The Ateneo Law School: Ad Maiorem Dei Gloriam

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Ad maiorem Dei gloriam.

GRACE ANN Q. BAJO
TIMOTHY JACOB J. PALAFOX
20 21 C H AI R PE R S O N S
JONATHAN DF. TORRES
GAEL PAULINE R. MORALES
KATHLEEN KAE Z. ENDOZO MEG V. BUENSALIDO RIA ALEXANDRA D. CASTILLO
ARISTEO RAPHAEL T. MARBELLA III MARIE KAYLA C. GALIT NICOLE ANN C. PAGLICAWAN
20 21 AD MI NI ST R A TI V E CO M MI T TE E HE A D S 20 21 A C AD E MI C C O M MI T TE E HE AD S JULIANNE BEATRICE N. ROSARIO
20 21 C R E ATI V E S
CARLOS ROSAURO N. MANALO
MA. CRISTINA ASUNCION
20 21 A C AD E MI C C O M MI T TE E U N D E R ST U D I E S JOSEPH BILL P. QUINTOS STEFI MONIKA S. SUERO
SAMANTHA J. MAGAOAY KATHLEEN C. ROMINA
DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN FREEDOM JUSTIN B. HERNANDEZ SERMAE ANGELA G. PASCUAL
ATTY. MARIA CECILIA G. NATIVIDAD ATTY. CHRISTINE JOY K. TAN
20 21 TE C H NI CA L 2 02 1 FI N AN CE
ATTY. FERDINAND M. NEGRE ATTY. ROEL A. REFRAN
ATTY. ELMORE O. CAPULE ATTY. IVY D. PATDU
20 21 C O M ME R CI AL LA W F A CU L TY A D V I SE R S
AINA RAE L. CORTEZ CHRISTIAN GIO R. SENARLO
LUMINA ALINEA O. AQUINO MAEDEN M. BORCELANGO
CARLO ANTON J. DEL MUNDO ALIYAH ROSH DY TIMOTHY JACOB J. PALAFOX ANNA MARIE GRACE M. ANTONIO IMI LIZA B. ESPINA
JONAH MAE M. SAMPANG DIANNE P. MULINGTAPANG ANNA YSABELLE A. VELUZ MARY STEPHANIE CABRERA CRUZ FRANCIS SABIN BELTRAN
MARK JOSEL P. VIVIT MART AMIEL J. LAFORTEZA JIM MATTHEW O. HAM CLARISSE MAE D. ZAPLAN ANTHONY JEFFERSON Y. JULIO
SIEGFRED G. PEREZ TALISA MARI D. DELA ROSA
20 21 S PE CI AL P ROJ E C TS 20 21 LO GI STI C S
20 21 C O M ME R CI AL LA W SU BJE CT HE A D S
ISABELLE BEATRIZ DLS. GINEZ RIVER M. GADDI LUIS TEODORO B. PASCUA

TERESA JOANNA C. ROSALES JASMINE R. BRIONES JAYE MARIE C. MARTINEZ DONN MARIE ISABELLE BALINA MELISSA GABRIELLE P. REMULLA
LESLIE ANNE M. CASTILLO ANGELIE MARIE PINTOR IRISH MAE GARCIA ALISHA BEATRICE A. VERGARA GRACIELLA RACHEL D. ROBLES
AUBREYLAINE M. SALAZAR PRISHA LEIGH D. CRUZ DANELLA DIANE D. DIMAPILIS
ALITHEA C. SORIANO REYNALDO M. REVECHE
20 21 C O M ME R CI AL LA W U ND E R S TU D I E S AARON C. CHENG CZAREANA JOUSCH T. PARRA
20 21 M AR K E TI N G 20 21 PU BLI C R E L A TI ON S
ROSEANNE REALUBIN MIKKO RINGIA ANA SAMANTHA ISABELA PARUNGAO
KATRINA ANGELA D. LOYOLA ISABELLA SABIO MARIA ANTOINETTE C. DUQUE
20 21 C O M ME R CI AL LA W V OLU NTE E R S
ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW
JUSTIN LUIGI V. HERNANDEZ

TABLE OF CONTENTS
20 2 0 C HAI R P E R SO N
I. INSURANCE ......................................................................................................................................................... 2
YVES PETER CARLO D. MEDINA THERESE ANNE C. ESPINOSA
KATRINA ISABELLE G. PIMENTEL HAZEL VIANCA I. ORTEGA A. CONCEPT OF INSURANCE ................................................................................................................................... 3
GENICA GALE F. LAHOZ VINCE ZYRENCE T. BARLONGAY B. ELEMENTS OF AN INSURANCE CONTRACT .......................................................................................................... 3
C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS ............................................................................ 6
20 2 0 AD MI NI S TR ATI V E CO M MI T TE E HE A D S 20 2 0 HO TE L C O M MI TTE E HE A D S D. CLASSES OF INSURANCE ..................................................................................................................................... 7
E. VARIABLE CONTRACTS ....................................................................................................................................... 8
EUNICE A. MALAYO MEG V. BUENSALIDO F. INSURABLE INTEREST ......................................................................................................................................... 8
1. IN LIFE/HEALTH ..................................................................................................................................................8
FRANCES CHRISTINE P. SAYSON MARIE KAYLA C. GALIT
2. IN PROPERTY ......................................................................................................................................................9
20 2 0 A CAD E MI C CO M MI T TE E HE AD S 2 02 0 A CA D E M I C CO M MIT T E E U N D E R S T U DI E S 3. DOUBLE INSURANCE AND OVER INSURANCE ...................................................................................................11
4. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY .................................................................................12
G. PERFECTION OF THE CONTRACT OF INSURANCE ............................................................................................... 13
DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN 1. OFFER AND ACCEPTANCE / CONSENSUALITY ...................................................................................................13
ATTY. MARIA CECILIA G. NATIVIDAD ATTY. CHRISTINE JOY K. TAN 2. PREMIUM PAYMENT ........................................................................................................................................15
ATTY. FERDINAND M. NEGRE ATTY. ROEL A. REFRAN
3. NON-DEFAULT OPTIONS IN LIFE INSURANCE ...................................................................................................16
4. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE .............................................................................17
ATTY. ELMORE O. CAPULE ATTY. IVY D. PATDU 5. REFUND OF PREMIUMS ....................................................................................................................................17
H. RESCISSION OF INSURANCE CONTRACTS .......................................................................................................... 18
20 2 0 CO M ME R CI AL LA W F A CU L TY A D V I SE R S
1. CONCEALMENT ................................................................................................................................................18
2. MISREPRESENTATION/OMISSIONS ..................................................................................................................20
JONAH MAE M. SAMPANG JUSTIN NICHOLAS T. SY 3. BREACH OF WARRANTIES .................................................................................................................................21
WENDELL A. LAXAMANA EZEKIEL MANUEL B. GARCIA I. CLAIMS SETTLEMENT AND SUBROGATION ........................................................................................................ 24
1. NOTICE AND PROOF OF LOSS ...........................................................................................................................24
ELDEN ROCAMORA MARINELA ISABELLE M. CAPISTRANO 2. GUIDELINES ON CLAIM SETTLEMENT ...............................................................................................................25
SERGIO LUIS M. MERCADO JIM MATTHEW O. HAM J. BUSINESS OF INSURANCE; REQUIREMENTS ....................................................................................................... 27
REYNALEIGH H. DE LOS REYES BENIGNO P. ENCISO K. INSURANCE COMMISSIONER AND ITS POWERS ................................................................................................ 28
20 2 0 CO M ME R CI AL LA W SU BJE CT HE A D S
II. PRE-NEED ......................................................................................................................................................... 47
TIMOTHY JACOB J. PALAFOX ALIYAH ROSH DY CARLO ANTON J. DEL MUNDO A. DEFINITION ...................................................................................................................................................... 47
DIANNE P. MULINGTAPANG SIEGFRED G. PEREZ MART AMIEL J. LAFORTEZA 1. PRE-NEED PLANS ..............................................................................................................................................47
TALISA MARI D. DELA ROSA MARK JOSEL P. VIVIT ANNA YSABELLE A. VELUZ 2. PRE-NEED COMPANY .......................................................................................................................................47
B. REGISTRATION OF PRE-NEED PLANS ................................................................................................................. 47
20 2 0 CO M ME R CI AL LA W U ND E R S TU D I E S C. LICENSING OF SALES COUNSELOR AND GENERAL AGENT .................................................................................. 48
D. DEFAULT AND TERMINATION .......................................................................................................................... 48
E. CLAIMS SETTLEMENT ........................................................................................................................................ 49
MARIA ANTOINETTE C. DUQUE CHAVI LEVINE REYES KATRINA ANGELA D. LOYOLA
MARIA ANGELICA TORIO VICTORIA FAY V. CHANG HOSEA LEJIAN SALAZAR
III. TRANSPORTATION LAW .................................................................................................................................. 52
CARLO DEL MUNDO ALYSSA MARIE L. SIYCHA HOSEA L. SALAZAR
YIELA SANTIAGO SARA KARMINA D. AVILLON MARLO CAPACITE
A. COMMON CARRIERS ........................................................................................................................................ 53
KEVIN B. GAMAD JOHANN ANGELO C. BULATAO BRIAN PINEDA
1. DILIGENCE REQUIRED OF COMMON CARRIERS ................................................................................................54
20 2 0 CO M ME R CI AL LA W V OLU NTE E R S 2. LIABILITIES OF COMMON CARRIERS .................................................................................................................55
3. CLASSIFICATION OF TRANSPORT NETWORK VEHICLE SERVICES AND TRANSPORT NETWORK COMPANIES ....55
B. VIGILANCE OVER GOODS .................................................................................................................................. 55
i
ATENEO CENTRAL ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW BAR OPERATIONS 2020/21 COMMERCIAL LAW
1. EXEMPTING CAUSES .........................................................................................................................................55 A. CAUSES OF DISSOLUTION (ART. 1830) ......................................................................................................90

