consent established. Otherwise, it is
2. from using in the course of trade identical considered to have acquired all the
or similar signs or containers for goods or rights of a trademark owner under
services which are identical or similar to the IP Code.
those in respect of which the trademark is (Zuneca Parmaceutical v
registered Natrapharm, G,R. 185917, 2011)
3. where such use would result in a likelihood
of confusion. d. the mark is being used by, or with
the permission of, the registrant so
NOTE: In case of the use of an identical sign for as to misrepresent the source of
identical goods or services, a likelihood of confusion the goods or services on or in
shall be presumed. (Sec. 147.1, IP Code) connection with which the mark is
used.
The exclusive right of the owner of a well-known The primary significance of the registered
mark which is registered in the Philippines, shall mark to the relevant public rather than
extend to goods and services which are not similar purchaser motivation shall be the test for
to those in respect of which the mark is registered, determining whether the registered mark
Provided: has become the generic name of goods or
1. That the use of that mark in relation to those services on or in connection with which it
goods or services would indicate a has been used.
connection between those goods or 3. At any time, if the registered owner of the
services and the owner of the registered mark without legitimate reason
mark; and a. Fails to use the mark within the
2. That the interests of the owner of the Philippines or
registered mark are likely to be damaged by b. To cause it to be used in the
such use. (Sec. 147.2, IP Code) Philippines by virtue of a license
during an uninterrupted period of 3
The ownership of a trademark or tradename is a years or longer. (Sec. 151.1, IP
property right that the owner is entitled to protect. Code)
However, when a trademark is used by a party for a
product in which the other party does not deal, the
Court Has The Authority to Determine Right to
use of the same trademark on the latter's product
Registration
cannot be validly objected to. (Canon Kabushiki
Kaisha v. Court of Appeals, G.R. No. 120900, 2000) In any action involving a registered mark, the court
may determine the right to registration, order the
cancellation of a registration, in whole or in part, and
6. CANCELLATION OF otherwise rectify the register with respect to the
registration of any party to the action in the exercise
REGISTRATION OF A TRADEMARK of this. Judgment and orders shall be certified by the
court to the Director, who shall make appropriate
A petition to cancel a registration of a mark may be
filed with the Bureau of Legal Affairs by any person
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entry upon the records of the Bureau, and shall be of each particular case. (Philip Morris, Inc. v.
controlled thereby. (Section161, IP Code) Fortune Tobacco Corp., G.R. No. 158589, 2006)
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(i) the conditions under which the article is infringer, the owner of the right infringed
usually purchased; and shall be entitled as against such infringer
(j) the channels of trade through which the only to an injunction against future printing.
goods flow, how they are distributed, 3. Where the infringement complained of is
marketed, displayed and sold. (Kolin v. contained in or is part of paid advertisement
Kolin, G.R. No. 209843, 2015) in a periodical or in an electronic
communication, the remedies of the owner
The use of an identical or colorable imitation of a of the right infringed as against the
registered trademark by a person for the same publisher or distributor of periodical or
goods or services or closely related goods or electronic communication shall be limited to
services of another party constitutes infringement. It an injunction against the presentation of
is a form of unfair competition because there is an such advertising matter in future issues.
attempt to get a free ride on the reputation and
selling power of another manufacturer by passing of NOTE: This shall apply only to innocent
one’s goods as identical or produced by the same infringers.
manufacturer as those carrying the other mark
(brand). (Commissioner of Internal Revenue v. San 4. There shall be no infringement of
Miguel Corp., G.R. Nos. 205045 & 205723, 2017) trademarks or tradenames of imported or
sold drugs and medicines as well as
The general impression of the ordinary purchaser imported or sold off-patent drugs and
buying under the normally prevalent conditions in medicines PROVIDED, the marks
trade and giving the attention such purchasers appearing thereon have been registered
usually give in buying that class of goods, is the marks that have not been tampered or
touchstone. (Del Monte Corp v. Court of Appeals, unlawfully modified.
G.R. No. 78325, 1990)
a. Damages
Right of Foreign Corporation to Sue in
Trademark or Service Mark Enforcement Action The owner of a registered mark may recover
Any foreign national or juridical person who meets damages from any person who infringes his rights.
the requirements of Section 3 of the IP Code and The measure of the damages suffered shall be
does not engage in business in the Philippines may either:
bring a civil or administrative action hereunder for 1. The reasonable profit which the
opposition, cancellation, infringement, unfair complaining party would have made had
competition, or false designation of origin and false the defendant not infringed his rights, or
description, whether or not it is licensed to do 2. The profit which the defendant actually
business in the Philippines under existing laws. made out of the infringement.
(Sec. 160, IP Code)
If the measure of damages cannot be readily
Limitations to Actions for Infringement ascertained with reasonable certainty, the court may
1. A registered mark shall have no effect award as damages a reasonable percentage based
against any person who, in good faith, upon the amount of gross sales of the defendant or
before the filing date or the priority date, the value of the services in connection with which
was using the mark for the purposes of his the mark or trade name was used in the
business or enterprise. infringement of the rights of the complaining party.
(Sec. 156.1, IP Code)
NOTE: Such right may only be transferred
or assigned together with his enterprise or NOTE: Where there was actual intent to mislead the
business or with that part of his enterprise public or to defraud the complainant, the court may
or business in which the mark is used. double the amount of damages to be awarded. (Sec.
156.3, IP Code)
NOTE: cf. (Zuneca v. Natrapharm, G.R.
No. 211850, 2020 - wherein the SC held On application of the complainant, the court may
that the first to file rule shall prevail against impound during the pendency of the action, sales
a user of a mark in good faith.) invoices and other documents evidencing sales.
(Sec. 156.2, IP Code)
2. Where an infringer who is engaged solely
in the business of printing the mark or other
infringing materials for others is an innocent
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General Rule: Prior approval of the government of the original or the copy which is the
agency or office wherein the work is created shall be subject of the rental;
necessary for exploitation of such work for profit.
Rental
Such agency or office may impose as a condition Transfer of the possession of the original or
the payment of royalties. a copy of a work or a sound recording for a
limited period of time, for profit-making
Exception: No prior approval or conditions shall be purposes
required for the use of any purpose of:
1. Statutes, rules and regulations, or 5. Public display of the original or a copy of the
2. Speeches, lectures, sermons, addresses, work;
and dissertations, pronounced, read or 6. Public performance of the work; and
rendered in courts of justice, before
administrative agencies, in deliberative Definitions of Public Performance
assemblies, and in meetings of public a. For Non-audiovisual work – reciting,
character. playing, dancing, acting or otherwise
performing the work, either directly or
NOTE: The author of speeches, lectures, by means of any device or process
sermons, addresses, and dissertations b. For Audiovisual work – showing of its
mentioned in the preceding paragraphs images in sequence and the making of
shall have the exclusive right of making a the sounds accompanying it audible
collection of his works. c. For Sound recording – making the
recorded sounds audible at a place or
Publication or republication by the government in a at places where persons outside the
public document of any copyrighted work shall not normal circle of a family and that
be taken to cause any abridgment or annulment of family’s closest social acquaintances
the copyright or to authorize any use or are or can be present
appropriation of such work without the consent of
the copyright owner. (Sec. 176.3, IP Code) 7. Other communication to the public of the
work, e.g. online/Internet.
3. RIGHTS CONFERRED BY A
COPYRIGHT Communication to the public
Any communication to the public, including
Copyright or Economic Rights broadcasting, rebroadcasting, retransmitting by
Copyright or economic rights shall consist of the cable, broadcasting, and retransmitting by
exclusive right to carry out, authorize or prevent the satellite, and includes the making of a work
following acts: available to the public by wire or wireless means
in such a way that members of the public may
1. Reproduction of the work or substantial access these works from a place and time
portion of the work; individually chosen by them
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g. managing of client money, securities or for at least five (5) years from the
other assets; dates when they were closed.
h. management of bank, savings or securities d. Reporting to the AMLC all covered
accounts; transactions and suspicious transactions
i. organization of contributions for the within 5 working days from occurrence
creation, operation or management of thereof, unless the AMLC prescribes a
companies; and different period not exceeding 15 days
j. creation, operation or management of (Sec. 9)
juridical persons or arrangements, and
buying and selling business entities. B. COVERED AND SUSPICIOUS
k. casinos, including internet and ship-based TRANSACTIONS
casinos, with respect to their casino cash
transactions related to their gaming
1. COVERED TRANSACTIONS
operations;
l. Real estate developers and brokers;
a. Transaction in cash or other
m. Offshore gaming operators, as well as their
equivalent monetary instrument
service providers, supervised, accredited
involving a total amount in excess of
or regulated by the Philippine Amusement
Five hundred thousand pesos
and Gaming Corporation (PAGCOR) or any
(P500,000.00) within one (1)
government agency.
banking day;
b. For casinos, including internet and
Notwithstanding the foregoing, the term 'covered
ship-based casinos, a single casino
persons' shall exclude lawyers and accountants cash transaction involving an
acting as independent legal professionals in relation amount in excess of Five million
to information concerning their clients or where pesos (P5,000,000.00) or its
disclosure of information would compromise client equivalent in any other currency;
confidences or the attorney-client relationship: c. For real estate developers and
Provided, That these lawyers and accountants are brokers, a single cash transaction
involving an amount in excess of
authorized to practice in the Philippines and shall
Seven Million Five Hundred
continue to be subject to the provisions of their Thousand Pesos (P7,500,000.00) or
respective codes of conduct and/or professional its equivalent in any other currency.
responsibility or any of its amendments. (Sec. 3)
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r. Forgeries and Counterfeiting under Articles Code of 1997, as amended, where the
163, 166, 167, 168, 169 and 176 of the deficiency basic tax due in the final
RPC, as amended; assessment is in excess of Twenty-five
s. Violations of Sections 4 to 6 of RA. 9208, or million pesos (P25,000,000.00) per taxable
the Anti-Trafficking in Persons Act of 2003; year, for each tax type covered and there
t. Violations of Sections 78 to 79 of Chapter has been a finding of probable cause by the
IV, of PD 705, or the Revised Forestry competent authority: Provided further, That
Code of the Philippines, as amended; there must be a finding of fraud, willful
u. Violations of Sections 86 to 106 of Chapter misrepresenting or malicious intent on the
VI, of RA 8550, or the Philippine Fisheries part of the taxpayer: Provided, finally, That
Code of 1998; in no case shall the AMLC institute
v. Violations of Sections 101 to 107, and 110 forfeiture proceedings to recover monetary
of RA 7942, or the Philippine Mining Act of instruments, property or proceeds
1995; representing, involving, or relating to a tax
w. Violations of Section 27(c), (e), (f), (g) and crime, if the same has already been
(i), of RA 9147, or the Wildlife Resources recovered or collected by the Bureau of
Conservation and Protection Act; Internal Revenue (BIR) in a separate
x. Violation of Section 7(b) of RA 9072, or the proceeding and
National Caves and Cave Resources jj. Felonies or offenses of a similar nature that
Management Protection Act; are punishable under the penal laws of
y. Violation of RA 6539, or the Anti- other countries. (Sec. 2, RA 10365)
Carnapping Act of 2002, as amended;
z. Violations of Sections 1, 3 and 5 of PD
1866, as amended, or the decree Codifying E. AUTHORITY TO INQUIRE INTO BANK
the Laws on Illegal/Unlawful Possession, DEPOSITS
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
1. AUTHORITY OF THE AMLC TO
aa. Violation of PD 1612, otherwise known as INQUIRE INTO A DEPOSIT OR
the Anti-Fencing Law; INVESTMENT; EX PARTE
bb. Violation of Section 6 of RA 8042, or the APPLICATION
Migrant Workers and Overseas Filipinos
Act of 1995, as amended by Republic Act Notwithstanding the provisions of Republic Act No.
No. 10022; 1405, as amended, R.A. No. 6426, as amended,
cc. Violation of RA 8293, or the Intellectual R.A. No. 8791, and other laws, the AMLC may
Property Code of the Philippines; inquire into or examine any particular deposit or
dd. Violation of Section 4 of RA 9995, or the investment, including related accounts, with any
Anti-Photo and Video Voyeurism Act of banking institution or non-bank financial
2009; institution upon order of any competent court
ee. Violation of Section 4 of RA 9775, or the based on an ex parte application in cases of
Anti-Child Pornography Act of 2009; violations of this Act, when it has been established
ff. Violations of Sections 5, 7, 8, 9, 10(c), (d) that there is probable cause that the deposits or
and (e), 11, 12 and 14 of RA 7610, or the investments, including related accounts involved,
Special Protection of Children Against are related to an unlawful activity as defined in
Abuse, Exploitation and Discrimination; Section 3(i) hereof or a money laundering
gg. Fraudulent practices and other violations offense under Section 4 hereof; except that no
under RA 8799, or the Securities court order shall be required in cases involving
Regulation Code of 2000; activities defined in Section 3(i)(1), (2), and (12)
hh. Violation of Section 9 (a)(3) of Republic Act hereof, and felonies or offenses of a nature defined
No. 10697, otherwise known as the in Section 3(i)(1), (2), and (12) hereof, and felonies
"Strategic Trade Management Act", in or offenses of a nature similar to those
relation to the proliferation of weapons of mentioned in Section 3(i)(1), (2), and (12), which
mass destruction and its financing pursuant are Punishable under the penal laws of other
to United Nations Security Council countries, and terrorism and conspiracy to
Resolution Numbers 1718 of 2006 and commit terrorism as defined and penalized under
2231 of 2015; Republic Act No. 9372.
ii. Violation of Section 254 of Chapter
II, Title X of the National Internal Revenue
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To ensure compliance with this Act, the Bangko The twenty (20)-day period may be extended after
Sentral ng Pilipinas may, in the course of a the conduct of a summary hearing. However, the
periodic or special examination, check the total period of the freeze order issued by the Court
compliance of a Covered institution with the of Appeals shall not exceed six (6) months.
requirements of the AMLA and its implementing
rules and regulations. NOTE: If there is no case filed against a person
whose account has been frozen within the period
4. DEFINITION OF RELATED determined by the Court of Appeals, not exceeding
ACCOUNTS six (6) months, the freeze order shall be deemed
ipso facto lifted
For purposes of this section, 'related accounts' shall
refer to accounts, the funds and sources of which b. Summary Hearing to Determine
originated from and/or are materially linked to the Modification of Freeze Order;
monetary instrument(s) or property(ies) subject of Period; Total Period of Freeze
the freeze order(s). Order
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In any case, the court should act on the petition to principle of effective judicial protection:
freeze within twenty-four (24) hours from filing of the Provided, That the person whose property or funds
petition. If the application is filed a day before a have been frozen may withdraw such sums as the
nonworking day, the computation of the twenty-four AMLC determines to be reasonably needed for
(24)-hour period shall exclude the nonworking days. monthly family needs and sustenance including the
services of counsel and the family medical needs of
e. Scope of Freeze Order such person.
The freeze order or asset preservation order issued The AMLC, if circumstances warrant, may
under this Act shall be limited only to the amount initiate civil forfeiture proceedings to preserve
of cash or monetary instrument or value of the assets and to protect it from dissipation. No
property that court finds there is probable cause court shall issue a temporary restraining order or a
to be considered as proceeds of a predicate writ of injunction against the freeze order, except
offense, and the freeze order or asset preservation the Court of Appeals or the Supreme Court.
order shall not apply to amounts in the same
account in excess of the amount or value of the
proceeds of the predicate offense. 2. CIVIL FORFEITURE
h. Special rules on targeted The forfeiture shall include those other monetary
financial sanctions in relation instrument or property having an equivalent
to proliferation of weapons of value to that of the monetary instrument or
mass destruction and their property found to be related in any way to an
financing unlawful activity or a money laundering offense,
when with due diligence, the former cannot be
For purposes of implementing targeted financial located, or it has been substantially altered,
sanctions in relation to proliferation of weapons destroyed, diminished in value or otherwise
of mass destruction and its financing, as rendered worthless by any act or omission, or it has
provided under Section 3(15), the AMLC shall have been concealed, removed, converted, or otherwise
the power to issue, ex parte, an order to freeze transferred, or it is located outside the Philippines or
without delay. has been placed or brought outside the jurisdiction
of the court, or it has been commingled with other
The freeze order shall be effective until the basis for monetary instrument or jurisdiction of the court, or it
its issuance shall have been lifted. During the has been commingled with other monetary
effectivity of the freeze order, the aggrieved party instrument or property belonging to either the
may, within twenty (20) days from issuance, file offender himself or a third person or entity, thereby
with the Court of Appeals a petition to determine rendering the same difficult to identify or be
the basis of the freeze order according to the segregated for purposes of forfeiture.
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of communication, storage and display; and on printed or hard copies of the electronic
(Section 11(c)(i), IRR) documents or electronic data messages by
2. The standard of reliability required shall be electronic notaries, service providers and other duly
assessed in the light of the purpose for recognized or appointed certification authorities.
which the information was generated and in
Burden of Proving Authenticity
the light of all the relevant circumstances.
The person seeking to introduce an electronic data
(Section 11(c)(ii), IRR) message or electronic document in any legal
proceeding has the burden of proving its authenticity
4. AUTHENTICATION OF by evidence capable of supporting a finding that the
ELECTRONIC DATA MESSAGES electronic data message or electronic document is
AND ELECTRONIC DOCUMENTS what the person claims it to be.
(SECTION 11)
Establishment of Integrity of Information and
Authentication, Substantiation, and Validation Communication System
Procedures In the absence of evidence to the contrary, the
Until the Supreme Court by appropriate rules shall integrity of the information and communication
have so provided, electronic documents, electronic system in which an electronic data message or
data messages and electronic signatures, shall be electronic document is recorded or stored may be
authenticated by demonstrating, substantiating and established in any legal proceeding:
validating a claimed identity of a user, device, or 1. By evidence that at all material times the
another entity in an information or communication information and communication system or other
system, among other ways, as follows: similar device was operating in a manner that
1. The electronic signature shall be authenticated did not affect the integrity of the electronic data
by proof that a letter, character, number or other message or electronic document, and there are
symbol in electronic form representing the no other reasonable grounds to doubt the
persons named in and attached to or logically integrity of the information and communication
associated with an electronic data message, system;
electronic document, or that the appropriate 2. By showing that the electronic data message or
methodology or security procedures, when electronic document was recorded or stored by
applicable, were employed or adopted by a a party to the proceedings who is adverse in
person and executed or adopted by such interest to the party using it; or
person, with the intention of authenticating or 3. By showing that the electronic data message or
approving an electronic data message or electronic document was recorded or stored in the
electronic document; usual and ordinary course of business by a person
2. The electronic data message or electronic who is not a party to the proceedings and who did
document shall be authenticated by proof that not act under the control of the party using the
an appropriate security procedure, when record.