2. CONTRIBUTORY NEGLIGENCE ..........................................................................................................................58 B. EFFECTS OF DISSOLUTION .........................................................................................................................91
3. DURATION OF LIABILITY ...................................................................................................................................58 C. RIGHTS OF PARTNERS UPON DISSOLUTION ..............................................................................................92
4. STIPULATION FOR LIMITATION OF LIABILITY ....................................................................................................58 D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED ...............................................................93
5. LIABILITY FOR BAGGAGE OF PERSONS..............................................................................................................59 4. LIMITED PARTNERSHIP .....................................................................................................................................93
C. SAFETY OF PASSENGERS ................................................................................................................................... 60 A. CHARACTERISTICS OF LIMITED PARTNERSHIP ..........................................................................................93
1. VOID STIPULATIONS .........................................................................................................................................60 B. GENERAL PARTNERSHIP V. LIMITED PARTNERSHIP ..................................................................................94
2. DURATION OF LIABILITY ...................................................................................................................................61 C. REQUIREMENTS FOR FORMATION OF LIMITED PARTNERSHIP .................................................................94
3. LIABILITY FOR ACTS OF OTHERS ........................................................................................................................61 D. CONSENT/RATIFICATION OF ALL LIMITED PARTNERS NEEDED ................................................................94
4. LIABILITY FOR DELAYS IN THE COMMENCEMENT OF VOYAGE .........................................................................62 E. SPECIFIC RIGHTS OF LIMITED PARTNERS ...................................................................................................94
5. LIABILITY FOR DEFECTS IN EQUIPMENT AND FACILITIES ..................................................................................62 F. REQUISITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER .......................................................94
6. EXTENT OF LIABILITY FOR DAMAGES ................................................................................................................62 G. LIABILITIES OF A LIMITED PARTNER ..........................................................................................................95
D. BILL OF LADING ................................................................................................................................................ 62 H. DISSOLUTION OF LIMITED PARTNERSHIP .................................................................................................95
1. THREE-FOLD CHARACTER .................................................................................................................................62 I. AMENDMENT OF CERTIFICATE OF PARTNERSHIP ......................................................................................95
2. DELIVERY OF GOODS ........................................................................................................................................63 B. CORPORATION ................................................................................................................................................. 96
3. PERIOD FOR FILING CLAIMS..............................................................................................................................63 1. DEFINITION OF CORPORATION ........................................................................................................................96
4. PERIOD FOR FILING ACTIONS ...........................................................................................................................64 2. CLASSES OF CORPORATIONS ............................................................................................................................97
5. EFFECTS OF STIPULATIONS ...............................................................................................................................64 3. NATIONALITY OF CORPORATIONS ..................................................................................................................100
E. MARITIME COMMERCE .................................................................................................................................... 64 4. CORPORATE JURIDICAL PERSONALITY............................................................................................................102
1. CHARTER PARTIES ............................................................................................................................................64 A. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY .................................................................................103
2. LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS .........................................................................................65 B. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION ...................................................................106
3. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE ...................................................................................66 5. CAPITAL STRUCTURE ......................................................................................................................................109
4. CARRIAGE OF GOODS BY SEA ACT ....................................................................................................................68 A. NUMBER AND QUALIFICATIONS OF INCORPORATORS ...........................................................................109
F. PUBLIC SERVICE ACT ......................................................................................................................................... 70 B. MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS ..........................................................110
1. DEFINITION OF PUBLIC UTILITY ........................................................................................................................70 C. CORPORATE TERM (SEC. 11) ...................................................................................................................110
2. NECESSITY FOR CERTIFICATE OF PUBLIC CONVENIENCE ..................................................................................70 D. CLASSES OF SHARES OF STOCK (SEC. 6) ..................................................................................................111
3. FIXING OF RATE ................................................................................................................................................71 6. INCORPORATION AND ORGANIZATION .........................................................................................................112
4. UNLAWFUL ARRANGEMENTS ..........................................................................................................................72 A. PROMOTER..............................................................................................................................................112
5. APPROVAL OF SALE, ENCUMBRANCE OR LEASE OF PROPERTY ........................................................................72 B. SUBSCRIPTION CONTRACTS ....................................................................................................................113
G. THE WARSAW CONVENTION ............................................................................................................................ 73 C. PRE-INCORPORATION SUBSCRIPTION (SEC. 60) ......................................................................................113
1. APPLICABILITY ..................................................................................................................................................73 D. CONSIDERATION FOR STOCKS (SEC. 61) .................................................................................................113
2. LIMITATION OF LIABILITY .................................................................................................................................73 E. ARTICLES OF INCORPORATION ................................................................................................................114
3. WILLFUL MISCONDUCT ....................................................................................................................................74 F. CORPORATE NAME (SEC. 17) ...................................................................................................................115
G. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATE EXISTENCE (SEC. 18) ........117
H. ELECTION OF DIRECTORS OR TRUSTEES (SEC. 23) ..................................................................................118
IV. BUSINESS ORGANIZATIONS ............................................................................................................................ 76
I. ADOPTION OF BY-LAWS ...........................................................................................................................118
J. EFFECTS OF NON-USE OF CORPORATE CHARTER (SEC. 21) .....................................................................120
A. PARTNERSHIPS ................................................................................................................................................ 80 7. CORPORATE POWERS .....................................................................................................................................121
1. GENERAL PROVISIONS ......................................................................................................................................80 A. GENERAL POWERS; THEORY OF GENERAL CAPACITY .............................................................................121
A. DEFINITION ................................................................................................................................................80 B. SPECIFIC POWERS: THEORY OF SPECIFIC CAPACITY ................................................................................121
B. ELEMENTS .................................................................................................................................................80 C. POWER TO EXTEND OR SHORTEN CORPORATE TERM (SEC. 36) .............................................................121
C. CHARACTERISTICS .....................................................................................................................................80 D. POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE, INCREASE BONDED
D. RULES TO DETERMINE EXISTENCE ............................................................................................................80 INDEBTEDNESS (SEC. 37) .............................................................................................................................122
E. PARTNERSHIP TERM ..................................................................................................................................81 E. POWER TO DENY PRE-EMPTIVE RIGHTS (SEC. 38) ...................................................................................122
F. PARTNERSHIP BY ESTOPPEL .......................................................................................................................82 F. POWER TO SELL OR DISPOSE CORPORATE ASSETS (SEC. 39)...................................................................122
G. PARTNERSHIP AS DISTINGUISHED FROM JOINT VENTURE .......................................................................82 G. POWER TO ACQUIRE OWN SHARES (SEC. 40) .........................................................................................123
H. PROFESSIONAL PARTNERSHIP...................................................................................................................83 H. POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR FOR NON-PRIMARY PURPOSE
I. MANAGEMENT ...........................................................................................................................................83 (SEC. 41).......................................................................................................................................................123
2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND PARTNERS.........................................................................84 I. POWER TO DECLARE DIVIDENDS (SEC. 42) ...............................................................................................124
A. RIGHTS AND OBLIGATIONS OF THE PARTNERSHIP ...................................................................................84 J. POWER TO ENTER INTO MANAGEMENT CONTRACT (SEC. 43) ................................................................124
B. OBLIGATIONS OF PARTNERS AMONG THEMSELVES .................................................................................85 K. LIMITATIONS ...........................................................................................................................................124
C. OBLIGATIONS OF PARTNERS TO THIRD PERSONS .....................................................................................89 L. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION ....................................................................................125
3. DISSOLUTION AND WINDING UP ......................................................................................................................90 M. DOCTRINE OF EQUALITY OF SHARES ......................................................................................................125
ii iii
N. TRUST FUND DOCTRINE ..........................................................................................................................125 14. INVESTIGATIONS, OFFENSES, AND PENALTIES .............................................................................................182
O. HOW CORPORATE POWERS ARE EXERCISED ..........................................................................................126 A. AUTHORITY OF COMMISSIONER .............................................................................................................182
8. STOCKHOLDERS AND MEMBERS ....................................................................................................................127 B. SANCTIONS FOR VIOLATIONS ..................................................................................................................183
A. FUNDAMENTAL RIGHTS OF STOCKHOLDERS AND MEMBERS ................................................................127 C. AUTHORITY OF THE SECURITIES AND EXCHANGE COMMISSION (JURISDICTION) ..................................184
B. PARTICIPATION IN MANAGEMENT .........................................................................................................127
C. PROPRIETARY RIGHTS ..............................................................................................................................129
V. SECURITIES .................................................................................................................................................... 189
D. REMEDIAL RIGHTS ...................................................................................................................................135
E. OBLIGATIONS OF A STOCKHOLDER .........................................................................................................135
F. MEETINGS ................................................................................................................................................135 A. STATE POLICY ................................................................................................................................................. 189
9. BOARD OF DIRECTORS AND TRUSTEES ...........................................................................................................138 B. DEFINTION OFSECURITIES .............................................................................................................................. 189
A. REPOSITORY OF CORPORATE POWERS ...................................................................................................138 C. KINDS OF SECURITIES ..................................................................................................................................... 190
B. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS ....................................................139 1. EXEMPT SECURITIES .......................................................................................................................................191
C. REQUIREMENT OF INDEPENDENT DIRECTORS (SEC. 22) .........................................................................140 2. EXEMPT TRANSACTIONS ................................................................................................................................191
D. ELECTIONS ...............................................................................................................................................140 3. NON-EXEMPT TRANSACTIONS .......................................................................................................................193
E. REMOVAL (SEC. 27) .................................................................................................................................143 D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION ............................................... 193
F. FILLING OF VACANCIES (SEC. 28) .............................................................................................................143 E. PROCEDURE FOR REGISTRATION OF SECURITIES............................................................................................. 194
G. COMPENSATION (SEC. 30) ......................................................................................................................144 F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING .............................................................. 199
H. DISLOYALTY .............................................................................................................................................144 1. MANIPULATION OF SECURITY PRICES ............................................................................................................199
I. BUSINESS JUDGMENT RULE .....................................................................................................................145 2. SHORT SALES ..................................................................................................................................................199
J. SOLIDARY LIABILITIES FOR DAMAGES ......................................................................................................145 3. OPTION TRADING ...........................................................................................................................................200
K. PERSONAL LIABILITIES .............................................................................................................................145 4. FRAUDULENT TRANSACTIONS ........................................................................................................................200
L. RESPONSIBILITY FOR CRIMES ...................................................................................................................146 G. PROTECTION OF INVESTORS .......................................................................................................................... 201
M. SPECIAL FACT DOCTRINE ........................................................................................................................146 1. TENDER OFFER RULE ......................................................................................................................................201
N. INSIDE INFORMATION .............................................................................................................................146 2. RULES ON PROXY SOLICITATION ....................................................................................................................202
O. CONTRACTS.............................................................................................................................................146 3. DISCLOSURE RULE ..........................................................................................................................................202
P. EXECUTIVE AND OTHER SPECIAL COMMITTEES ......................................................................................147
Q. MEETINGS ...............................................................................................................................................147
VI. BANKING ...................................................................................................................................................... 205
10. CAPITAL AFFAIRS ..........................................................................................................................................150
A. CERTIFICATE OF STOCK ...........................................................................................................................150
B. WATERED STOCK (DILUTED STOCK) ........................................................................................................152 A. THE NEW CENTRAL BANK ACT ........................................................................................................................ 206
C. PAYMENT OF BALANCE OF SUBSCRIPTION .............................................................................................153 1. STATE POLICIES ..............................................................................................................................................206
D. SALE OF DELINQUENT SHARES ................................................................................................................154 2. CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) .............................................................................206
E. ALIENATION OF SHARES ..........................................................................................................................155 3. RESPONSIBILITY AND PRIMARY OBJECTIVE ....................................................................................................206
F. CORPORATE BOOKS AND RECORDS.........................................................................................................156 4. CORPORATE POWERS .....................................................................................................................................207
11. DISSOLUTION AND LIQUIDATION .................................................................................................................157 5. OPERATIONS OF THE BANGKO SENTRAL NG PILIPINAS ..................................................................................207
A. MODES OF DISSOLUTION: .......................................................................................................................157 A. AUTHORITY TO OBTAIN DATA AND INFORMATION ................................................................................207
B. METHODS OF LIQUIDATION ....................................................................................................................161 B. SUPERVISION AND EXAMINATION ..........................................................................................................207
12. OTHER CORPORATIONS................................................................................................................................162 C. AUTHORITY TO APPROVE TRANSFER OF SHARES ....................................................................................208
A. CLOSE CORPORATIONS ...........................................................................................................................162 D. PROHIBITIONS .........................................................................................................................................208
B. NON-STOCK CORPORATIONS .................................................................................................................165 E. EXAMINATION AND FEES.........................................................................................................................209
C. EDUCATIONAL CORPORATIONS ..............................................................................................................168 6. MONETARY BOARD, POWERS AND FUNCTIONS.............................................................................................209
D. RELIGIOUS CORPORATIONS ....................................................................................................................169 7. HOW THE BANGKO SENTRAL NG PILIPINAS HANDLES BANKS IN DISTRESS ....................................................211
E. ONE PERSON CORPORATIONS .................................................................................................................170 A. CONSERVATORSHIP .................................................................................................................................211
F. FOREIGN CORPORATIONS .......................................................................................................................173 B. CLOSURE ..................................................................................................................................................212
13. MERGER AND CONSOLIDATION ...................................................................................................................178 C. RECEIVERSHIP ..........................................................................................................................................212
A. DEFINITION AND CONCEPT .....................................................................................................................178 D. LIQUIDATION ...........................................................................................................................................213
B. CONSTITUENT AND CONSOLIDATED CORPORATIONS ............................................................................179 8. ADMINISTRATIVE SANCTIONS ON SUPERVISED ENTITIES ..............................................................................214
C. PLAN OF MERGER OR CONSOLIDATION (SEC. 75) ...................................................................................180 9. SUPERVISION AND REGULATION OF BANK OPERATIONS ...............................................................................215
D. ARTICLES OF MERGER OR CONSOLIDATION (SEC. 78) ............................................................................180 A. LOANS AND OTHER CREDIT ACCOMMODATIONS ...................................................................................215
E. PROCEDURE OF CONSOLIDATION OR MERGER .......................................................................................180 B. SELECTIVE REGULATION ..........................................................................................................................216
F. EFFECTIVITY OF MERGER OR CONSOLIDATION .......................................................................................181 B. LAWS ON SECRECY OF BANK DEPOSITS ........................................................................................................... 217
G. LIMITATIONS OF MERGER AND CONSOLIDATION ..................................................................................181 1. PURPOSE ........................................................................................................................................................217
H. EFFECTS OF MERGER OR CONSOLIDATION .............................................................................................182 2. PROHIBITED ACTS ...........................................................................................................................................217
iv v
3. DEPOSITS COVERED........................................................................................................................................218 C. INDUSTRIAL APPLICABILITY .....................................................................................................................242