applicable was adopted and employed for the
purpose of verifying the originator of an 5. RETENTION OF ELECTRONIC
electronic data message or electronic DATA MESSAGE OR ELECTRONIC
document, or detecting error or alteration in the
DOCUMENT (SECTION 13)
communication, content or storage of an
electronic document or electronic data Notwithstanding any provision of law, rule or
message from a specific point, which, using regulation to the contrary, the requirement in any
algorithm or codes, identifying words or provision of law that certain documents be retained
numbers, encryptions, answers back or in their original form is satisfied by retaining them in
acknowledgment procedures, or similar security the form of an electronic data message or electronic
devices. document which:
1. Remains accessible so as to be usable for
Other Authentication Procedures subsequent reference; (Section 20(a)(i), IRR)
The Supreme Court may adopt such other 2. Is retained in the format in which it was
authentication procedures, including the use of generated, sent or received, or in a format
electronic notarization systems as necessary and which can be demonstrated to accurately
advisable, as well as the certificate of authentication represent the electronic data message or
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D. OBLIGATION OF CONFIDENTIALITY
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by way of the present value of payments projected filing of his petition. He shall attach to his petition, as
in the plan, more if the debtor continues as a going a minimum:
concern than if it is immediately liquidated. (FRIA,
RA 10142, Sec. 4[gg] (a) a schedule of debts and liabilities;
(b) an inventory of assets; and
Rehabilitation contemplates a continuance of (c) a proposed agreement with his creditors.
corporate life and activities in an effort to restore (FRIA, RA 10142, Sec. 94)
and reinstate the corporation to its former position
of successful operation and solvency (Wonder The manner of approval of the proposed agreement
Book Corporation v. Phil. Bank of is as follows:
Communications, G.R. No. 187316, 2012)
1. Quorum requirement for a valid creditors’
The basic issues in rehabilitation proceedings meeting - The presence of creditors holding
concern the viability and desirability of continuing claims amounting to at least three-fifths (3/5) of
the business operations of distressed the liabilities shall be necessary for holding a
corporations, all with a view of effectively restoring meeting (FRIA, RA 10142, Sec. 96)
to a state of solvency or to its former healthy 2. Vote requirement for approval of the proposed
financial condition through the adoption of a agreement - To form a majority, it is necessary:
rehabilitation plan (BPI Family Savings Bank v. St. (a) that two-thirds (2/3) of the creditors voting
Michael Medical Center, G.R. No. 205469, 2015) unite upon the same proposition; and
(b) that the claims represented by said majority
2. INSOLVENT
vote amount to at least three-fifths (3/5) of
Insolvent shall refer to the financial condition of a the total liabilities of the debtor mentioned in
debtor that is generally unable to pay its or his the petition; (FRIA, RA 10142, Sec. 97 [d]).
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its The suspension order shall lapse when three (3)
or his assets. (FRIA, RA 10142, Sec. 4[p],) months shall have passed without the proposed
agreement being accepted by the creditors or as
Ground
soon as such agreement is denied. (FRIA, RA
An individual debtor possesses sufficient property
to cover all his debts but foresees the impossibility 10142, Sec. 96)
of meeting them when they respectively fall due
(FRIA, RA 10142, Sec. 94) If the individual debtor fails, wholly or in part, to
perform the agreement decided upon at the meeting
3. LIQUIDATION of the creditors, all the rights which the creditors had
against the individual debtor before the agreement
In Liquidation, corporations preserve their assets in shall revest in them, and the individual debtor may
order to sell them. Without these assets, business be subject to insolvency proceedings. (FRIA, RA
operations are effectively discontinued. The 10142, Sec. 102)
proceeds of the sale are distributed equitably among
creditors, and surplus is divided or losses are re- B. MODES OF REHABILITATION
allocated. (Viva Shipping Lines v. Keppel
Philippines Mining, G.R. No. 177382, 2016) 1. COURT-SUPERVISED
REHABILITATION
4. SUSPENSION OF PAYMENTS
a. Voluntary vs. Involuntary
Procedure in suspension of payment
An individual debtor who, possessing sufficient VOLUNTARY INVOLUNTARY
property to cover all his debts but foreseeing the
impossibility of meeting them when they debtor-initiated creditor-initiated
respectively fall due, may file a verified petition that (FRIA, RA 10142, (FRIA, RA 10142,
he be declared in the state of suspension of Sec. 12, RA 10142) Sec. 13 & 14)
payments by the court of the province or city in
which he has resided for six (6) months prior to the
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be made within 7 days from the time of its Effects of the Commencement Order
issuance; 1. Vest the rehabilitation with all the powers and
7. If the petitioner is the debtor direct the service by functions provided for the FRIA, such as the right
personal delivery of a copy of the petition on to review and obtain records to which the
each creditor holding at least 10% of the total debtor's management and directors have
liabilities of the debtor as determined from the access, including bank accounts or whatever
schedule attached to the petition within 5 days; nature of the debtor subject to the approval by
if the petitioner/s is/are creditor/s, direct the the court of the performance bond filed by the
service by personal delivery of a copy of the rehabilitation receiver;
petition on the debtor within 5 days; 2. Prohibit or otherwise serve as the legal basis
8. Appoint a rehabilitation receiver who may or not rendering null and void the results of any
be from among the nominees of the petitioner/s extrajudicial activity or process to seize property,
and who shall exercise such powers and duties sell encumbered property, or otherwise attempt
defined in the FRIA as well as the procedural to collection or enforce a claim against the
rules that the Supreme Court will promulgate; debtor after commencement date unless
9. Summarize the requirements and deadlines for otherwise allowed in the FRIA, subject to the
creditors to establish their claims against the provisions of Section 50 hereof;
debtor and direct all creditors to their claims with 3. Exempt the debtor from liability for taxes and
the court at least 5 days before the initial fees, including penalties, interests, and charges
hearing; due to the government;
10. Direct Bureau of internal Revenue (BIR) to file 4. Serve as the legal basis for rendering null and
and serve on the debtor its comment on or void any setoff after the commencement date of
opposition to the petition or its claim/s against any debt owed to the debtor by any of the
the debtor under such procedures as the debtor's creditors;
Supreme Court provide; 5. Serve as the legal basis for rendering null and
11. Prohibit the debtor's suppliers of goods or void the perfection of any lien against the
services from withholding the supply of goods debtor's property after the commencement date;
and services in the ordinary course of business and
for as long as the debtor makes payments for 6. Consolidate the resolution of all legal
the services or goods supplied after the proceedings by and against the debtor to the
issuance of the Commencement Order; court; provided, however, that the court may
12. Authorize the payment of administrative allow the continuation of cases on other courts
expenses as they become due; where the debtor had initiated the suit. (FR
13. Set the case for initial hearing, which shall not Rules, Rule 2, Sec. 9)
be more than 40 days from the date of filing of
the petition for the purpose of determining Effectivity and Duration of the Commencement
whether there is substantial likelihood for the Order
debtor to be rehabilitated; The Commencement Order shall be effective for the
14. Make available copies of the petition and duration of the rehabilitation proceedings, unless:
rehabilitation plan for examination and copying
by any interested party; a. Earlier lifted by the court;
15. Indicate the location or locations at which b. The Rehabilitation Plan is seasonably
documents regarding the debtor and the confirmed or approved; or
proceedings under Act may be reviewed and c. The Rehabilitation proceedings are ordered
copied; terminated by the court (FR Rules, Rule 2,
16. State that any creditor or debtor who is not the Sec. 11)
petitioner, may submit the name or nominate
any other qualified person to the position of NOTE: “Commencement date” refers to the date
rehabilitation receiver at least 5 days before the on which the court issues the Commencement
initial hearing; Order, which shall be retroactive to the date of
17. Include a Stay or Suspension Order. (FRIA, RA filing of the petition for voluntary or involuntary
10142, Sec. 16) proceedings.
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NOTE: The effects of the Commencement Order The issuance of a stay order does not deprive
shall be reckoned from the date of the filing of the creditors the right to enforce their claims against the
petition for corporate rehabilitation, be it voluntary debtor. It does not affect the right to commence
or involuntary. actions or proceedings in order to preserve ad
cautelam a claim against the debtor and to toll the
The determination of the date of the filing of the running of the prescriptive period to file the claim.
petition for rehabilitation is relevant in ascertaining (Allied Banking Corp. v. Equitable PCI Bank, Inc.,
the extent of the legal effects of a Commencement G.R. No. 191939, 2018)
Order. (Land Bank of the Philippines v. Polillo
Paradise Island Corporation,G.R. No. 211537,
2019) Claims against sureties and other persons solidarily
liable with the debtor is not barred by a stay order.
(Trade and Investment Development Corporation of
Stay or Suspension Order the Philippines v. Philippine Veterans Bank, G.R.
Effects (FRIA, RA 10142, Sec. 16[q]) No. 233850, 2019)
(a) Suspend all actions or proceedings, in
When a stay order is issued, the rehabilitation court
court or otherwise, for the enforcement of
is only empowered to suspend claims against the
claims against the debtor;
(b) Suspend all actions to enforce any debtor, its guarantors, and sureties who are not
judgment, attachment or other provisional solidarily liable with the debtor. Hence, the making
remedies against the debtor; of claims against sureties and other persons
(c) Prohibit the debtor from selling, solidarily liable with the debtor is not barred by a stay
encumbrancing, transferring or disposing in order. (Situs Dev. Corp v. Asiatrust Bank, G.R. No.
any manner any of its properties (except in 233850,2019)
the ordinary course of business); and
(d) Prohibit the debtor from making any NOTE: Stay Order may now cover third-party or
payment of its liabilities outstanding as of accommodation mortgages, in which the “mortgage
the commencement date (except as may be is necessary for the rehabilitation of the debtor as
provided in the order) determined by the court upon recommendation by
the rehabilitation receiver.” (Situs Dev. Corp v.