4. EXCEPTIONS ...................................................................................................................................................218 2. NON-PATENTABLE INVENTIONS .....................................................................................................................242
5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS .....................................................................221 3. OWNERSHIP OF A PATENT..............................................................................................................................243
6. PENALTIES FOR VIOLATION ............................................................................................................................221 4. GROUNDS FOR CANCELLATION OF A PATENT ................................................................................................243
C. GENERAL BANKING ACT ................................................................................................................................. 222 5. REMEDY OF THE TRUE AND ACTUAL INVENTOR .............................................................................................243
1. DEFINITION AND CLASSIFICATION OF BANKS .................................................................................................222 6. RIGHTS CONFERRED BY A PATENT ..................................................................................................................244
2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES ..............................................................223 7. LIMITATIONS OF PATENT RIGHTS ...................................................................................................................244
3. BANK POWERS AND LIABILITIES .....................................................................................................................224 A. PRIOR USER .............................................................................................................................................245
A. CORPORATE POWERS ..............................................................................................................................224 B. USE BY THE GOVERNMENT .....................................................................................................................245
B. BANKING AND INCIDENTAL POWERS ......................................................................................................224 8. PATENT INFRINGEMENT.................................................................................................................................245
4. DILIGENCE REQUIRED OF BANKS IN VIEW OF FIDUCIARY NATURE OF BANKING ............................................225 A. TESTS IN PATENT INFRINGEMENT ...........................................................................................................245
5. NATURE OF BANK FUNDS AND BANK DEPOSITS .............................................................................................225 B. CIVIL AND CRIMINAL ACTION ..................................................................................................................246
6. GRANT OF LOANS AND SECURITY REQUIREMENTS ........................................................................................226 C. PRESCRIPTIVE PERIOD .............................................................................................................................247
A. RATIO OF NET WORTH TO TOTAL RISK ASSETS .......................................................................................226 D. DEFENSES IN ACTION FOR INFRINGEMENT ............................................................................................247
B. SINGLE BORROWER’S LIMIT (SBL) ...........................................................................................................226 9. LICENSING ......................................................................................................................................................247
C. RESTRICTIONS ON BANK EXPOSURE TO DIRECTORS, OFFICERS, STOCKHOLDERS, AND THEIR RELATED A. VOLUNTARY LICENSING ..........................................................................................................................247
INTERESTS....................................................................................................................................................227 B. COMPULSORY LICENSING ........................................................................................................................249
D. PROHIBITED ACTS OF BORROWERS ........................................................................................................228 10. ASSIGNMENT AND TRANSMISSION OF RIGHTS ............................................................................................250
E. FLOATING INTEREST RATES AND ESCALATION CLAUSES .........................................................................228 C. TRADEMARKS ................................................................................................................................................ 251
7. PENALTIES FOR VIOLATIONS ..........................................................................................................................229 1. DEFINITIONS OF MARKS, COLLECTIVE MARKS, AND TRADE NAMES ..............................................................251
A. FINE, IMPRISONMENT .............................................................................................................................229 2. ACQUISITION OF OWNERSHIP OF A MARK .....................................................................................................251
B. SUSPENSION OR REMOVAL OF DIRECTOR OR OFFICER ..........................................................................229 3. ACQUISITION OF OWNERSHIP OF TRADE NAME ............................................................................................252
C. DISSOLUTION OF BANK ...........................................................................................................................229 4. NON-REGISTRABLE MARKS ............................................................................................................................253
D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT .................................................................................... 230 5. PRIOR USE OF MARK AS REQUIREMENT .........................................................................................................253
1. BASIC POLICY ..................................................................................................................................................230 6. TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS ................................................................254
2. POWERS AND FUNCTIONS OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION; PROHIBITIONS ..........230 7. WELL-KNOWN MARKS....................................................................................................................................254
3. CONCEPT OF INSURED DEPOSITS ...................................................................................................................231 8. RIGHTS CONFERRED BY REGISTRATION..........................................................................................................256
4. LIABILITY TO DEPOSITORS ..............................................................................................................................231 9. USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK ......................................................256
A. DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PHILIPPINE DEPOSIT INSURANCE CORPORATION 10. INFRINGEMENT AND REMEDIES...................................................................................................................256
.....................................................................................................................................................................231 A. TRADEMARK INFRINGEMENT..................................................................................................................256
B. COMMENCEMENT OF LIABILITY ..............................................................................................................231 B. DAMAGES ................................................................................................................................................258
C. DEPOSIT ACCOUNTS NOT ENTITLED TO PAYMENT .................................................................................231 C. DAMAGES; REQUIREMENT OF NOTICE ...................................................................................................258
D. EXTENT OF LIABILITY ...............................................................................................................................231 D. PENALTIES ...............................................................................................................................................258
E. DETERMINATION OF INSURED DEPOSITS ................................................................................................231 11. UNFAIR COMPETITION .................................................................................................................................258
F. CALCULATION OF LIABILITY .....................................................................................................................232 12. REGISTRATION OF MARKS UNDER THE MADRID PROTOCOL .......................................................................259
5. CONCEPT OF BANK RESOLUTION ...................................................................................................................233 A. COVERAGE ...............................................................................................................................................259
6. ROLE OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION IN RELATION TO BANKS IN DISTRESS ...........234 B. RIGHTS CONFERRED ................................................................................................................................259
A. CLOSURE AND TAKEOVER .......................................................................................................................234 C. REQUIREMENTS FOR REGISTRATION ......................................................................................................260
B. CONSERVATORSHIP .................................................................................................................................234 D. TERM OF PROTECTION ............................................................................................................................260
C. RECEIVERSHIP ..........................................................................................................................................234 D. COPYRIGHT .................................................................................................................................................... 261
D. LIQUIDATION ...........................................................................................................................................235 1. BASIC PRINCIPLES ...........................................................................................................................................261
2. COPYRIGHTABLE WORKS................................................................................................................................261
A. ORIGINAL LITERARY OR ARTISTIC WORKS ...............................................................................................261
VII. INTELLECTUAL PROPERTY ............................................................................................................................ 239
B. DERIVATIVE WORKS ................................................................................................................................262
3. NON-COPYRIGHTABLE WORKS .......................................................................................................................262
A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL ............................................................................................... 240 4. RIGHTS OF COPYRIGHT OWNER .....................................................................................................................263
1. INTELLECTUAL PROPERTY RIGHTS ..................................................................................................................240 5. RULES ON OWNERSHIP OF COPYRIGHT ..........................................................................................................264
2. DIFFERENCES BETWEEN COPYRIGHT, TRADEMARKS, AND PATENTS .............................................................240 6. LIMITATIONS ON COPYRIGHT .........................................................................................................................265
3. TECHNOLOGY TRANSFER ARRANGEMENT .....................................................................................................241 A. FAIR USE ..................................................................................................................................................265
B. PATENTS ........................................................................................................................................................ 241 7. COPYRIGHT INFRINGEMENT ..........................................................................................................................266
1. PATENTABLE INVENTION ...............................................................................................................................241 A. REMEDIES ................................................................................................................................................267
A. NOVELTY..................................................................................................................................................241 B. CRIMINAL PENALTIES ..............................................................................................................................267
B. INVENTIVE STEP.......................................................................................................................................241
vi vii
VIII. SPECIAL LAWS............................................................................................................................................. 270 D. DOMESTIC MARKET ENTERPRISE ............................................................................................................335

3. REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS ..............................................................336
4. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES .........................................................................................337
A. SECURED TRANSACTIONS .............................................................................................................................. 271
5. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES ......................................................................337
1. PERSONAL PROPERTY SECURITIES ACT...........................................................................................................271
6. FOREIGN INVESTMENT NEGATIVE LIST ..........................................................................................................338
A. DEFINITIONS AND SCOPE ........................................................................................................................271
E. INSOLVENCY LAWS ......................................................................................................................................... 339
B. ASSET-SPECIFIC RULES .............................................................................................................................272
1. CONCURRENCE AND PREFERENCE OF CREDITS ..............................................................................................339
C. PERFECTION OF SECURITY INTERESTS .....................................................................................................273
A. MEANING OF CONCURRENCE AND PREFERENCE ...................................................................................339
D. REGISTRATION ........................................................................................................................................274
B. EXEMPT PROPERTIES ...............................................................................................................................339
E. PRIORITY OF SECURITY INTERESTS ..........................................................................................................278
C. CLASSIFICATION OF CREDITS ...................................................................................................................340
F. TANGIBLE ASSETS; INTANGIBLE ASSETS ..................................................................................................278
D. ORDER OF PREFERENCE OF CREDITS.......................................................................................................341
G. ENFORCEMENT OF SECURITY INTERESTS ................................................................................................279
2. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 ........................................................................342
H. PRIOR INTEREST AND THE TRANSITIONAL PERIOD .................................................................................282
A. DEFINITION OF INSOLVENCY ...................................................................................................................343
2. REAL ESTATE MORTGAGE LAW ......................................................................................................................283
B. SUSPENSION OF PAYMENTS ....................................................................................................................343
A. DEFINITION AND CHARACTERISTICS .......................................................................................................283
C. REHABILITATION ......................................................................................................................................345
B. ESSENTIAL REQUISITES ............................................................................................................................292
D. LIQUIDATION ...........................................................................................................................................358
3. GUARANTY .....................................................................................................................................................297
F. DATA PRIVACY ACT OF 2012 ........................................................................................................................... 367
A. NATURE AND EXTENT OF GUARANTY .....................................................................................................297
1. DEFINITIONS AND SCOPE ...............................................................................................................................367
B. EFFECTS OF GUARANTY ...........................................................................................................................306
2. EXTRATERRITORIAL APPLICATION ..................................................................................................................370
C. EXTINGUISHMENT OF GUARANTY...........................................................................................................306
3. PROCESSING OF PERSONAL INFORMATION ...................................................................................................371
D. LEGAL AND JUDICIAL BONDS ..................................................................................................................308
A. GENERAL PRINCIPLES ..............................................................................................................................371
4. SURETY ...........................................................................................................................................................309
B. SENSITIVE AND PRIVILEGED INFORMATION ...........................................................................................372
A. CONCEPT .................................................................................................................................................309
C. SUBCONTRACTING ..................................................................................................................................373
B. FORM OF SURETY ....................................................................................................................................309
D. RULE ON PRIVILEGED COMMUNICATION ...............................................................................................373
C. OBLIGATIONS SECURED ...........................................................................................................................309
4. RIGHTS OF THE DATA SUBJECT; EXCEPTIONS/NON-APPLICABILITY................................................................373
D. SURETY DISTINGUISHED FROM STANDBY LETTER OF CREDIT ................................................................309
5. DUTIES AND RESPONSIBILITIES OF PERSONAL INFORMATION CONTROLLER.................................................375
E. SURETY DISTINGUISHED FROM GUARANTY ............................................................................................310
5 PILLARS OF COMPLIANCE OF THE NATIONAL PRIVACY COMMISSION .............................................................377
F. SURETY DISTINGUISHED FROM JOINT AND SOLIDARY OBLIGATIONS .....................................................310
G. PHILIPPINE COMPETITION ACT ....................................................................................................................... 378
5. LETTERS OF CREDIT.........................................................................................................................................311
1. DEFINITION AND SCOPE OF APPLICATION ......................................................................................................378
A. DEFINITION AND PURPOSE .....................................................................................................................311
2. POWERS AND FUNCTIONS OF THE PHILIPPINE COMPETITION COMMISSION ................................................379
B. KINDS OF LETTERS OF CREDIT .................................................................................................................313
3. JURISDICTION AND ENFORCEMENT ...............................................................................................................380
C. RULE OF STRICT COMPLIANCE ................................................................................................................315
4. DETERMINING THE RELEVANT MARKET .........................................................................................................382
D. INDEPENDENCE PRINCIPLE .....................................................................................................................316
5. DETERMINING CONTROL OR DOMINANCE OF MARKET .................................................................................383
B. TRUTH IN LENDING ACT .................................................................................................................................. 317
6. PROHIBITED ACTS ...........................................................................................................................................384
1. PURPOSE ........................................................................................................................................................317
A. PROHIBITED MERGERS AND ACQUISITIONS ...........................................................................................384
2.OBLIGATION OF CREDITORS TO PERSON TO WHOM CREDIT IS EXTENDED .....................................................317
B. ANTI-COMPETITIVE AGREEMENTS ..........................................................................................................387
3. COVERED AND EXCLUDED TRANSACTIONS ....................................................................................................318
C. ABUSE OF DOMINANT POSITION ............................................................................................................389
4. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION .........................................................................318
7. FORBEARANCE BY THE PCC ............................................................................................................................393
C. ANTI-MONEY LAUNDERING ACT ..................................................................................................................... 319
1. POLICY ............................................................................................................................................................319
2. COVERED INSTITUTIONS AND OBLIGATIONS .................................................................................................319
3. COVERED AND SUSPICIOUS TRANSACTIONS ..................................................................................................321
4. MONEY LAUNDERING; HOW COMMITTED; UNLAWFUL PRACTICES OR PREDICATE CRIMES .........................322
5. ANTI-MONEY LAUNDERING COUNCIL; FUNCTIONS .......................................................................................323
6. SAFE HARBOR PROVISION ..............................................................................................................................324
7. APPLICATION FOR FREEZE ORDERS ................................................................................................................324
8. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ..............................................................................................326
D. FOREIGN INVESTMENTS ACT .......................................................................................................................... 329
1. POLICY OF THE LAW........................................................................................................................................329
2. DEFINITION OF TERMS ...................................................................................................................................329
A. FOREIGN INVESTMENT ............................................................................................................................329
B. DOING BUSINESS IN THE PHILIPPINES .....................................................................................................333
C. EXPORT ENTERPRISE ...............................................................................................................................335
viii ix
ATENEO CENTRAL
I. INSURANCE I. CLAIMS SETTLEMENT AND

SUBROGATION
1. Notice and proof of loss
TOPIC OUTLINE UNDER THE SYLLABUS 2. Guidelines on Claim Settlement
a. Unfair claims settlement;
I. INSURANCE sanctions
b. Prescription of action
A. CONCEPT OF INSURANCE c. Subrogation
B. ELEMENTS OF AN INSURANCE J. BUSINESS OF INSURANCE;

CONTRACT REQUIREMENTS
C. CHARACTERISTICS AND NATURE K. INSURANCE COMMISSIONER AND

OF INSURANCE CONTRACTS ITS POWER
D. CLASSES
INSURANCE
1. Marine
2. Fire
3. Casualty
4. Suretyship
5. Life
6. Microinsurance
Commercial Law 7. Compulsory motor vehicle liability

insurance
8. Compulsory insurance coverage
for agency-hired workers
E. VARIABLE CONTRACTS
F. INSURABLE INTEREST
1. In life/health
2. In property
3. Double insurance and over
insurance
4. Multiple or several interests on
same property
G. PERFECTION OF THE CONTRACT

OF INSURANCE
1. Offer and acceptance /
consensuality
a. Delay in acceptance
b. Delivery of the policy
2. Premium payment
3. Non-default options in life
insurance
4. Reinstatement of a lapsed policy
of life insurance
5. Refund of premiums
H. RESCISSION OF INSURANCE
CONTRACTS
1. Concealment
2. Misrepresentation/omissions
3. Breach of warranties
Page 2 of 393
A. CONCEPT OF INSURANCE not as merely incidental to any other Additional Requisites for Insurance Contract: Contracts for Personal Service Distinguished
legitimate business or activity of the (IRADP) from Contracts of Insurance
surety; a. The insured must possess an interest of Contracts a law firm enters into with clients
Governing Laws 2. Doing any kind of business including a some kind susceptible of pecuniary whereby in consideration of periodical payments,
1. P.D. No. 612, as amended by R.A. No. reinsurance business, specifically estimation, known as insurable interest; the law firm promises to represent such clients in
10607 (hereinafter Insurance Code); recognized as constituting the doing of b. The insured is subject to a risk of loss all suits for or against them are not insurance
2. Special Laws, such as R.A. No. 1161 an insurance business within the through the destruction or impairment of contracts but are contracts for personal services;
(Social Security Act) meaning of this Code; that interest by the happening of
3. Civil Code, for matters not expressly 3. Doing or proposing to do any business in designated perils; A contract by which a corporation, in
provided for in #1 and #2 substance equivalent to any of the c. The insurer assumes the risk of loss; consideration of a stipulated amount, agrees at its
foregoing in a manner designed to evade d. Such assumption is part of a general own expense to defend a physician against all
Contract of Insurance the provisions of this Code. (Insurance scheme to distribute actual losses suits for damages for malpractice is one of
1. An agreement; Code, Sec. 2[b]) among a large group of persons bearing insurance, and the corporation will be deemed as
2. Whereby one undertakes for a somewhat similar risks; engaged in the business of insurance since the
consideration; Contract of Suretyship e. As consideration for the insurer’s purpose of the contract is to indemnify against
3. To indemnify another against loss, A contract of suretyship is also considered an promise, the insured makes a ratable loss and damage. (Philippine Health Care
damage or liability insurance contract, if made by a surety who is contribution called premium, to a general Providers v. CIR, G.R. No. 167330, 2009)
4. Arising from an unknown or contingent doing insurance business. (P.D. No. 612, as insurance fund.
event. (Insurance Code, Sec. 2[a]). amended by R.A. No. 10607 [hereinafter PARTIES TO AN INSURANCE CONTRACT
Insurance Code], Sec. 2[a]). Note: The presence of these five elements are
Note: what separate Insurance from other contracts, a. Insurer
A contingent event is one that is not certain to Suretyship is an agreement whereby a party and which makes Insurance a “risk-distributing The party who assumes or accepts the risk of loss
take place. called the “surety” guarantees the performance device” (De Leon, The Insurance Code and undertakes for a consideration to indemnify
by another party called the “principal obligor” of Annotated, 2014) the insured or to pay him a certain sum on the
An unknown past event is one which had already an obligation or undertaking in favor of a third happening of a specified contingency or event;
happened, but one is unaware if it happened or party called the “obligee.” Risk-distributing device
not. It includes official recognizances, stipulations, A contract of insurance is primarily a risk- An insurer may be:
bonds or undertakings issued by any company by distributing device, a mechanism by which all 1. A foreign or domestic company or
A past event may be a designated event only in virtue of and under the provisions of Act No. 536, members of a group exposed to a particular risk corporation; or
cases where it has happened already but the as amended by Act No. 2206. (Insurance Code, contribute premiums to an insurer. From these 2. A partnership or an association
parties do not know about it, e.g., prior loss of a Sec. 177) contributory funds are paid whatever losses occur
ship at sea (applicable only to marine insurance). due to exposure to the peril insured against. Insurance Corporations
(De Leon, The Insurance Code of the Philippines Protection and Indemnity Club – Doing The term insurer or insurance company shall
Annotated [2014]) Insurance Business Test to Determine Whether a Contract is an include all partnerships, associations,
A protection and indemnity club is an association Insurance Contract cooperatives or corporations, including
Consideration Required in Insurance composed of shipowners generally formed for the It depends on the nature of the promise, the act government-owned or -controlled corporations or
An insurance business consists in undertaking, specific purpose of providing insurance cover required to be performed, and the exact nature of entities, engaged as principals in the insurance
for a consideration, to indemnify another against against third-party liabilities of its members. It is a the agreement in the light of the occurrence, business, excepting mutual benefit associations.
loss, damage or liability arising from an unknown mutual insurance association. (Steamship Mutual contingency or circumstances under which the Unless the context otherwise requires, the term
or contingent event. v. Sulpicio Lines, G.R. No. 196072, 2017) performance becomes requisite. It is not by what shall also include professional reinsurers defined
it is called (White Gold Marine Services v. Pioneer in Section 288. Domestic company shall include
The fact that no profit is derived from the making Insurance, G.R. No. 154514, 2005) companies formed, organized or existing under
of insurance contracts, agreements or B. ELEMENTS OF AN INSURANCE the laws of the Philippines. Foreign company
transactions or that no separate or direct Principal Objects and Purpose Test when used without limitation shall include
CONTRACT Whether the assumption of risk and companies formed, organized, or existing under
consideration is received therefor, shall not be
deemed conclusive to show that the making indemnification of loss (which are elements of an any laws other than those of the Philippines.
thereof does not constitute the doing or insurance business) are the principal object and (Insurance Code, Sec. 190)
transacting of an insurance business. (Insurance REQUISITES purpose of the organization or whether they are
Code, Sec. 2[b]) Requisites of Ordinary Contracts: merely incidental to its business. If these are the An Insurance Corporation must have:
a. Consent principal objectives, the business is that of 1. Sufficient Capital and assets required
Doing or Transacting an Insurance Business b. Subject-matter insurance. But if they are merely incidental and under the Insurance Code and pertinent
1. Making or proposing to make, as insurer c. Cause service is the principal purpose, then the regulations issued by the Commission;
any insurance contract; Making, or business is not insurance. (Philippine Health and
proposing to make, as surety, any Care Providers v. CIR, G.R. No. 167330, 2009) 2. A Certificate of Authority to operate
contract of suretyship as a vocation and issued by the Insurance Commission
Page 3 of 393 Page 4 of 393

which should be renewable every 3 Insurance Contract vs. Gambling Contract

years. (New Insurance Code, Sec. 193) Note: There are only two parties to a contract of Provided: They are not contrary to law, morals,
insurance, the insured and the insurer. The INSURANCE GAMBLING good customs, public order, or public policy.
b. Insured beneficiary is NOT a party to the contract unless CONTRACT CONTRACT
The person in whose favor the contract is he is the party to be insured. Aleatory
operative and who is indemnified against or is to The parties seek to The parties It is an aleatory but not a wagering contract.
receive a sum upon the happening of a specified Also Note: LGBTQ+ members have the right to distribute possible contemplate gain
event. designate their domestic partners as loss by reason of through mere By an aleatory contract, one of the parties or both
beneficiaries. An individual who has secured a life mischance. chance. reciprocally bind themselves to give or to do
Requisites in Order that a Person May Be insurance policy on his or her own life may something in consideration of what the other shall
Insured Under a Contract of Insurance: (CIP) designate any person as beneficiary provided The insurer seeks to The gambler courts give or do upon the happening of an event which
(Insurance Code, Sec. 3) that such designation does not fall under the avoid misfortune. fortune. is uncertain, or which is to occur at an
1. He must be competent to enter into a enumerations provided in Article 739 of the Civil indeterminate time. The insurer’s liability depends
The contract tends to The contract tends to
contract; Code. (Insurance Commission, Legal Opinion upon the happening of an uncertain event which
equalize fortune. increase the
2. He must possess an insurable interest No. 2020-02, dated March 04, 2020) is to occur at an indeterminate time.
inequality of fortune.
in the subject of the insurance; and
3. He must not be a public enemy (citizen SUBJECT MATTER Unilateral
What one insures Whatever one
or subject of a country with whom the A contract of insurance is executed as to the
against is not at the person wins from a
Philippines is at war) (Insurance Code, Risks or Perils That May be Insured insured after the payment of the premium.
expense of another wager is lost by the
Sec. 7) a. Any contingent or unknown event,
insured person. other wagering party.
whether past or future, which may It is executory as to the insurer since it is not
Effect of War on Existing Insurance Contracts damnify (cause damage to) a person executed until payment for a loss.
The purchase of As soon as a party
having an insurable interest; or
insurance does not makes a wager, he
1. Property Insurance b. Any contingent or unknown event, Personal
create a new, and creates a risk of loss
An insurance policy ceases to become valid and whether past or future, which may create Each party to it, in entering into the insurance
therefore, non- to himself where no
enforceable as soon as the insured becomes a a liability against the person insured contract, takes into account the character, credit
existing risk of loss to such risk existed
public enemy. (Insurance Code, Sec. 3) and conduct of the other.
the purchaser. The previously.
purchaser faces an
However, premium paid by the insured (public Past Events – Marine Insurance Conditional
already existing risk
enemy) shall be returned by the insurer (Filipinas A past event which may be insured against is The insurer’s liability is based on the happening
of economic loss
Compania de Seguros v. Christern Huenefield & peculiar to Marine Insurance. A person insured by of the event insured against.
(“insurable interest”).
Co., G.R. No. L-2294, 1951) a contract of marine insurance is presumed to
have knowledge, at the time of insuring, of a prior In both cases, one party promises to pay a Contract of Indemnity
2. Life Insurance loss, if the information might possibly have given sum to the other upon the occurrence General Rule: Indemnity is the basis of all
The contract is abrogated but the insured is reached him in the usual mode of transmission of a given future event, the promise being property insurance. The insured who has
entitled to the case or reserve value of the policy and at the usual rate of communication. conditioned upon the payment of, or insurable interest over a property is only
(if any), which is the excess of the premiums paid (Insurance Code, Sec. 111) agreement to pay, a stipulated amount by the entitled to recover the amount of actual loss
over the actual risk carried during the years when other party to the contract. In either case, one sustained and the burden is upon him to
the policy had been in force (Constantino v. Asia Contingent Liability party may receive more, or much more, than establish the amount of such loss.
Life Insurance, G.R. No. L-1669, 1950) Example: Reinsurance he paid or agreed to pay.
Exception: life and accident insurance
Note: Where the loss occurs after the end of the Note: Sec. 4 does not authorize an insurance for where measure of indemnity is the amount
war, the contract is not revived. or against the drawing of any lottery, or for or fixed in the policy.
against any chance or ticket in a lottery drawing a C. CHARACTERISTICS AND NATURE OF
Rule on Married Persons prize. (Insurance Code, Sec. 4) Uberrimae Fides Contract
The consent of the spouse is not necessary for
INSURANCE CONTRACTS The contract of insurance is one of perfect good
the validity of an insurance policy taken out by a Elements of a Lottery faith not for the insured alone, but equally so for
married person on his or her life or that or his or a. Consideration; the insurer (Qua Chee Gan v. Law Union Rock,
her children (Insurance Code, Sec. 3, ¶ 2) or that b. Prizes; and Consensual G.R. No. L-4611, 1955).
of her husband (Insurance Code, Sec. 10) c. Chance Perfected by the meeting of the minds of the
parties (Civil Code, Art. 1315) Construction of Insurance Contract –
[A married woman] may also take out insurance Contract of Adhesion
on her paraphernal or separate property, or on Voluntary Insurance contracts are contracts of adhesion the
property given to her by her husband (Harding v. It is not compulsory and the parties may terms of which must be interpreted and enforced
Commercial Union Assurance, G.R. No. L-12707, incorporate such terms and conditions as they stringently against the insurer which prepared the
1918) may deem convenient which will be binding. contract.