NOTE: The effects of a Stay Order are immediate, Asiatrust Bank, G.R. No. 233850,2019)
and shall also be retroactive to the date of the filing
of the petition. Effect of violating Stay or Suspension order:
For the Debtor:
Once due notice is made through publication, the Debtor shall be liable for double the value of the
rehabilitation court may nullify actions inconsistent property sold, embezzled, or disposed of or double
with the stay order but which may have been taken the transaction involved (FRIA, RA 10142, Sec.
prior to publication. Because prior to publication, 10)
creditors may not yet be aware that they are to
desist from pursuing claims against the insolvent For the Creditor
debtor. (Allied Banking Corp. v. Equitable PCI Bank, NOTE: The creditors must ventilate their claims
Inc., G.R. No. 191939, 2018) before the rehabilitation court, and any “attempts
to seek legal or other resource against the
The issuance of the Commencement Order and the distressed corporation shall be sufficient to
Suspension or Stay Order, and any other provision support a finding of indirect contempt of court.”
of the Act, shall not in any way diminish or impair the (Bureau of Internal Revenue v. Lepanto Ceramics,
security or lien of a secured creditor, or the value of Inc., G.R. No. 224764, 2017)
his lien or security, except that his right to enforce
the security or lien may be suspended during the
term of the Stay Order. The court may allow the Exceptions to stay order: (FRIA, RA 10142 Sec.
enforcement of the security or lien if the property is 18
not necessary for the rehabilitation of the debtor. 1. Cases already pending in the SC as of the
(FR Rules, Rule 2, Sec. 59) commencement date;
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2. Cases pending or filed at a specialized court or the trial court has ample discretion to call a hearing
quasi-judicial agency; prior to the issuance of a stay order, so long as said
3. Enforcement actions against: hearing is held within the 5-day period from the filing
a. Sureties and other persons solidarily liable of the petition. (Pryce Corp. v. Chinabank, G.R. No.
with the debtor 172302, 18 Feb. 2014)
b. Third party or accommodation mortgagors
c. Unless the property subject of the third party What is the rationale of the Stay Order? (Bar
or accommodation mortgagor is necessary 2006)
for the rehabilitation of the debtor, as “The justification for the suspension of actions or
determined by the court upon claims, without distinction, pending rehabilitation
recommendation of the rehabilitation proceedings is to enable the management
receiver committee or rehabilitation receiver to effectively
d. Issuers of letters of credit exercise its/his powers free from any judicial or
4. Any action of customers/clients of a securities extra-judicial interference that might unduly hinder
market participant to recover money/securities or prevent the "rescue" of the debtor company.
entrusted to the latter in the ordinary course of
To allow such other actions to continue would only
business, and any action of such securities
add to the burden of the management committee
market participant or the appropriate regulatory
or rehabilitation receiver, whose time, effort and
agency/self-regulatory organization to pay or
resources would be wasted in defending claims
settle such claims or liabilities;
against the corporation instead of being directed
5. Actions of a licensed broker/dealer to sell
toward its restructuring and rehabilitation.”
pledged securities of a debtor, pursuant to a
securities pledge or margin agreement for the
c. Rehabilitation receiver and
settlement of securities transactions;
management committee
6. Clearing and settlement of financial transactions
through the facilities of a clearing agency or Rehabilitation Receiver
similar entity duly authorized, registered and/or The person or persons, natural or juridical,
recognized by the appropriate regulatory agency appointed as such by the court pursuant to the FRIA
(like BSP, SEC, etc.) as well as any form of and which shall be entrusted with such powers and
actions of such agencies to reimburse duties as set forth herein. (FRIA, R.A. 10142, Sec.
themselves for any transactions settled by the 4(hh))
debtor; and
7. Criminal actions against the individual debtor or Minimum Qualifications of a Rehabilitation
owner, partner, director, or officer of the debtor. Receiver
NOTE: Determining the date when ownership of the A. If the rehabilitation receiver is a natural
subject properties was vested upon the creditor is person:
crucial. If the ownership was vested prior to the filing 1. Citizen of the Philippines or a resident of
of the petition for corporate rehabilitation, the effect
the Philippines in the 6 months prior to
of such sale is to release the debtor from its
outstanding obligation. In other words there is no nomination;
more creditor-debtor relationship to speak of. Thus, 2. Not been earlier dismissed as a
the Stay Order does not apply anymore as Section rehabilitation receiver;
17 of the FRIA extends only to processes which 3. As far as practicable, has expertise and
occurred after the commencement date. (Land Bank acumen to manage and operate a business
of the Philippines v. Polillo Paradise Island similar in size and complexity of that of the
Corporation, G.R. No. 211537, 2019) debtor;
4. Has a general familiarity with the rights of
NOTE: there is no need for a hearing before the creditors subject to suspension of payment
issuance of a stay order. The Interim Rules only or rehabilitation and a general
require an initial hearing before the court will give understanding of the duties and obligations
due course to or dismiss a petition. Nevertheless, of a rehabilitation receiver;
neither do the Interim Rules prohibit the holding of a
hearing before the issuance of a stay order. Thus,
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NOTE: Additionally, the liquidator shall have the Without limiting the generality of the foregoing, an
right and duty to take all reasonable steps to individual shall be deemed to have a conflict of
manage and dispose of the debtor's assets with a interest if:
view towards maximizing the proceeds therefrom, to
pay creditors and stockholders, and to terminate the 1. He is a creditor, owner, partner or stockholder of
debtor's legal existence. the debtor;
2. He is engaged in a line of business which
NOTE: The determination of the validity and the competes with that of the debtor;
approval of the rehabilitation plan is not the 3. He is, or was, within 5 years from the filing of the
responsibility of the rehabilitation receiver, but petition, a director, officer, owner, partner or
remains the function of the court – notwithstanding employee of the debtor or any of the creditors,
the credentials of the court-appointed rehabilitation or the auditor or accountant of the debtor;
receiver. While the court may consider the receiver's 4. He is, or was, within 2 years from the filing of the
report favorably recommending the debtor's petition, an underwriter of the outstanding
rehabilitation, it is not bound thereby if, in its securities of the debtor;
judgment, the debtor's rehabilitation is not feasible. 5. is related by consanguinity or affinity within the
(Land Bank of the Philippines v. Fastech Synergy fourth civil degree to any individual creditor,
Philippines, Inc., G.R. No. 206150, 2017) owner/s of a sale proprietorship-debtor, partners
of a partnership-debtor or to any stockholder,
Removal of a Rehabilitation Receiver director, officer, employee or underwriter of a
The rehabilitation receiver may be removed at any corporation-debtor; or
time by the court, either: 6. He has any other direct or indirect material
interest in the debtor or any of the creditors. (FR
a. Motu proprio; or Rules, Rule 2, Sec. 22)
b. Upon motion by any creditor/s holding more
than 50% of the total obligations of the NOTE:
debtor (FR Rules, Rule 2, Sec. 27) Any rehabilitation receiver, member of the
management committee or persons employed or
Grounds for Removal contracted by them possessing any conflict of
interest shall make the appropriate disclosure either
1. Incompetence, gross negligence, failure to to the court or to the creditors in case of out-of-court
perform or failure to exercise the proper degree rehabilitation proceedings. (FRIA, R.A. 10142, Sec.
of care in the performance of his duties and 40)
powers; Any party to the proceeding adversely affected by
2. Lack of a particular or specialized competency the appointment of any person with a conflict of
required by the specific case; interest to any of the positions enumerated above
3. Illegal acts or conduct in the performance of his may however waive his right to object to such
duties and powers; appointment and, if the waiver is unreasonably
4. Lack of qualification or presence of any withheld, the court may disregard the conflict of
disqualification; interest, taking into account the general interest of
5. Conflict of interest that arises after his the stakeholders. (FR Rules, Rule 2, Sec. 24)
appointment;
6. Manifest lack of independence that is Management of Debtor’s Business
detrimental to the general body of the General Rule: The management of the juridical
stakeholders; debtor shall remain with existing management.
7. Failure, without just cause, to perform any of his Exception: Displacement of Existing Management
powers and functions under these Rules; or by the Rehabilitation Committee
8. Any of the grounds for removing a trustee under
the general principles of trusts. NOTE:
Upon motion of any interested party and within the
Cases of Conflict of Interest soonest possible time, the court may appoint and
An individual shall be deemed to have a conflict of direct the rehabilitation receiver to assume the
powers of management of the debtor, or appoint a
interest if he is so situated as to be materially
management committee that will undertake the
influenced in the exercise of his judgment for or management of the debtor, upon clear and
against any party to the proceedings.
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convincing evidence of any of the following b. Assume the powers, rights and
circumstances: responsibilities of the debtor (FR Rules,
Rule 2, Sec. 33)
a. Actual or imminent danger of dissipation,
loss, wastage or destruction of the debtor's
NOTE: A majority of all members shall be necessary
assets or other properties; or
for the management committee to act or make a
b. Paralyzation of the business operations of
decision (FR Rules, Rule 2, Sec. 35)
the debtor; or
c. Gross mismanagement of the debtor, fraud
Composition of the Management Committee
or other wrongful conduct on the part of, or
The management committee shall be composed of
gross or willful violation of the Act by the
three qualified members appointed by the court, as
existing management of the debtor or the
follows:
owner, partner, director, officer or
a. Nominated by the debtor;
representative/s in management of the
b. Nominated by the creditor/s holding more
debtor.
than 50% of the total obligations of the
debtor;
NOTE: In case the court appoints the rehabilitation
c. A chairman nominated by the first and
receiver to assume the management of the debtor,
second members within 10 days from the
the court may:
appointment (FR Rules, Rule 2, Sec. 34)
(a) Require the rehabilitation receiver to post an
additional bond;
NOTE: The management committee may overrule
(b) Authorize him to engage the services or to
or revoke the actions of the previous management
employ persons or entities to assist him in
or governing body of the debtor (FR Rules, Rule 2,
the discharge of his managerial functions;
Sec. 33)
and
(c) Authorize a commensurate increase in his
Powers and Duties of the Management
compensation.
Committee
The specific powers and duties of the management
Rules and Liability on Conflicting Decisions
committee, whose members shall also be
• In case the rehabilitation receiver is a juridical
considered as officers of the court, are the following:
person, the acts of its designated
representative shall be presumed to be carried 1. Investigate the acts, conduct, properties,
out in accordance with the authority vested in liabilities, and financial condition of the
him by the juridical entity which he represents. corporation, association or partnership under
• In case of conflict, the decision of the governing management;
body of the juridical entity shall prevail. 2. Examine under oath the directors and officers of
the entity and any other witnesses that the
NOTE: However, the rehabilitation receiver and its committee may deem appropriate;
representative/s shall remain solidarily liable for all 3. Report to the court any ascertained fact
obligations and responsibilities, subject to the right pertaining to the causes of the problems, fraud,
of withdrawal prior to the implementation of the misconduct, mismanagement and irregularities
disputed decision. committed by any other person;
4. Use the services of or employ such person or
NOTE: Upon assumption of management, the persons, such as lawyers, accountants,
receiver shall exercise the same powers granted auditors, appraisers and staff as are necessary
under Sec. 26 in addition to the powers granted to to perform its functions and duties as
the management committee (FR Rules, Rule 2, Sec. management committee;
32) 5. Report to the court any material adverse change
in the business of the entity under management;
Management Committee 6. Evaluate the existing equity, capital, assets and
Role of the Management Committee liabilities, earnings, and operations of the entity
Take custody of and control all assets owned or under management;
possessed by the debtor; 7. Determine and recommend to the court the best
a. Take the place of the management and way to salvage and protect the interest of the
governing body of the debtor; and creditors, stockholders and the general public,
including the rehabilitation of the entity under
management;
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21. Include a certified copy of a certificate of tax corporation in financing the proposed rehabilitation
clearance or evidence of a compromise plan.
settlement with the BIR;
22. Include a valid and binding resolution of a This commitment may include the voluntary
meeting of the debtor's stockholders to increase undertakings of the stockholders or the would-be
the shares by the required amount in cases investors of the debtor-corporation indicating their
where the Rehabilitation Plan contemplates an readiness, willingness, and ability to contribute
additional issuance of shares by the debtor; funds or property to guarantee the continued
23. State the compensation and status, if any, of the successful operation of the debtor-corporation
rehabilitation receiver before and after the during the period of rehabilitation. (Land Bank of the
approval of the Rehabilitation Plan; Philippines v. Fastech Synergy Philippines, Inc.,
24. Contain provisions for conciliation and mediation G.R. No. 206150, 2017)
as a prerequisite to court assistance or
intervention; The submitted commitments by the corporation
25. Include material financial undertakings or must not be identical to another corporation’s
commitments to support the Rehabilitation commitment. Submitting identical commitments
Plan; pertaining to their respective rehabilitation plan
26. Contain provisions for monitoring the negates firm assurances that could convince
implementation of the Rehabilitation Plan, creditors, future investors and the general public of
including, requiring the rehabilitation receiver its financial and operational viability. (Philippine
Bank of Communications v. Basic Polyprinters and
and/or debtor to make reports from time to time;
Packaging Corporation, G.R. No. 187581,2014)
27. Contain the manner of its implementation, giving
due regard to the interests of secured creditors Effect of Non-compliance
such as the non- impairment of their security It is well to emphasize that the remedy of
liens or interests; and rehabilitation should be denied to corporations that
28. Contain such other relevant information to do not qualify under the Rules. Neither should it be
enable a reasonable investor to make an allowed to corporations whose sole purpose is to
informed decision on the feasibility of the delay the enforcement of any of the rights of the
Rehabilitation Plan. creditors. (Land Bank of the Philippines v. Fastech
Synergy Philippines, Inc., G.R. No. 206150, 2017)
Liquidation Analysis
Liquidation analysis must be attached to the Test of Economic Feasibility
rehabilitation plan. Such failure would not allow the If the results of such examination and analysis
Court to “properly determine whether its creditors show that there is a real opportunity to rehabilitate
could recover by way of the present value of the the corporation in view of the assumptions made
payments projected in the plan than if the assets and financial goals stated in the proposed
were to be sold by a liquidator.” (MTV Klinika Health rehabilitation plan, then it may be said that a
Spa Inc. v. BDO Leasing and Finance, Inc., G.R. No. rehabilitation is feasible.
216123, 2017)
On the other hand, if the results of the financial
The liquidation analysis may include the following: examination and analysis clearly indicate that there
a. Total liquidation assets; lies no reasonable probability that the distressed
b. Estimated liquidation return to the creditors; corporation could be revived and that liquidation
c. Fair market value vis-à-vis the forced would, in fact, better subserve the interests of its
liquidation value of the fixed assets. (Land stakeholders, then it may be said that a
Bank of the Philippines v. Fastech Synergy rehabilitation would not be feasible. (Land Bank of
Philippines, Inc., G.R. No. 206150, 2017) the Philippines v. Fastech Synergy Philippines,
Inc., G.R. No. 206150, 2017)
Material Financial Commitment in a
Rehabilitation Plan Present Value Recovery as a measure of
A material financial commitment becomes Economic Feasibility:
significant in gauging the resolve, determination, Due to the suspension of payments and the
earnestness and good faith of the distressed changing value of money, it would be unfair if the
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creditor merely receives the face value of the debt (Land Bank of the Philippines v. Fastech Synergy
by the time the creditor is paid. Present value of Philippines, Inc., G.R. No. 206150, 2017)
the credit takes into account the interest that the
amount of money would have earned if the creditor Rehabilitation should not be allowed when the
were paid on time. corporation’s purpose is only to delay the
enforcement of the rights of its creditors. (MTV
Trial courts must ensure that the projected cash Klinika Health Spa Inc. v. BDO Leasing and
flow from a business' rehabilitation plan allows for Finance, Inc.,G.R. No. 216123, 2017)
the closest present value recovery for its creditors.
If the projected cash flow is realistic and allows the f. Creditor approval and
corporation to meet all its obligations, then courts confirmation
should favor rehabilitation over liquidation.
However, if the projected cash flow is unrealistic, Approval of the Rehabilitation Plan
then courts should consider converting the Within 20 days from notice to creditors and
proceedings into that for liquidation to protect the stakeholders, the creditors shall be convened for
creditors. (Viva Shippings Lines v. Keppel purposes of voting on the approval of the
Philippines Mining, G.R. No. 177382, 2016) Rehabilitation Plan. The Plan shall be deemed
rejected unless approved by all classes of
Characteristics of an economically feasible creditors. (FRIA, RA 10142, Sec. 64)
rehabilitation plan:
a. The debtor has assets that can generate The Plan is deemed to have been approved by a
more cash if used in its daily operations than class of creditors if members of the said class
if sold; holding more than 50% of the total class vote in
b. Liquidity issues can be addressed by a favor of the plan (FR Rules, Rule 2, Sec. 62)
practicable business plan that will generate
enough cash to sustain daily operations; Confirmation of Plan Notwithstanding Rejection
c. The debtor has a definite source of (Cram Down Power of the Courts)
financing for the proper and full Notwithstanding the rejection of the Rehabilitation
implementation of a Rehabilitation Plan that Plan, the court may, motu proprio or upon motion of
is anchored on realistic assumptions and any interested party within ten (10) days from notice
goals. (Viva Shippings Lines v. Keppel of the rejection of the Rehabilitation Plan, confirm
Philippines Mining, G.R. No. 177382, 2016) the Plan if all of the following circumstances are
present:
Characteristics of a rehabilitation plan that is 1. The Rehabilitation Plan complies with the
infeasible: requirements specified in the FRIA and the FR
(a) The absence of a sound and workable Rules;
business plan. 2. The rehabilitation receiver recommends the
(b) Baseless and unexplained assumptions, confirmation of the Rehabilitation Plan;
targets and goals; 3. The shareholders, owners or partners of the
(c) Speculative capital infusion or complete juridical debtor lose at least their controlling
lack thereof for the execution of the interest as a result of the Rehabilitation Plan;
business plan; and
(d) Cash flow cannot sustain daily operations; 4. The Rehabilitation Plan would likely provide the
and objecting class of creditors with compensation,
(e) Negative net worth and the assets are near which has a net present value greater than that
full depreciation or fully depreciated (Viva which they would have received if the debtor
Shippings Lines v. Keppel Philippines were under liquidation. (FR Rules, Rule 2, Sec.
Mining, G.R. No. 177382, 2016) 62)
NOTE: These characteristics indicate that the sole NOTE: The rehabilitation receiver shall submit the
purpose of the rehabilitation plan is to delay the approved Plan to the court for confirmation. Within
enforcement of any of the rights of the creditors. five (5) days from receipt of the Rehabilitation Plan,
the court shall notify the creditors that the
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Rehabilitation Plan has been submitted for made adequate provisions for paying such
confirmation. (FR Rules, Rule 2, Sec. 63) claims.
b. If the court finds that there is no substantial
NOTE: Objections by creditors may be filed 20 days likelihood that the debtor can be
from notice (FR Rules, Rule 2, Sec. 64). rehabilitated, it shall not confirm the
Rehabilitation Plan and, instead, declare a
Grounds for Objection on the Rehabilitation failure of rehabilitation.