Agreement whereby a party called the surety E. VARIABLE CONTRACTS c. Any person under a legal obligation to
Limitations of liability on the part of the insurer or guarantees the performance by another party him for the payment of money, or
health care provider must be construed in such a called the principal or obligor of an obligation respecting property or services, of which
way as to preclude it from evading its obligations. or undertaking in favor of a third party called Variable Contract death or illness might delay or prevent
Accordingly, they should be scrutinized by the the obligee. It includes official recognizances, Any policy or contract on either a group or the performance; and
courts with extreme jealousy and care and with a stipulations, bonds or undertakings issued by individual basis issued by an insurance company
jaundiced eye. (Blue Cross Health Care v. any company by virtue of and under the providing for benefits or other contractual Note: A creditor may insure his debtor’s
Olivares, G.R. No. 169737, 2008) provisions of Act No. 536, as amended by Act payments or values thereunder to vary so as to life for the purpose of protecting his debt,
No. 2206 (Insurance Code, Sec. 177) reflect investment results of any segregated but only to the extent of the amount of the
The terms in an insurance policy which are portfolio of investment. debt and the cost of carrying the
ambiguous, equivocal, or uncertain are to be 5. LIFE (Insurance Code, Secs. 50, 181-186, insurance on the debtor’s life.
construed strictly and most strongly against the 233-237)
Insurance on human lives and insurance d. Any person upon whose life any estate or
insurer, and liberally in favor of the insured so as F. INSURABLE INTEREST
appertaining thereto or connected therewith interest vested in him depends.
to effect the dominant purpose of indemnity or (Insurance Code, Sec. 181) (Insurance Code, Sec. 10)
payment to the insured (Calanoc v. CA, G.R. No.
L-8218, 1955) 6. MICROINSURANCE Interest which the law requires the owner of an Life Insurance v. Civil Donation
Microinsurance is a financial product or insurance policy to have in the thing or person
service that meets the risk protection LIFE INSURANCE CIVIL DONATION
D. CLASSES OF INSURANCE insured.
needs of the poor where:
a. The amount of contributions, premiums, This is also founded An act of liberality
General Rule: It is pecuniary in nature.
fees or charges, computed on a daily on liberality, as the whereby a person
1. MARINE (Insurance Code, Secs. 101-168) beneficiary will disposes gratuitously
basis, does not exceed 7.5% of the A person is deemed to have an insurable interest
An agreement to indemnify against injury to a receive the proceeds a thing or right in
current daily minimum wage rate for in the subject matter insured where he has a
ship, cargo, or profits involved in a certain of the said insurance. favor of another who
nonagricultural workers in Metro Manila; relation or connection with or concern in it that he
voyage or for a specific vessel during a fixed accepts it.
and will derive pecuniary benefit or advantage from its
period.
b. The maximum sum of guaranteed preservation and will suffer pecuniary loss or
benefits is not more than 1,000 times of damage from its destruction, termination or injury As a consequence, the proscription in Civil Code,
However, the Insurance Code does not limit
the current daily minimum wage rate for by the happening of the event insured against. Art. 739 should equally operate in life insurance
marine insurance to risks of navigation.
nonagricultural workers in Metro Manila. (Lalican v. Insular Life Insurance Co, G.R. No. contracts (Insular Life v. Ebrado, G.R. No. L-
(Insurance Code, Sec. 101)
183526, 2009) 44059, 1977)
7. COMPULSORY MOTOR VEHICLE
2. FIRE (Insurance Code, Secs. 169-175)
LIABILITY INSURANCE (Insurance Code, Exception: Life Insurance Beneficiary
Insurance against loss by fire, lightning,
Secs. 386-402) Person who is named or designated in a contract
windstorm, tornado or earthquake and other
Contract of insurance against passenger and The expectation of benefit from the continued life of life, health, or accident insurance as the one
allied risks, when such risks are covered by
third-party liability for death or bodily injuries of that person need not necessarily be of who is to receive the benefits which become
extension to fire insurance policies or under
and damage to property arising from motor pecuniary nature. payable, according to the terms of the contract,
separate policies (Insurance Code, Sec. 169)
vehicle accidents (Insurance Code, Sec. 386 upon the death of the insured (44 Am. Jur. 2d.
[f]) 1. IN LIFE/HEALTH 639 cited in de Leon, 2010, p. 96).
3. CASUALTY (Insurance Code, Sec. 176)
Insurance covering loss or liability arising
8. COMPULSORY INSURANCE COVERAGE a. Himself, of his spouse and of his children; Designation of Beneficiary
from accident or mishap, excluding certain
FOR AGENCY-HIRED WORKERS General rule: When one insures his own life, he
types of loss which by law or custom are
Each migrant worker deployed by a If a person will insure the life of another may designate any person as the beneficiary,
considered as falling exclusively within the
recruitment/manning agency shall be payable to himself, he must have an whether or not the beneficiary has an insurable
scope of other types of insurance such as fire
covered by a compulsory insurance policy insurable interest in the life of the person interest in the life of the insured.
or marine. It includes, but is not limited to,
which shall be secured at no cost to the said
employer’s liability insurance, motor vehicle whose life he is insuring.
worker. (Migrant Workers and Overseas Exceptions: Persons specified in Article 739 of
liability insurance, plate glass insurance,
Filipinos Act of 1995, as Amended) b. Any person on whom he depends wholly the Civil Code cannot be designated:
burglary and theft insurance, personal
accident and health insurance as written by or in party for education or support, or in a. Those made between persons who were
Compulsory insurance coverage for agency- whom he has pecuniary interest; guilty of adultery or concubinage
non-life insurance companies, and other
hired Filipino workers under R.A 10022 shall (conviction is not a condition precedent);
substantially similar kinds of insurance
be without cost to the worker. This will cover Note: Persons obliged to support each b. Those made between persons found
(Insurance Code, Sec. 176)
accidental death, natural death, other: See Family Code, Art. 195 guilty of the same criminal offense, in
compassionate visit, medical evacuation, consideration thereof;
4. SURETYSHIP (Insurance Code, Secs. 177-
medical repatriation and repatriation of mortal
180)
remains.

c. Those made to a public officer or his wife, Right of Insured to Change Beneficiary in Life pecuniary interest over the property is always Exceptions
descendants or ascendants by reason of Insurance necessary.
his office. General Rule: The insured shall have the right to Sec. EXCEPTION
change the beneficiary he designated in the Existence of insurable interest is a matter of
In order for Article 739 to apply, it is not required policy. (Insurance Code, Sec. 11) public policy. Hence, the principle of estoppel 20 Life, health, and accident insurance.
that there be a previous conviction for adultery cannot be invoked.
21 A change of interest in the thing
or concubinage, due to the wording of Exception: If the insured expressly waived his
insured after the occurrence of an
“preponderance of evidence” (Insular Life v. right to change the beneficiary, this makes the Insurable Interest in Life v. Property injury which results in a loss.
Ebrado, G.R. No. L-44059, 1977) latter an irrevocable beneficiary. But despite the
waiver, he can still change the beneficiary, LIFE PROPERTY
22 A change of interest in one or more
Note: LGBTQ+ members have the right to provided that he obtains the beneficiary’s
Basis of several things, separately insured
designate their domestic partners as consent. (Insurance Code, Sec. 11)
by one policy.
beneficiaries. An individual who has secured a life
insurance policy on his or her own life may Forfeiture by Beneficiary of Interest in May be based on Based on pecuniary
pecuniary interest, interest. 23 A change of interest by will or
designate any person as beneficiary provided Insurance Policy
affinity, or succession on the death of the
that such designation does not fall under the The interest of a beneficiary in a life insurance
consanguinity. insured.
enumerations provided in Article 739 of the Civil policy shall be forfeited when the beneficiary is
Code. (Insurance Commission, Legal Opinion the principal, accomplice, or accessory in willfully 24 A transfer of interest by one of
No. 2020-02, dated March 04, 2020) bringing about the death of the insured; in which When Interest Must Exist
several partners, joint owners, or
event, the share forfeited shall be paid as follows: owners in common, who are jointly
When is the estate entitled to the proceeds of In life insurance Must exist when the
(save that effected by insurance takes effect insured, to the others.
the insurance? 1. To the other beneficiaries if not
1. Where the insured has not designated disqualified; creditor on life of and when the loss
debtor), it is enough occurs, but need not 57 When a policy is so framed that it will
any beneficiary; or 2. If no other beneficiaries, in accordance inure to the benefit of whomsoever,
2. When the designated beneficiary is with the policy contract; (e.g. to the that insurable exist in the meantime.
interest exists at the during the continuance of the risk,
disqualified by law to receive the contingent or substitute of beneficiaries) may become the owner of the
proceeds (Heirs of Maramag v. 3. If the policy contract is silent, to the estate time the policy takes
effect and need not interest insured.
Maramag, G.R. No. 181132, 2009) of the insured. (Insurance Code, Sec. 12)
exist at the time of
Notes: the loss. Note: When there is an express prohibition
2. IN PROPERTY
1. The designation is revocable unless the against alienation in the policy, in case of
Amount of Insurable Interest
right to revoke is expressly waived in the Coverage of Insurable Interest in Property alienation, the contract of insurance is not
policy. 1. Property itself; merely suspended but is avoided. (Civil Code,
General Rule: No Limited to the actual
2. If the insured or beneficiary is a minor, 2. Any relation thereto; or Art. 1306)
limit. value of
and the amount involved does not 3. Liability in respect thereof (Insurance Exception: If damage/injury/loss.
exceed P50,000.00, the father, or in his Code, Sec. 13) Change of Interest That Suspends an
insurable interest is
absence or incapacity, the mother may Insurance Contract
based on creditor-
exercise the minor’s rights under the It may consist of: The change of interest contemplated by law is an
debtor relationship,
policy, without the need of a court 1. An existing interest; absolute transfer of the insured’s entire interest in
only to the extent of
authority or a bond. 2. An inchoate interest founded on an the property insured to one not previously
the credit or debt.
3. If the premiums are paid out of the existing interest; or interested or insured. In the following cases, the
conjugal funds, the proceeds are 3. An expectancy, coupled with an existing policy is not suspended: (ML2R2)
considered conjugal. interest in that out of which the Change in Interest of Thing
expectancy arises General rule: A change in interest in the thing a. Execution of a Mortgage
If the beneficiary is other than the insured without a change in insurance does not b. Lease of the insured property
insured’s estate, the source of Measure of Insurable Interest in Property transfer the policy but suspends it until the c. Vendor who has a Lien on the property
premiums (either from The extent to which the insured might be interest in the thing and the interest in the sold until the purchase price is paid or the
paraphernal or conjugal funds) damnified by loss or injury thereof. insurance are vested in the same person. conditions of the sale are performed
would not be relevant (BPI v. d. Judgment debtor whose property has
Posadas, G.R. No. L-34583, In general, a person has an insurable interest in been sold on execution (Right to
1931). the property, if he derives pecuniary benefit or redeem)
advantage from its preservation or would suffer e. Mortgagor whose property has been
pecuniary loss, damage or prejudice by its foreclosed (Right of redemption)
destruction whether he has or has no title in, or
lien upon, or possession of the property. Hence,

Extent of Insurable Interest in a Mortgage the debt of the mortgagor to the extent of the
when the sum total of of the insured’s insurer’s risk.
Situation amount paid to the mortgagee.
the amounts of the insurable interest.
Interest of the Mortgagor and the Mortgagee in
policies issued does Insured has to give Consent of original
the mortgaged property is separate and distinct Standard or Union Mortgage Clause
not exceed the his consent. insured, not
from the other. In case both of them take out If a fire insurance policy contains this, the acts of
insurable interest of necessary.
separate insurance policies on the same the mortgagor do not affect the mortgagee. It
the insured.
property, or one policy covering their respective makes a separate and distinct contract of
interests, there is no double insurance. insurance on the interest of the mortgagee. The reinsurance contracts were correctly issued
Several insurers May have only one
involved. insurer involved. in favor of Plaridel. By its nature, reinsurance
Mortgagor, as owner, may insure the property Open or Loss-Payable Mortgage Clause contracts are issued in favor of the direct insurer
mortgaged to the full value of such property. It is a contract which provides that the payment of because the subject of such contracts is the direct
loss to the mortgagee, if any, will be according to Reinsurance insurer’s risk, in this case, Plaridel’s contingent
Mortgagee can insure the same only to the extent his interest as it may appear in the contract. One by which an insurer procures a third person liability to MSAPL, and not the risk assumed
of the amount of his credit. Under such clause, the acts of the mortgagor will to insure him against loss or liability by reason of under the original policy. With or without
affect the mortgagee. such original insurance. In every reinsurance reinsurance, the obligation of the surety to the
Insurance by Mortgagor for the Benefit of contract, the original contract of insurance and party against whom writ of attachment is issued
Mortgagee, or Policy Assigned to the 3. DOUBLE INSURANCE AND OVER the contract of reinsurance are separate and remains the same (Communication and
Mortgagee: INSURANCE distinct and covered by separate policies. Information Systems Corporation v. Mark
The insurance is still deemed to be upon the Sensing Australia, G.R. No. 192159, 2016).
interest of the mortgagor who does not cease to Double insurance exists where the same person Insurance vs. Reinsurance
be a party to the original contract. is insured by several insurers separately in 4. MULTIPLE OR SEVERAL INTERESTS ON
INSURANCE POLICY REINSURANCE
respect to the same subject and interest. SAME PROPERTY
Any act of the mortgagor, prior to the loss, which
would otherwise avoid the insurance, will have Written document Any contract by
Note: It is not prohibited by law. embodying the terms which an insurer Effects of insurance when the mortgagor effects
the same effects, although the property is in the But it may be contractually prohibited by a and stipulations of procures a 3rd insurance in his own name and provides that the
hands of the mortgagee. provision in an insurance policy. the contract of person to insure him loss be payable to the mortgagee:
insurance between against loss or a. The contract is deemed to be upon the
Any act, which under the contract of insurance is Over insurance exists when the amount of the the insured and liability by reason of interest of the mortgagor; hence he does
to be performed by the mortgagor, may be insurance is beyond the value of the insured’s insurer. an original insurance. NOT cease to be a party to the contract;
performed by the mortgagee with the same effect insurable interest. b. Any action of the mortgagor prior to the
as if it has been performed by the mortgagor.
Formal written The original contract loss which would otherwise avoid the
When there is double insurance and over instrument of insurance and the insurance affects the mortgagee even if
Upon the occurrence of the loss, the mortgagee insurance results, the insured can claim in case evidencing the contract of the property is in the hands of the
is entitled to recover to the extent of his credit and of loss only up to the agreed valuation or up to the contract of reinsurance are mortgagee;
the balance, if any, is payable to the mortgagor full insurable value from any, some or all insurers, insurance. covered by separate c. Any act which under the contract of
since such policy is for the benefit of both the without prejudice to the insurers ratably policies. insurance is to be performed by the
mortgagor and mortgagee. apportioning the payments. Insured can also mortgagor, may be performed by the
recover before or after the loss, from both mortgagee;
Upon recovery of the mortgagee to the extent of insurers the excess premium he has paid. Reinsurance v. Double Insurance d. In case of loss, the mortgagee is entitled
his credit from the insurer, the mortgagor is
DOUBLE INSURANCE REINSURANCE
to the proceeds to the extent of his credit;
released from his indebtedness. Requisites of Double Insurance: and
a. The person injured is the same; e. Upon recovery by the mortgagee to the
Insurance by Mortgagee of His Own Interest Involves the same Insurance of different
b. There are two or more insurers insuring extent of his credit, the debt is
The mortgagee may collect from the insurer upon interest. interests.
separately; extinguished.
the occurrence of the loss to the extent of his c. The subject matter is the same;
credit. Insurer remains in Insurer becomes an
d. The interest insured is also the same; In case it is the mortgagee who effects the
such capacity. insured in relation to
e. The risk or peril insured against is insurance in behalf of the mortgagor, the same
Unless otherwise stated in the policy, the insurer.
likewise the same. rules apply.
mortgagor has no right to collect the balance of
the proceeds of the policy after payment of the Insured in the 1st Original insured has
Double Insurance v. Over Insurance contract is a party in no interest in If an insurer assents to the transfer of an
interest of the mortgagee.
interest in the 2nd reinsurance contract. insurance from a mortgagor to a mortgagee, and,
DOUBLE INSURANCE OVER INSURANCE
contract. at the time of his assent, imposes further
The insurer, upon payment to the mortgagee-
There may be no Amount of insurance obligations on the assignee, making a new
insured, becomes subrogated to the rights of the
over insurance as is beyond the value Subject of insurance Subject of insurance contract with him, the acts of the mortgagor
mortgagee against the mortgagor and may collect
is property. is the original cannot affect the rights of said assignee.

G. PERFECTION OF THE CONTRACT OF FORM OF THE CONTRACT days after the issuance of such cover Rider
INSURANCE note, be issued in lieu thereof. Such Attachment to an insurance policy that modifies
Form NOT REQUIRED to perfect a contract of policy shall include within its terms the the conditions of the policy by expanding or
insurance identical insurance bond under the cover restricting its benefits or excluding certain
Consensual Nature of Contract
The policy is the formal written instrument note and the premium therefor. conditions from the coverage.
A contract of insurance must be assented to by
evidencing the contract of insurance entered into f. Cover notes may be extended or
both parties, either in person or through their
between the insured and the insurer. No form is renewed beyond such sixty (60) days Formal requirements of riders
agents and so long as an application for
required to perfect (i.e., to give rise to rights and with the written approval of the Riders, together with other attachments to the
insurance has not been either accepted or
obligations) a contract of insurance although an Commissioner if he determines that such policy, like clause, warranty or endorsements, are
rejected, it is merely a proposal or an offer to
insurer is potentially exposed to sanctions if the extension is not contrary to and is not for not binding on the insured unless:
make a contract. (Perez v. CA, G.R. No. 112329,
following are not complied with: the purpose of violating any provisions of 1. The descriptive title or name thereof is
2000)
this Code. The Commissioner may mentioned and written on the blank
Form of Insurance Contracts promulgate rules and regulations spaces provided in the policy and;
Also, according to Enriquez v. Sun Life
1. No policy, certificate or contract of governing such extensions for the 2. Countersigned by the insured or owner.
Assurance (G.R. No. L-15895, 1920):
insurance shall be issued or delivered purpose of preventing such violations
(1) Submission of application, even with premium
within the Philippines unless in the form and may by such rules and regulations Exception: No need to countersign if the rider
payment is a mere offer on the part of the
previously approved by the dispense with the requirement of written or other attachment is applied for by the
applicant, and does not bind the insurer;
Commissioner; and approval by him in the case of extension insured or owner of the policy
2. No application form shall be used with, in compliance with such rules and
(2) An insurance contract is also not perfected
and no rider, clause, warranty or regulations. (Insurance Code, Sec. 52) A rider containing an “Automatic Increase
where the applicant dies before the approval of
endorsement shall be attached to, g. Insurance companies may impose on Clause” – one that increases the coverage
his application or it does not appear that the
printed or stamped upon such policy, cover notes a deposit premium subject to the attainment of a certain age of the
acceptance of the application ever came to the
certificate or contract unless the form of equivalent to at least 25% of the insured – is not a separate contract. It is part of
knowledge of the applicant;
such application, rider, clause, warranty estimated premium of the intended the original policy which is in the nature of a
or endorsement has been approved by insurance coverage but in no case less conditional obligation (Commissioner of Internal
(3) An acceptance made by letter shall not bind
the Commissioner. (Insurance Code, than P500.00. (Ins. Cir. Letter, Jan. Revenue v. Lincoln Philippine Life Insurance
the person making the offer except from the time
Sec. 232) 17,1980.) (De Leon, The Insurance Code Company, G.R. No. 119176, March 19, 2001).
it came to his knowledge.
of the Philippines Annotated [2014])
Cover Note Note: If there is inconsistency between the policy
1. OFFER AND ACCEPTANCE / It is a contract for temporary insurance for a The fact that no separate premium was paid on and the rider, the rider prevails, it being a more
CONSENSUALITY reasonable time until the policy or policies can be the cover note before the loss insured against deliberate expression of the agreement of the
written or issued by the insurer. occurred, does not militate against its binding parties.
a. Delay in acceptance effect as an insurance contract. By their nature,
Also called: Binding Receipt or Slip, Interim, cover notes do not contain particulars that would Formal Requirements of a Policy
A contract of insurance, like other contracts, must Temporary or Provisional Policy serve as basis for the computation of the a. In printed form which may contain blank
be assented to by the parties either in person, or premiums and consequently, no separate spaces;
by their agents. Under the law, assent or consent Rules on Cover Notes: premiums are intended or required to be paid b. Any word, phrase, clause, mark, sign,
is manifested by the meeting of the offer and the a. Insurance companies doing business in therefor (Pacific Timber Export Corp. v. CA, G.R. symbol, signature, number or word
acceptance upon the thing and the cause which the Philippines may issue cover notes to No. L-38613, 1982) necessary to complete the contract of
are to constitute the contract. If an application has bind insurance temporarily, pending the insurance shall be written in the blank
not been either accepted or rejected, there is no issuance of the policy. Insurance Policy spaces provided therein. (Insurance
contract yet as it is merely and offer or proposal b. A cover note shall be deemed to be a A written document issued by the insurer to the Code, Sec. 50)
(Insurance, de Leon, p.176). contract of insurance within the meaning insured, embodying the terms and conditions of
of Section 1(1) of the Code. their contract of insurance. Contents of an Insurance Policy
b. Delivery of the policy c. No cover note shall be issued or renewed a. The parties between whom the contract
unless in the form previously approved The policy is not necessary for the perfection of is made;
The delivery of a policy is not, however, a by the Insurance Commission. the contract. The Policy is only the formal written b. The amount to be insured except in the
prerequisite to a valid contract of insurance. The d. A cover note shall be valid and binding instrument evidencing the contract. It is required, cases of open or running policies;
contract may be completed prior to delivery of the for a period not exceeding sixty (60) days however, that all policies issued or delivered must c. The premium, or if the insurance is of a
policy or even without delivery of the policy from the date of its issuance, whether or be in the form previously approved by the character where the exact premium is
depending on the intention of the parties not the premium therefor has been paid, Insurance Commission. only determinable upon the termination
(Insurance, de Leon, p.180). but such cover note may be cancelled by of the contract, a statement of the basis
either party upon at least seven (7) days’ The BEST EVIDENCE that a contract has been and rates upon which the final premium
notice to the other party. entered into between the insurer and the insured is to be determined;
e. If a cover note is not so cancelled, a is the DELIVERY of the policy by the insurer to d. The property or life insured;
policy of insurance shall, within sixty (60) the insured.

e. The interest of the insured in property An insurer is entitled to payment of the premium deposit and does not make the policy
insured, if he is not the absolute owner as soon as the thing insured is exposed to the binding. (Sps. Tibay v. CA, G.R. No. Cash Surrender Value
thereof; peril insured against. 119655, 1996) An amount to be paid to the insured upon
f. The risks insured against; and surrender of the policy contract.
g. The period during which the insurance is Effect of Non-Payment of Premium d. Where a credit term was agreed upon like
to continue. (Insurance Code, Sec. 51) the agreement in where the insurer Alternatives to Cash Surrender Value
General Rule: granted a 60-90-day credit term for the
Kinds of Policies Non-payment of first premium - prevents the payment of the premiums despite full a. Extended Insurance/Term Insurance
a. Open or Unvalued Policy contract from becoming binding notwithstanding awareness of Section 77 (UCPB General Where insurance is "extended," the insured is
Value of thing insured is not agreed upon, but the acceptance of the application or the issuance Insurance, Inc. v. Masagana Telemart, given the right, upon default, after the payment of
left to be ascertained in case of loss;(ex. of the policy. G.R. No. 137172, 1999) at least three full annual premiums (see Sec.
Marine and Fire Insurances) (Insurance 227[f].), to have the policy continued in force from
Code, Sec. 60) But non-payment of the balance of the premium e. Where the parties are barred by the date of default for a time either stated or equal
due does not produce the cancellation of the estoppel. (Jose Marques, et al. vs. Far to the amount as the net value of the policy taken
In an open policy, the value of the property contract. (Phil. Phoenix Surety & Insurance v. East Bank and Trust Company, et al. / as a single premium, will purchase. In case of
insured is not agreed upon, although the Woodworks, G.R. No. L-22684, Aug. 31, 1967). Far East Bank and Trust Company, et al. death of the insured within the extended term, he
parties may agree on the maximum amount vs. Jose Marques, et al. G.R. No. may recover the face value of the policy.
of recovery or limit to the liability of the Subsequent premiums - does not affect the 171379/G.R. No. 171419, 2011). Extended insurance is sometimes called "term
insurer. In case of loss, this amount must be validity of the contracts unless, by express insurance," "temporary insurance," or "paid-up
considered, by agreement of the insurer and stipulation, it is provided that the policy shall in Given the provisions of the Insurance Code, extended insurance." (De Leon, The Insurance
the insured, the actual value of the property that event be suspended or shall lapse. which is a special law, the applicable rate of Code of the Philippines Annotated [2014])
in the absence of evidence of greater or interest shall be that imposed in a loan or
lesser value. (Dev’t Ins. Corp. v. IAC, G.R. Exceptions to General Rule as to Payment of forbearance of money as imposed by the BSP. b. Paid-up Insurance
No. L-71360, 1986). Premiums: The unpaid amount due from insurer is a Where insurance is "paid-up," the insured is given
a. In case of life and industrial life whenever forbearance of money. So, the proper rate applies the right, upon default, after the payment of at
b. Valued Policy the grace period provision applies. (Stronghold Insurance Co., Inc. v. Pamana Island least three annual premiums (Ibid.) to have the
Definite valuation is agreed upon by both Resort Hotel and Marina Club, Inc., G.R. No. policy continued in force from the date of default
parties, and written on the face of the policy; Individual Life or Endowment 174838, 2016). for the whole period of the insurance without
(ex. Marine and Fire Insurances) (Insurance Insurance and Group Life Insurance further payment of premiums. In case of death of
Code, Sec. 51) Grace period of either thirty (30) days or Authority of Agent to Receive Premium the insured, he may recover only the "paid-up"
one (1) month within which the payment Where an insurer authorizes an insurance agent value of the policy, usually less than the "paid-up"
c. Running Policy of any premium after the first may be or broker to deliver a policy to the insured, it is premiums, under the same conditions as the
Also called Floating, Adjustable, Blanket or made deemed to have authorized said agent to receive original policy. Technically, the term "paid-up"
Declaration Policy; Contemplates successive the premium in its behalf. insurance is often referred to as "reduced paid-
insurances and which provides that the Industrial Life Insurance up" insurance. (De Leon, The Insurance Code of
subject of the policy may from time to time be Grace period is four (4) weeks, and The insurer is also bound by its agent’s the Philippines Annotated [2014])
defined. (Insurance Code, Sec. 62) where premiums are payable monthly, acknowledgement of receipt of payment of
either thirty (30) days or one (1) month. premium (American Home Assurance Co. v. c. Automatic Premium Loan
Void Stipulations in an Insurance Contract Chua, G.R. No. 130421,1999). This provision protects against the unintentional
a. Stipulations for the payment of loss b. Where there is an acknowledgement in lapse of the contract by advancing, in the form of
whether the person insured has or has the contract or policy of insurance that 3. NON-DEFAULT OPTIONS IN LIFE policy loan, the unpaid amount of a premium due.
not any interest in the property insured; the premium had already been paid. INSURANCE The automatic premium loan is advantageous to
or (Insurance Code, Sec. 79) the policy owner because it helps to continue the
b. The policy shall be received as proof of Options to a Policy-holder contract and all its features in full force and effect.
such interest, or c. There is an agreement allowing the The options available to a policyholder in case of Conditions:
c. Policies executed by way of gaming or insured to pay the premium in non-payment of premium after three full annual 1. In the event of default in premium
wagering. installments and partial payment has premiums have been paid are: payment, the Premium Loan provision
been made at the time of loss (Makati a. Received the cash surrender value shall only apply if requested in writing by
2. PREMIUM PAYMENT Tuscany Condominium v. Court of b. Apply such value as the premium for an the policyholder either in the application
Appeals, G.R. No. 95546, 1992) extended insurance or at any time before the expiration of the
Premium c. Apply such value as the premium for a grace period.
Premium is the consideration paid to an insurer Cf. Where the policy provides for paid-up insurance 2. The moment there is default in premium
for undertaking to indemnify the insured against a payment in premium in full before the d. Secure from such value an automatic payment and no option has been elected
specified peril. “policy shall be deemed effective, valid, premium loan before the expiration of the either in the application or within the time
and binding upon the company” – the grace period specified in the policy, one of the paid-up
partial payment is merely treated as a options specified therein shall