Plan c. The court shall have the power to approve
or implement the Rehabilitation Plan
1. The creditors' support was induced by fraud; despite the lack of approval, or objection
2. The documents or data relied upon in the from the owners, partners or stockholders
Rehabilitation Plan are materially false or of the insolvent debtor: provided, that the
misleading; or terms thereof are necessary to restore the
3. The Rehabilitation Plan is in fact not supported financial well-being and viability of the
by the voting creditors. (FR Rules, Rule 2, Sec. insolvent debtor.
64) d. The order confirming the Rehabilitation
Plan shall specify the portions approved by
Creditor’s Opposition to Rehabilitation the court and the portions rejected during
If a creditor, whose interests remain well- consideration or cured by the rehabilitation
preserved under the existing rehabilitation plan, still receiver. (FR Rules, Rule 2, Sec. 66)
declines to accept interests pegged at reasonable e. The approval of the Rehabilitation Plan
rates during the period of rehabilitation, and, in shall not affect the rights of creditors to
turn, proposes rates which are largely counter- pursue separate actions against general
productive to the rehabilitation, then it may be said partners of a partnership to the extent they
that the creditor's opposition is manifestly are liable under relevant legislation for the
unreasonable. debts thereof. (FR Rules, Rule 2, Sec. 68)
f. Amounts of any indebtedness or
Opposition of a distressed corporation's majority obligations reduced or forgiven in
creditor is manifestly unreasonable if it counter- connection with a Plan's approval shall not
proposes unrealistic payment terms and conditions be subject to any tax. (FR Rules, Rule 2,
which would, more likely than not, impede rather Sec. 69)
than aid its rehabilitation. (Bank of Philippine g. Court is not bound by the report if
Islands v. Sarabia Manor Hotel Corporation, G.R. rehabilitation, in its judgment, will not be
No. 175844, 2013) viable. (MTV Klinika Health Spa Inc. v. BDO
Leasing and Finance, Inc.,G.R. No.
Confirmation of the Rehabilitation Plan 216123, 2017)
The court shall issue an order confirming the
Rehabilitation Plan in any of the following instances: g. Failure of rehabilitation
(a) No objections are filed within the twenty Cases of Failure of Rehabilitation:
(20)-day period from receipt of notice from 1. Dismissal of the petition by the court;
the court that a Rehabilitation Plan has been 2. Failure to submit a Rehabilitation Plan;
submitted to court; 3. A Rehabilitation Plan is not confirmed by the
(b) court finds the objections lacking in merit; court;
(c) The basis for the objection has been cured; 4. Under the Rehabilitation Plan submitted by the
or debtor, there is no substantial likelihood that the
(d) The debtor has complied with the order to debtor can be rehabilitated within a reasonable
cure the objection. period based on the requirements of Section 21
of the Act;
NOTE: 5. The Rehabilitation Plan or its amendment is
a. The court may confirm the Rehabilitation approved by the court but in the implementation
Plan notwithstanding unresolved disputes thereof, the debtor fails to perform its obligations
over claims if the Rehabilitation Plan has thereunder (or has committed a breach of the
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than 50% of the total unsecured claims of the Within 10 days from the date of the second
debtor. publication of the Order, the court shall approve the
Rehabilitation Plan unless a creditor or other
The petition shall include as a minimum: interested party submits an objection to it in
accordance with the next succeeding section.
1. Schedule of the debtor's debts and liabilities; (FRIA, RA 10142, Sec. 78)
2. Inventory of the debtor's assets;
3. The pre-negotiated Rehabilitation Plan, NOTE: There must be no verified objection to the
including the names of at least 3 qualified petition or Rehabilitation Plan filed within 8 days
nominees for rehabilitation receiver; and from the date of the second publication of the Order,
4. Summary of disputed claims against the debtor for the aforementioned approval to be made. (FR
and a report on the provisioning of funds to Rules, Rule 3, Sec. 4)
account for appropriate payments should any
such claims be ruled valid or their amounts Objections to the Pre-Negotiated Plan
adjusted. (FRIA, RA 10142, Sec. 76) Any creditor or other interested party may submit to
the court a verified objection to the petition or the
If Petition Deemed Sufficient Rehabilitation Plan not later than 8 days from the
Within five (5) working days, and after determination date of the second publication of the Order.
that the petition is sufficient in form and substance,
the court shall issue an Order which shall; The grounds for objection are limited to the
following:
1. Identify the debtor, its principal business of a. Allegations in the petition or the Rehabilitation
activity/ies and its principal place of business; Plan or the attachments thereto are materially
2. Declare that the debtor is under rehabilitation; false or misleading;
3. Summarize the grounds for the filling of the b. Majority of any class of creditors do not in fact
petition; support the Rehabilitation Plan;
4. Direct the publication of the Order in a c. The Rehabilitation Plan fails to accurately
newspaper of general circulation in the account for a claim against the debtor and the
Philippines once a week for at least 2 claim in not categorically declared as a
consecutive weeks, with the first publication to contested claim; or
be made within 7 days from the time of its d. Support of the creditors, or any of them was
issuance; induced by fraud.
5. Direct the service by personal delivery of a copy
of the petition on each creditor who is not a NOTE: Copies of any objection to the petition of the
petitioner holding at least 10% of the total Rehabilitation Plan shall be served on the debtor,
liabilities of the debtor, as determined in the the rehabilitation receiver (if applicable), the secured
schedule attached to the petition, within 3 days; creditor with the largest claim and who supports the
6. State that copies of the petition and the Rehabilitation Plan, and the unsecured creditor with
Rehabilitation Plan are available for examination the largest claim and who supports the
and copying by any interested party; Rehabilitation Plan. (FRIA, RA 10142, Sec. 79)
7. State that creditors and other interested parties
opposing the petition or Rehabilitation Plan may b. Period and effect of Approval
file their objections or comments thereto within a
period of not later than 20 days from the second Period of Approval
publication of the Order; The court shall have a maximum period of one
8. Appoint a rehabilitation receiver, if provided for hundred twenty (120) days from the filing of the
in the Plan; and petition to approve or disapprove the Pre-
9. Include a Suspension or Stay Order as Negotiated Rehabilitation Plan.
described in the FRIA. (FRIA, RA 10142, Sec. If the court fails to so act within the said period, the
77) Pre-Negotiated Rehabilitation Plan shall be deemed
approved.
Approval of the Pre-Negotiated Plan
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In such a case, the court shall certify that no action 3. OUT – OF – COURT OR INFORMAL
has been made within the one hundred twenty RESTRUCTURING AGREEMENT OR
(120)-day period and the Pre-Negotiated Plan is REHABILITATION PLAN
deemed approved. (FR Rules, Rule 3, Sec. 8)
a. Minimum requirements
Effect of Approval
Approval of the Pre-Negotiated Rehabilitation Plan 1. The debtor must agree to the out-of-court or
shall have the same legal effect as confirmation of a informal restructuring/workout agreement or
rehabilitation plan. (FR Rules, Rule 3, Sec. 9) Rehabilitation Plan;
2. Must be approved by creditors representing at
COURT-SUPERVISED PRE- least:
REHABILITATION NEGOTIATED
REHABILITATION a. 85% of total liabilities, secured and
PERIOD OF 20 days from the 120 days unsecured, of the debtor;
APPROV- date of notification from the filing b. 67% of secured obligations of the debtor;
AL and
to creditors and of the petition
stakeholders for (max) (FR c. 75% of unsecured obligations of the debtor;
examination of the Rules, Rule 3, (FRIA, RA 10142, Sec. 84)and
Rehabilitation Plan Sec. 8) 3. Publication of the notice of the OCRA once a
(FR Rules, Rule 2, week for at least three (3) consecutive weeks in
Sec. 62) a newspaper of general circulation in the
EFFECT OF Submission to the Confirmation Philippines. (FR Rules, Rule 4, Sec. 1)
APPROV- court for of
AL
confirmation of Rehabilitation b. Standstill period
Rehabilitation Plan Plan (FR
Standstill period:
(FR Rules, Rule 2, Rules, Rule 3,
a. May be agreed upon by the parties pending
Sec. 66) Sec. 9)
EFFECT OF
negotiation and finalization of the plan;
Deemed Rejected Deemed
NON- b. Shall cover not only the negotiating parties
(FR Rules, Rule 2, Approved (FR
APPROV- but also all other creditors; (FRIA, RA
Sec. 62) Rules, Rule 3,
AL 10142, Sec. 85)
Sec. 8)
Requirements:
Procedure in Pre-negotiated Rehabilitation
1. Filing of the petition by debtor (FR Rules, Rule 1. Approved by creditors representing more than
3, Sec. 1) 50% of total liabilities;
2. Issuance of Court Order (FR Rules, Rule 3, Sec. 2. Notice is published in a newspaper of general
2) circulation in the Philippines once a week for 2
3. Publication of Order and Notification of consecutive weeks; and
Creditors (FR Rules, Rule 3, Sec. 2) 3. Standstill period does not exceed 120 days
4. Verified Objection to the petition or from date of effectivity (FRIA, RA 10142, Sec.
Rehabilitation Plan (FR Rules, Rule 3, Sec. 5) 85)
5. Comments (FR Rules, Rule 3, Sec. 6)
c. Cram Down Effect
6. Hearing on Objections (FR Rules, Rule 3, Sec.
7) Requisites for the application of Cram Down
7. Approval of the Plan (FR Rules, Rule 3, Sec. 4) Power of the Courts
Notwithstanding the rejection of the Rehabilitation
Plan, the court may confirm the Plan if all of the
following circumstances are present:
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2. The rehabilitation receiver recommends the whose present value projected in the plan
confirmation of the Rehabilitation Plan; would be greater than that which they would
3. The shareholders, owners or partners of the have received if the assets of the debtor
juridical debtor lose at least their controlling were sold by a liquidator within a six (6)
interest as a result of the Rehabilitation Plan; month period from the date of filing of the
and petition; and
4. The Rehabilitation Plan would likely provide the (c) The rehabilitation receiver has
objecting class of creditors with compensation, recommended approval of the plan.
which has a net present value greater than that (Victorio-Aquino v. Pacific Plans, G.R. No.
which they would have received if the debtor 193108, 2014)
were under liquidation. (FR Rules, Rule 2, Sec.