automatically take effect. (De Leon, The June 22, 1999. An insurance contract is a Note:
Insurance Code of the Philippines contract of adhesion which must be construed The official receipts in question serve as proof of Requisites of Concealment (KDNA)
Annotated [2014]) liberally in favor of the insured and strictly against payment of the premium for one year on each a. A party knows the fact which he neglects
the insurer in order to safeguard the latter’s surety bond. It does not, however, automatically to communicate or disclose to the other;
4. REINSTATEMENT OF A LAPSED interest (The Insular Life Assurance Company v. mean that the surety bond is effective for only one b. Such party concealing is duty bound to
POLICY OF LIFE INSURANCE Paz Khu, G.R. No. 195176, 2016). (1) year. In fact, the effectivity of the bond is not disclose such fact to the other;
wholly dependent on the payment of premium c. Such party concealing makes no
A provision that the policyholder shall be entitled 5. REFUND OF PREMIUMS (Country Bankers Insurance Corporation v. warranty of the fact concealed; and
to have the policy reinstated at any time within Antonio Lagman, G.R. No. 165487, 2011). d. The other party has not the means of
three years from the date of default of premium Instances for Refund ascertaining the fact concealed.
payment unless the cash surrender value has The insured is entitled to return of premiums paid
been duly paid, or the extension period has when: H. RESCISSION OF INSURANCE Proof of Fraud in Concealment
expired, upon production of evidence of a. The thing insured was never exposed to General Rule: Fraud need not be proven in order
CONTRACTS
insurability satisfactory to the company and upon the risks insured against; to prove concealment.
payment of all overdue premiums and any b. Contract is voidable due to the fraud or
indebtedness to the company upon said policy, misrepresentation of insurer; Good faith is not a defense. (Saturnino vs Phil.
Primary Concerns of the Insurer American Life Insurance, G. R. No. L-16163,
with interest rate not exceeding that which would c. Insurer never incurred liability;
a. Correct estimation of risk which enables 1963)
have been applicable to said premiums and d. The insurance is for a definite period and
insurer to determine if he will approve the
indebtedness in the policy years prior to the insured surrenders his policy before
policy application and if so, at what Proof of fraudulent intent is unnecessary for the
reinstatement. the termination thereof (pre-termination);
premium rate; rescission of an insurance contract on account of
e. Contract is voidable because of the
b. Delimitation of the risk; concealment. It is because in insurance
Requisites for Reinstatement of Lapsed Life existence of facts of which the insured
c. Control of risk to guard against increase contracts, concealing material facts is inherently
Insurance Policy was ignorant without his fault;
in risk; fraudulent: "if a material fact is actually known to
a. Application shall be made within three f. There is over-insurance (but only a
d. Determine if loss occurs and if so, the the [insured], its concealment must of itself
years from the date of lapse; ratable return of premium); and
amount thereof. necessarily be a fraud." When one knows a
b. There should be a production of evidence g. rescission is granted due to the insurer’s
of the good health of the insured: breach of contract. material fact and conceals it, "it is difficult to see
Devices of Insurer in Ascertaining and how the inference of a fraudulent intent or
c. If the rate of premium depends upon the Controlling Risks
age of the Beneficiary, there should Payment of Interest on Refund of Premium: intentional concealment can be avoided.” Thus, a
a. Concealment concealment, regardless of actual intent to
likewise be a production of evidence of Sections 243 and 244 of the Insurance Code
b. Representations defraud, "is equivalent to a false representation."
his or her good health; explicitly provide for payment of interest when
c. Warranties (Insular Life vs Heirs of Alvarez, G.R. No.
d. There should be presented such other there is unjustified refusal or withholding of
Statements or promises by the insured, 207526)
evidence of insurability at the date of payment of claim by the insurer. Article 2209 of
whether expressed, implied, affirmative
application for reinstatement; the Civil Code likewise provides for payment of
or promissory, set forth in the policy itself Exception: When the concealment is made by
e. There should be no change which has interest when the debtor is in delay. However, in
or incorporated in it by proper reference, the insured in relation to the falsity of a warranty,
taken place in such good health and cases where the refusal to refund insurance
the untruth or non-fulfilment of which in the non-disclosure must be intentional and
insurability subsequent to the date of premiums is because the insurer wants to rescind
any respect, and without reference to fraudulent in order that the contract may be
such application and before the policy is the insurance contract on account of
whether the insurer was in fact rescinded. (Insurance Code, Sec. 29)
reinstated; and concealment, the insurance company did not
prejudiced by such untruth or non-
f. All overdue premiums and other unreasonably deny or withhold the insurance
fulfilment renders the policy voidable by Effect of Concealment
indebtedness in respect of the policy, proceeds (Sun Life v. Tan Kit, G.R. No. 183272,
the insurer. General Rule: Concealment, whether intentional
together with interest at six per cent, 2014).
d. Conditions or not, entitles the injured party to rescind a
compounded annually, should first be e. Exceptions
paid. (Andres v. Crown Life Insurance Premium Necessary for Suretyship contract of insurance, (Insurance Code, Sec. 27)
Stipulations excluding certain specified even if the death or loss is due to a cause not
Co., G.R. No. L-10874, 1958) General rule: Premium is also necessary in order
risks that otherwise would be included related to the concealed matter. (Sunlife v. CA,
for the contract of suretyship or bond to be
under the general language describing G.R. No. 105135, 1995)
Insular Life’s argument was that the two-year binding.
the risks assumed.
contestability period of the reinstated insurance
policy had not lapsed inasmuch as the insurance Exception: Where the obligee has accepted the Exceptions:
bond, it is binding even if the premium has not 1. CONCEALMENT a. Incontestability Clause (Insurance Code,
policy was reinstated only on December 27,
1999. The Court notes that the reinstatement was been paid subject to the right of the insurer to Secs. 48 and 233[b])
recover the premium from its principal (Philippine A neglect to communicate that which a party b. Concealment made after the contract has
conditioned upon the payment of additional
Pryce Assurance Corporation v. CA, G.R. No. knows and ought to communicate (Insurance become effective;
premium not only prospectively, that is, to cover
107062, 1994). Code, Sec. 26) c. Waiver or estoppel;
the remainder of the annual period of coverage,
but also retroactively, that is for the period starting d. In marine insurance, in situations where
concealment does not vitiate the entire

contract, but merely exonerates the otherwise material. (Insurance Code, (Sunlife Assurance Company v. CA, G.R. No. his part to mislead the insurer. (Ng Zee v. Asian
insurer from a loss resulting from the risk Sec. 30) 105135, 1995). Crusader, G.R. No. L-30685, 1983)
concealed (Insurance Code, Sec. 112)
Disclosure of Insurable Interest The materiality of the existence of other 2. MISREPRESENTATION/OMISSIONS
Instances When Concealment Made by an General rule: The insured is not required to insurance contracts against fire upon the same
Agent Procuring Insurance Binds Principal communicate the nature (or kind) or the amount property insured, when its disclosure is one of the Definition
a. Where it was the duty of the agent to of his insurable interest in the life or property conditions specified in the fire insurance policy, is It is a factual statement made by the insured at
acquire and communicate information of insured to the insurer. not open to doubt (Union Mfg. v. Phil. Guaranty, the time of, or prior to, the issuance of the policy,
the facts in question; G.R. No. L-27932, October 30, 1972) to give information to the insurer and otherwise
b. Where it was possible for the agent, in Exceptions: induce him to enter into the insurance contract.
the exercise of reasonable diligence, to a. When the insurer makes inquiry from the Materiality in Medical Examinations
have made the communication before insured of the nature or amount of the A representation cannot qualify an express
the making of the insurance contract. latter’s insurable interest, whether in life General rule: non-disclosure is concealment provision in a contract of insurance but it may
or property insurance; qualify an implied warranty. (Insurance Code,
Failure on the part of the insured to disclose such b. Insurance policy must specify the interest In non-medical insurance (which does away with Sec. 40)
facts known to his agent, or wholly due to the fault of the insured in the property insured, if the usual medical examination before the policy
of the agent, will avoid the policy, despite the he is not the absolute owner thereof. is issued), the waiver by said insurance company Form
good faith of the insured. makes the previous health conditions of the Oral or written. (Insurance Code, Sec. 36)
Waiver of Disclosure of Material Facts insured more material (Saturnino v. Phil.
Rules on Disclosure of Information a. By the terms of the insurance (express American Life Ins., G.R. No. L-16163, 1963) When made
waiver); or It may be made orally or in writing. It may be
Items to disclose to the other, in good faith, b. By the neglect to make inquiry as to such Where the applicant concealed the fact that he made at the time of, or before, the issuance of the
even without inquiry facts, where they are distinctly implied in had pneumonia, diabetes or syphilis, the policy is policy. (Insurance Code, Sec. 37)
 Party concealing must have knowledge other facts which information is avoided although the cause of the death (e.g.,
of the facts concealed; communicated (implied waiver). (Sec. plane crash) be totally unconnected with the It may be altered or withdrawn before the
 Facts concealed must be material to the 33, Insurance Code) material fact concealed or misrepresented. insurance is effected, but not afterwards.
risk; (Insurance Code, Sec. 41)
 Party is duty bound to disclose such fact No duty to disclose opinions The withholding by the applicant, father of one-
to the other; Neither party is bound to communicate his mere year-old insured, of the fact that his daughter was Requisites for Misrepresentations (UWiM)
 Party concealing makes no warranty as opinion, speculation, intention or expectation typically a mongoloid child, of which he was fully 1. The insured stated a fact which is untrue;
to the facts concealed; even upon inquiry, because such opinion would aware, as such a congenital physical defect could 2. Such fact was stated with knowledge that
 Other party has no other means of add nothing to the appraisal of the application. never be ensconced nor disguised, in supplying it is untrue and with intent to deceive or
ascertaining the facts concealed. (Insurance Code, Sec. 35) essential data for the insurance application form which he states positively as true without
which fact is material to the contract, constitutes knowing it to be true and which has a
Items to disclose upon inquiry Materiality fraudulent concealment (Great Pacific v. CA, tendency to mislead;
General Rule: Neither party to the insurance Materiality is to be determined not by the event, G.R. No. L-31845, 1979) 3. Such fact in either case is material to the
contract is bound to communicate information on but solely by the probable and reasonable risk.
the following matters influence of the facts upon the party to whom the Exception: Imprecise description of information
communication is due: is not concealment. Misrepresentation as Affirmative Defense
Exception: Except in answer to the inquiries a. In forming his estimate of the Misrepresentation is an affirmative defense. To
of the other: disadvantages of the proposed Where the insured lacked sufficient medical avoid liability, the insurer has the duty to establish
a. Those of which the other knows; contract; or knowledge as to enable him to distinguish such a defense by satisfactory and convincing
b. That which, in the exercise of ordinary b. In making his inquiries. (Insurance between “peptic ulcer” and “tumor” the insured evidence. (Ng Gan Zee v. Asian Crusader, G.R.
care, the other ought to know and of Code, Sec. 31) cannot claim that he was deceived into entering No. L-30685, 1983)
which the former has no reason to into the contract.
suppose his ignorance, i.e. political Test of Materiality The fraudulent intent on the part of the insured
situation, general usages of trade; Was the insurer misled or deceived into entering In the absence of evidence that the insured had must be established to entitle the insurer to
c. Those of which the other waives a contract obligation or in fixing the premium of sufficient medical knowledge as to enable him to rescind the contract. Misrepresentation as a
communication; insurance by a withholding of material information distinguish between "peptic ulcer" and a "tumor," defense of the insurer to avoid liability is an
d. Those which prove or tend to prove the or facts within the assured’s knowledge or his statement that said tumor was "associated affirmative defense and the duty to establish
existence of the risk excluded by a presumed knowledge? (Argente v. West Coast with peptic ulcer of the stomach" should be such defense by satisfactory and convincing
warranty and which are not otherwise Life, G.R. No. L-24899, 1928) construed as an expression made in good faith of evidence rests upon the insurer. (Manulife
material; and his belief as to the nature of his ailment and Philippines v. Ybanez, G.R. No. 204736, 2016)
e. Those which relate to a risk excepted It is sufficient that his non-disclosure misled the operation. Such statement must be presumed to
from the policy and which are not insurer in forming his estimates of the risks of the have been made by him without knowledge of its
proposed insurance policy or in making inquiries incorrectness and without any deliberate intent on