62) Effects of Confirmation of Rehabilitation Plan
Two Aspects of the Cram Down Power of The 1. The Plan and its provisions shall bind the debtor
Rehabilitation Court and all persons who may be affected thereby,
including the creditors, whether or not such
a. Approval despite opposition; and persons have participated in the proceedings or
b. Binding effect of the approved plan opposed the Plan or whether or not their claims
have been scheduled;
Cram-Down 2. The debtor shall comply with the provisions of
The power of the rehabilitation court to approve and the Plan and shall take all actions necessary to
implement a rehabilitation plan notwithstanding the carry them out;
objection of the majority of creditors. The “cram- 3. Payments shall be made to the creditors in
down” clause is necessary to curb the majority accordance with the provisions of the Plan;
creditors’ natural tendency to dictate their own terms 4. Contracts and other arrangements between the
and conditions to the rehabilitation, absent due debtor and its creditors shall remain valid and
regard to the greater long-term benefit of all continue to apply to the extent that they do not
stakeholders. Otherwise stated, it forces the conflict with the provisions of the Plan;
creditors to accept the terms and conditions of the 5. Any compromises on amounts or rescheduling
rehabilitation plan, preferring long-term viability over of timing of payments by the debtor shall be
immediate but incomplete recovery. (Bank of the binding on the creditors regardless of whether or
Philippine Islands vs. Sarabia Manor Hotel not the Plan is successfully implemented; and
Corporation, GR No. 175844, 2013) 6. Claims arising after the approval of the Plan that
are otherwise not treated by the Plan are not
This power forces the creditors to accept the terms subject to any Suspension Order. (FR Rules,
and conditions of the rehabilitation plan, preferring Rule 2, Sec. 67)
long-term viability over immediate but incomplete
recovery. (Bank of Philippine Islands v. Sarabia NOTE: A creditor whose claim is not listed in the
Manor Hotel Corporation, G.R. No. 175844, 2013) schedule of debts and liabilities and who fails to file
a notice of claim in accordance with the
NOTE: The Court may approve a rehabilitation plan Commencement Order but subsequently files a
over the objection of the creditors, if, in its judgment, belated claim shall not be entitled to participate in
the rehabilitation of the debtors is feasible and the the rehabilitation proceedings but shall be entitled to
opposition of the creditors is manifestly receive distributions arising therefrom. (FRIA, R.A.
unreasonable. R.A. 10142, Sec. 23)
(a) The rehabilitation plan complies with the 1. VOLUNTARY LIQUIDATION VS.
requirements specified in Section 18 of Rule INVOLUNTARY LIQUIDATION VS.
3, A.M. No. 00-8-10-SC; CONVERSION
(b) The rehabilitation plan would provide the
objecting class of creditors with payments Voluntary Liquidation – Filed by Juridical Debtors
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Party Applicant – An insolvent debtor may apply for signed by the chairman and the secretary of the
liquidation by filing a petition for liquidation meeting
Where to file the application 3. Schedule of the debtor's debts and liabilities
RTC which has jurisdiction over its principal office including a list of creditors with their addresses,
as specified in its articles of incorporation or amounts of claims and collaterals, or securities,
partnership. Where the principal office of the if any;
corporation or partnership as registered with the 4. Inventory of all its assets including receivables
Securities and Exchange Commission (SEC) is in and claims against third parties; and
Metro Manila, the petition must be filed in the RTC 5. Schedule of current income and expenditures
Court of the city or municipality where the head within three (3) months prior to the filing of the
office is located. petition;
6. List of all properties acquired by the debtor in the
NOTE: When there is a pending court-supervised or immediately preceding two (2) years;
pre-negotiated rehabilitation proceeding, the debtor 7. List of all properties sold, disposed of, or
may file a motion in the same court where the donated by the debtor in the immediately
rehabilitation proceedings are pending to convert preceding two (2) years;
the rehabilitation proceedings into liquidation 8. Schedule of the debtor's executory contracts
proceedings. and unexpired leases;
9. Audited financial statements of the debtor for the
If the court finds the petition or motion, as the case immediately preceding three (3) years; and
may be, to be sufficient in form and substance, it 10. Income tax return of the debtor for the
shall issue the Liquidation Order. Otherwise, the immediately preceding year
court shall dismiss the petition or deny the motion.
(FLSP Rules, Rule 2, Secs. 2-3) Voluntary Liquidation – Filed by Individual Debtors
Party Applicant
Petition for Voluntary Liquidation An individual debtor whose properties are not
The petition shall be verified, shall establish the sufficient to cover his liabilities, and owing debts
insolvency of the debtor and shall indicate the exceeding Php500,000.00, may apply to be
names of at least 3 nominees to the position of discharged from his debts and liabilities by filing a
liquidator. verified petition with the court of the province or city
in which he has resided for 6 months prior to the
It shall include, as minimum attachments, the filing of such petition. (FLSP Rules, Rule 3, Sec. 11)
following:
Petition for Voluntary Liquidation
1. Certificate attesting to the holding of a meeting The petition shall indicate the names of at least 3
of the Board of Directors of a stock corporation nominees to the position of commissioner and shall
or the Board of Trustees of a non-stock include, as minimum attachments, the following:
corporation, as the case may be, called for the
purpose and the approval during the meeting of 1. Schedule of debts and liabilities, including a list
a resolution to file the petition, signed by the of creditors with their addresses, amount of
secretary of the meeting and at least a majority claims and collaterals, if any;
of the members of the Board present during the 2. Inventory of all the debtor's assets, including
meeting; receivables and claims against third parties;
2. Certificate attesting to the holding of a meeting 3. Schedule of current income and expenditures
of the stockholders, members or partners within three (3) months prior to the filing of the
comprising the debtor, as the case may be, petition;
called for the purpose and the approval during 4. Income tax return of the debtor for the
the meeting of a resolution to file the petition by immediately preceding year;
the stockholders holding at least two-thirds (2/3) 5. List of all properties acquired by the debtor in the
of the outstanding capital stock of the stock immediately preceding two (2) years;
corporation, or two-thirds (2/3) of the members 6. List of all properties sold, disposed of, or
or partners in case of a non-stock corporation, donated by the debtor in the immediately
association or partnership, as the case may be, preceding two (2) years; and
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7. Schedule of the debtor's executory contracts (c) Audited financial statements of the debtor
and unexpired leases (FLSP Rules, Rule 3, Sec. for the immediately preceding three (3)
11) years. (FLSP Rules, Rule 2, Sec. 4)
NOTE: If the court finds the petition sufficient in form NOTE: The petitioners shall post a bond in an
and substance it shall, within five (5) working days amount at least equal in value to the aggregate of
issue the Liquidation Order (FLSP Rules, Rule 3, their claims, conditioned upon payment to the debtor
Sec. 12) of all expenses and damages it may incur by reason
of the filing of the petition if the same is later denied
Involuntary Liquidation – Filed Juridical Debtors or dismissed by the court, or withdrawn by the
Party Applicant to Petition for Liquidation petitioners without the consent of the debtor. (FLSP
The applicants must be 3 or more creditors whose Rules, Rule 2, Sec. 5)
claim(s) is/are:
Involuntary Liquidation – Filed by Individual
a. At least P1,000,000.00; or Debtors
b. At least 25% of the subscribed capital stock Party Applicant
or partners’ contributions (FLSP Rules, Rule Any creditor or group of creditors with a claim of, or
2, Sec. 4) with claims aggregating at least Php500,000.00
may file a verified petition for liquidation with the
Where to file the Petition court of the province or city in which the individual
RTC which has jurisdiction over its principal office debtor resides. (FLSP Rules, Rule 3, Sec. 13)
as specified in its articles of incorporation or
partnership. Where the principal office of the Acts of Insolvency
corporation or partnership as registered with the The following shall be considered acts of insolvency,
Securities and Exchange Commission (SEC) is in and the petition for liquidation shall set forth or
Metro Manila, the petition must be filed in the RTC allege at least one of such acts:
Court of the city or municipality where the head
office is located. 1. Such person is about to depart or has departed
from the Republic of the Philippines, with intent
Petition for Involuntary Liquidation to defraud his creditors;
The motion shall be verified, shall indicate the 2. Being absent from the Republic of the
names of at least 3 nominees to the position of Philippines, with intent to defraud his creditors,
liquidator, and must show that: he remains absent;
3. He conceals himself to avoid the service of legal
(a) There is no genuine issue of fact or law on process for the purpose of hindering or delaying
the claims/s of the petitioner/s, and that the the liquidation or of defrauding his creditors;
due and demandable payments thereon 4. He conceals, or is removing, any of his property
have not been made for at least one to avoid its being attached or taken on legal
hundred eighty (180) days or that the debtor process;
has failed generally to meet its liabilities as 5. He has suffered his property to remain under
they fall due; and attachment or legal process for 3 days for the
b. There is no substantial likelihood that the purpose of hindering or delaying the liquidation
debtor may be rehabilitated (FRIA, RA or of defrauding his creditors;
10142, Sec. 91) 6. He has confessed or offered to allow judgment
in favor of any creditor or claimant for the
The petition shall also include information to the purpose of hindering or delaying the liquidation
best knowledge of the petitioners on: or of defrauding any creditors or claimant;
7. He has willfully suffered judgment to be taken
(a) The schedule of debts and liabilities, against him by default for the purpose of
including a list of its known creditors with hindering or delaying the liquidation or of
their addresses, amounts of claims and defrauding his creditors;
collaterals, or securities, if any; 8. He has suffered or procured his property to be
(b) The debtor's assets, including receivables taken on legal process with intent to give a
and claims against third parties; and
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preference to one or more of his creditors and 3. Section 75 of the FRIA or if termination of
thereby hinder or delay the liquidation or defraud proceedings is due to failure of rehabilitation or
any one of his creditors; dismissal of the petition for reasons other than
9. He has made any assignment, gift, sale, technical grounds, the proceedings shall be
conveyance or transfer of his estate, property, immediately converted to liquidation; or
rights or credits with intent to hinder or delay the 4. Section 90 of the FRIA or if during the pendency
liquidation or defraud his creditors; of court-supervised or pre-negotiated
10. He has, in contemplation of insolvency, made rehabilitation proceedings, the debtor may also
any payment, gift, grant, sale, conveyance or initiate liquidation proceedings by filing a motion
transfer of his estate, property, rights or credits; in the same court where the rehabilitation
11. Being a merchant or tradesman, he has proceedings are pending to convert the
generally defaulted in the payment of his current rehabilitation proceedings into liquidation
obligations for a period of 30 days; proceedings.
12. For a period of 30 days, he has failed, after 5. At any other time upon the recommendation of
demand, to pay any moneys deposited with him the rehabilitation receiver that the rehabilitation
or received by him in a fiduciary; and of the debtor is not feasible.
13. An execution having been issued against him on
final judgment for money, he shall have been 2. PROCEDURE
found to be without sufficient property subject to
execution to satisfy the judgment. (FLSP Rules, Motion to Convert Rehabilitation Proceedings
Rule 3, Sec. 13) into Liquidated Proceedings
At any time during the pendency of or after a
Court Action in Involuntary Liquidation rehabilitation court-supervised or pre-negotiated
a. The court shall issue an Order requiring the rehabilitation proceedings, creditors may compel a
individual debtor to show cause, at a time debtor who is undergoing rehabilitation to liquidate
and place to be fixed by the said court, why instead. The following are the requisites:
he should not be adjudged an insolvent.
(FLSP Rules, Rule 3, Sec. 15) The applicants must be made up of 3 or more
b. Upon good cause shown, the court may creditors whose claim(s) is/are:
issue an Order forbidding the individual
a. At least P1,000,000; or
debtor from making payments of any of his
b. At least 25% of the subscribed capital stock
debts, and transferring any property
or partners’ contributions
belonging to him. However, nothing
contained herein shall affect or impair the
NOTE: The motion shall be verified & shall
rights of a secured creditor to enforce his
contain/set forth the same matters mentioned in the
lien in accordance with its terms.
FLSP Rules, Sec. 4. (FLSP Rules, Rule 2, Sec. 6)
Conversion
Action on the Petition or Motion
During the pendency of court-supervised or pre-
If the petition or motion is sufficient in form and
negotiated rehabilitation proceedings, the court may
substance, the court shall issue an Order:
order the conversion of rehabilitation proceedings to
liquidation proceedings pursuant to:
1. Directing the publication of the petition or motion
in a newspaper of general circulation once a
1. Section 25(c) of the FRIA which states that
week for 2 consecutive weeks;
conversions can be done when the debtor is
2. Directing the debtor and all creditors who are not
insolvent and there is no substantial likelihood
the petitioners to file their comment on the
for the debtor to be successfully rehabilitated; or
petition or motion within 15 days from the date
2. Section 72 of the FRIA or if no Rehabilitation
of last publication; and
Plan is confirmed within 1 year from the date of
3. Directing that a copy of the petition or motion be
the filing of a petition to confirm the rehabilitation
plan, the proceedings may, upon motion or motu served on the debtor and on all known creditors,
unless they exceed 20 in number, in which case,
proprio, be converted into one for the liquidation
service shall be made on at least the first 20
of the debtor; or
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judgment, and any final and executor judgment 2. Liquidator may sell the property and satisfy the
therein for a claim against the debtor shall be secured creditor's entire claim from the
filed and allowed in court; and proceeds of the sale; or
5. No foreclosure proceeding shall be allowed for a 3. Secure creditor may enforce the lien or foreclose
period of 180 days. (FLSP Rules, Rule 4, Sec. on the property pursuant to applicable laws.
3) (FLSP Rules, Rule 4, Sec. 7)
Nature of Waiver NOTE: Only creditors who have filed their claims
A secured creditor shall not be deemed to have within the period set by the court, and whose claims
waived his right under the security or lien unless the are not barred by the statute of limitations, will be
waiver is made in a public document, in unequivocal allowed to vote in the election of the liquidator.
language, and with full knowledge of the
consequences of his action. If a secured creditor A secured creditor will not be allowed to vote unless:
waives his right, he shall be entitled to participate in a. He waives his security or lien; or
the liquidation proceedings as an unsecured b. Has the value of the property subject of his
creditor. (FLSP Rules, Rule 4, Sec. 6) security or lien fixed by agreement with the
liquidator, and is admitted for the balance of
If the secured creditor maintains his rights his claim. (FLSP Rules, Rule 4, Sec. 9)
under the security or lien:
Appointment of a Liquidator
1. The value of the property may be fixed in a The court may appoint the liquidator if:
manner agreed upon by the creditor and the a. On the date set for the election of the
liquidator. When the value of the property is less liquidator, the creditors do not attend;
than the claim it secures, the liquidator may b. Creditors who attend, fail or refuse to elect
convey the property to the secured creditor and a liquidator;
the latter will be admitted in the liquidation c. After being elected, the liquidator fails to
proceedings as a creditor for the balance. If its qualify ; or
value exceeds the claim secured, the liquidator d. Vacancy occurs for any reason whatsoever,
may convey the property to the creditor and In any of the cases provided herein, the
waive the debtor's right of redemption upon court may instead set another hearing of the
receiving the excess from the creditor; election of the liquidator. (FLSP Rules, Rule
4, Sec. 10)
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3. DETERMINATION OF CLAIMS
Registry of Claims
Within 20 days from his assumption into office the
liquidator shall prepare a preliminary registry of
claims of secured and unsecured creditors. Secured
creditors who have waived their security or lien, or
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D. SUSPENSION OF PAYMENTS; from the date of such Order and designating the
SUSPENSION OF PAYMENT date, time and place of the meeting;
3. Directing such creditors to prepare and present
ORDER written evidence of their claims before the
scheduled creditors' meeting;
NOTE: This is only applicable for the Individual 4. Directing the publication of the said order in a
Debtor newspaper of general circulation published in
the province or city in which the petition is filed
Party Applicant once a week for 2 consecutive weeks, with the
An individual debtor who, possessing sufficient first publication to be made within seven 7 days
property to cover all his debts but foreseeing the from the time of the issuance of the Order;
impossibility of meeting them when they 5. Directing the clerk of court to cause the sending
respectively fall due, may file a verified petition that of a copy of the Order by registered mail,
he be declared in the state of suspension of postage prepaid, to all creditors named in the
payments by the court of the province or city in schedule of debts and liabilities;
which he has resides for six (6) months prior to the 6. Forbidding the individual debtor from selling,
filing of his petition. (FLSP Rules, Rule 3, Sec. 1) transferring, encumbering or disposing in any
manner of his property, except those used in the
Petition for Suspension of Payments ordinary operations of commerce or of industry
The petition shall indicate the names of at least 3 in which the petitioning individual debtor is
nominees to the position of commissioner and shall engaged so long as the proceedings relative to
include, as minimum attachments, the following: the suspension of payments are pending;
7. Prohibiting the individual debtor from making
1. Schedule of debts and liabilities, including a list any payment outside of the necessary or
of creditors with their addresses, amount of legitimate expenses of his business or industry,
claims and collaterals, if any; so long as the proceedings relative to the
2. Inventory of all the debtor's assets, including suspension of payments are pending; and
receivables and claims against third parties; 8. Appointing a commissioner to preside over the
3. Schedule of current income and expenditures creditors' meeting. (FLSP Rules, Rule 3, Sec. 2)
within three (3) months prior to the filing of the
petition; Actions Suspended by a Suspension Order
4. Income tax return of the debtor for the Upon motion filed by the individual debtor, the court
immediately preceding year; may issue an order suspending any pending
5. List of all properties acquired by the debtor in the execution against the individual debtor. Properties
immediately preceding two (2) years; held as security by secured creditors shall not be the
6. List of all properties sold, disposed of, or subject of such suspension order.
donated by the debtor in the immediately
preceding two (2) years; The suspension order shall lapse when three (3)
7. Schedule of the debtor's executory contracts months shall have passed without the proposed
and unexpired leases; and agreement being accepted by the creditors or as
8. Proposed agreement with the creditors. (FLSP soon as such agreement is denied. (FLSP Rules,
Rules, Rule 3, Sec. 1) Rule 3, Sec. 3)
Court Action in Suspension of Payments -- end of topic --
If the court finds the petition sufficient in form and
substance, it shall, within 5 working days from the
filing of the petition, issue a Suspension of
Payments Order:
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