Kinds of Representation: Warranty v. Reproduction

inducing the insurer
1. Affirmative - an affirmation of a fact Other Insurance Clause – This is a clause in the
to enter into the WARRANTY REPRESENTATION
existing when the contracts begins; or policy that provides that the policy shall be void if
insurance contract.
2. Promissory - a statement by the insured the insured procures additional insurance without
concerning what is to happen during the Part of the contract. Collateral the consent of the insurer. The purpose is to
Passive form of the Active form of the inducement.
term of the insurance. prevent over-insurance and thus to avert the
act. act.
possibility of a perpetration of fraud. It is a
Written on the policy Need not be written.
Effect of Expressions of Opinion or warranty that entitles the insurer to rescind in
Usually occurs prior Maybe made at the or in a valid rider or
Expectation on Insurance Policy case of breach.
to making of the time of the insurance attachment. (except
A representation of the expectation, intention,
insurance contract. of the contract. for implied
belief, opinion or judgment of the insured, The “other insurance clause” may be subject to
warranties)
although false, WILL NOT AVOID a policy of In cases of rescission In cases of rescission waiver but the waiver must either be express or if
insurance if there is no actual fraud in inducing due to concealment, due to it is to be implied from conduct mainly, said
Generally, Should be
the acceptance of the risk, or its acceptance at proof of fraudulent misrepresentation, conduct must be clearly indicative of a clear intent
conclusively established to be
a lower rate of premium (Philam Health Systems intent not necessary proof of fraudulent to waive such right. There must be clear showing
presumed to be material.
v. CA, G.R. No. 125678, 2002); intent necessary that the insurer knew about the violation of the
material.
clause (General Insurance and Surety Corp. v.
However, in a marine insurance, information of Ng Hua, G.R. No 14373, 1960).
Falsity or non- Falsity renders the
the belief or expectation of a third person, in The Insurance Code dispenses with proof of
fulfillment operates policy voidable or
reference to a material fact, is material. fraudulent intent in cases of rescission due to EXERCISE OF THE RIGHT TO RESCIND
as a breach of rescissible on the
(Insurance Code, Sec. 110) concealment, but not so in cases of rescission contract. ground of fraud.
due to false representations. Concealment of Time to Exercise the Right to Rescind
Adoption of Misrepresentation material facts is fraudulent in and of itself. (The Facts warranted Requires only to be a. Non-Life Policy – Prior to the
An insured who signed the pension plan Insular Life Assurance Co., Ltd. v. Heirs of must be strictly substantially true. commencement of an action on the
application, adopted as his own the written Alvarez, G.R. Nos. 207526 & 210156, 2018) complied with. contract.
representations and declarations embodied in it b. Life Policy – Before the incontestability
(Ma. Lourdes S. Florendo vs. Philam Plans, Inc., 3. BREACH OF WARRANTIES clause sets in.
Perla Abcede, et al., G.R. No. 186983, 2012). Where express warranty must be contained
Warranty a. The policy itself; or Requisites of Incontestability Clause:
Effect of Misrepresentation A statement or promise set forth in the policy or b. In another instrument signed by the a. The insurance is a life insurance policy.
If there is misrepresentation, the injured party is by reference incorporated therein, the untruth or insured and referred to in the policy as b. It is payable on the death of the insured.
entitled to rescind from the time when the nonfulfillment of which in any respect, and without making a part of it. c. It has been in force during the lifetime of
representation becomes false. (Insurance Code, reference to whether insurer was in fact the insured for at least 2 years from its
Sec. 45) prejudiced by such untruth or non-fulfillment, Effect of Breach of Warranty date of issue or of its last reinstatement.
renders the policy VOIDABLE by the insurer. General Rule: The violation of a material
The injured party can rescind the contract warranty or other material provision of the policy Note: The period of 2 years may be shortened
when: Kinds of Warranties gives the insurer the right to rescind the insurance but it cannot be extended by stipulation.
a. The representation fails to correspond a. Express – An agreement contained in policy (Insurance Code, Sec. 74)
with the facts (Insurance Code, Sec. 44); the policy or clearly incorporated therein When incontestability clause sets in
and as part thereof whereby the insured Note: A policy may declare that a violation of Whichever is earlier, between:
b. It is false in a material point (Insurance stipulates that certain facts relating to the specified provisions thereof shall avoid it. a. Within 2 years from the date of issuance
Code, Sec. 45) risk are or shall be true or certain acts Otherwise, the breach of an immaterial provision or its last reinstatement; or
relating to the same subjects have been does not avoid the policy. (Insurance Code, Sec. b. Upon the insurer’s death (Sun Life v.
Note: The materiality of a representation is or shall be done. 75) Sibya, G.R. No. 211212, 2016)
determined by the same rules as the b. Implied – Warranties that are deemed
materiality of concealment. (Insurance Code, included in the contract, although not Exception: The below instances of warranties After the two-year period lapses, or when the
Sec. 46) expressly mentioned. They are found relating to the future insured dies within the period, the insurer must
usually in marine insurance. a. Loss occurs before the time of make good on the policy, even though the policy
Concealment vs. Misrepresentation c. Affirmative – Asserts the existence of a performance of the warranty; was obtained by fraud, concealment, or
fact or condition at the time it is made; b. The performance becomes unlawful; misrepresentation (Sun Life v. Sibya, G.R. No.
CONCEALMENT MISREPRESENTATION
d. Promissory – The insured stipulates that c. Performance becomes impossible. 211212, 2016).
The insured The insured makes certain facts or conditions shall exist or (Insurance Code, Sec. 73)
withholds information erroneous thin shall be done or omitted. Defenses Not Barred by Incontestability
of material facts from statements of facts Note: Waiver or estoppel may also prevent the Clause:
the insurer. with the intent of insurer from being discharged from liability a. Person taking the insurance lacked
(Pioneer v. Yap, G.R. No. L-36232, 1974) insurable interest as required by law;

b. Cause of the death of the insured is e. Physical changes in the property insured I. CLAIMS SETTLEMENT AND Mandatory Requirement of Notice of Loss and
excepted risk; making it uninsurable; and SUBROGATION Proof of Loss
c. Premiums have not been paid; f. Determination by the Insurance The requirement of the notice of loss and
d. Conditions of the policy relating to Commissioner that the policy would obligation to file a proof of loss are conditions with
military or naval service have been violate the Insurance Code. (Sec. 64, which the insured MUST comply before there is
violated; Insurance Code) 1. NOTICE AND PROOF OF LOSS any liability on the part of the insurer.
e. The fraud is of a particularly vicious type,
wherein: Requisites for Cancellation by Insurer (Other When Insurer is Liable for Loss When to Give Notice of Loss
i. The policy was taken in Than Life Insurance Contracts) a. Unless otherwise provided by the policy, Without unnecessary delay or within a
furtherance of a scheme to a. Prior notice of cancellation to insured; an insurer is liable for a loss of which a reasonable time.
murder the insured; b. Notice must be based on the occurrence peril insured against was the proximate
ii. The insured instituted another after effective date of the policy of one or cause, although a peril not contemplated A requirement of the policy that notice of loss be
person for the medical more of the grounds mentioned; by the contract may have been a remote given immediately or forthwith requires the giving
examination; and, c. Notice must be in writing, mailed or cause of the loss (Insurance Code, Sec. of notice within a reasonable time. (Bachrach v.
iii. The beneficiary feloniously killed delivered to the insured at the address 86) Britain Am. Assur. Co., G.R. No. L-5715, 1910)
the insured; shown in the policy; and b. The thing insured is rescued from a peril
f. Beneficiary failed to furnish proof of d. Notice must state the grounds relied insured against that would otherwise Form of Notice or Proof of Loss
death or to comply with any condition upon and upon request of insured, to have caused a loss, if, in the course of In case of loss upon fire insurance, the law
imposed by the policy after the loss has furnish facts on which cancellation is such rescue, the thing is exposed to a requires written notice. (Insurance Code, Sec. 90)
happened; or, based. peril not insured against, which
g. Action was not brought within the time permanently deprives the insured of its For other kinds of insurance, absent any
specified. Prior Notice is required to prevent the possession, in whole or in part; or where stipulation in the policy, notice or proof may be
cancellation of the policy, without allowing the a loss is caused by efforts to rescue the given orally or in writing.
Insurer is Liable if: insured ample opportunity to negotiate for other thing insured from a peril insured against
a. Loss, the proximate cause of which is the insurance in its stead for his own protection (Insurance Code, Sec. 87) When defects in a notice of loss are waived
peril insured against; (Saura Import & Export v. Phil. International c. The proximate cause of which is the peril All defects in a notice of loss, or in preliminary
b. Loss, the immediate cause of which is the Surety, G.R. No. L-15184, 1963). insured against proof thereof, which the insured might remedy,
peril insured against except where a. Immediate cause of which is the peril and which the insurer omits to specify to him,
proximate cause is an excepted peril; Renewal of Non-Life Insurance insured against except where proximate without unnecessary delay, as grounds of
c. Loss through the negligence of insured The insured shall be entitled to renew the policy cause is an excepted peril; objection, are waived. (Insurance Code, Sec. 92)
except where there was gross upon payment of the premium due on the b. Loss through the negligence of insured
negligence amount to willful act; and effective date of the renewal. Policy written: except where there was gross When Delay in the Presentation of Notice or
d. Loss caused by efforts to rescue the thing  Term of less than one (1) year - negligence amount to willful act; and Proof of Loss is Deemed Waived
from peril insured against – if during the considered as if written for a term of one c. Loss caused by efforts to rescue the thing Delay in the presentation to an insurer of notice
course of rescue, the thing is exposed to (1) year from peril insured against – if during the or proof of loss is waived if caused by any act of
course of rescue, the thing is exposed to
a peril not insured against, which  Term longer than one (1) year or any him, or if he omits to take objection promptly and
permanently deprives the insured of its a peril not insured against, which specifically upon that ground. (Insurance Code,
policy with no fixed expiration date -
possession, in whole or in part. permanently deprives the insured of its Sec. 93)
considered as if written for successive
possession, in whole or in part.
policy periods or terms of one (1) year
Insurer is Not Liable if: Payment of Proceeds
a. Loss by insured’s willful act or gross When Insurer is Not Liable for Loss
Exception: The insurer at least forty-five (45)
negligence; a. Loss of which the peril insured against Life Insurance
days in advance of the end of the policy period
b. Loss due to connivance of the insured; was only a remote cause. (Insurance The proceeds shall be paid immediately upon the
mails or delivers to the named insured at the
c. Loss where the excepted peril is the Code, Sec. 86) maturity of the policy (survival benefits) if there is
address shown in the policy notice of its intention
proximate cause. b. Loss caused by the willful act or through such a maturity date.
not to renew the policy or to condition its renewal
the connivance of the insured; but he is
upon reduction of limits or elimination of
CANCELLATION OF NON-LIFE INSURANCE not exonerated by the negligence of the If the policy matures by the death of the insured,
coverages (Insurance Code, Sec. 66)
insured, or of the insurance agents or within sixty (60) days after presentation of the
Grounds for Cancellation of a Non-Life Policy others (Insurance Code, Sec. 89) claim and filing of the proof of the death of the
by the Insurer c. Loss by insured’s willful act or gross insured.
a. Non-payment of premium; negligence;
b. Conviction of a crime out of acts d. Loss due to connivance of the insured; Property Insurance
increasing the hazard insured against; e. Loss where the excepted peril is the Proceeds shall be paid within thirty (30) days after
c. Fraud or material misrepresentation; proximate cause. proof of loss is received by the insurer and
d. Willful or reckless acts or omissions ascertainment of the loss or damage is made
increasing the risk insured against; either by agreement or by arbitration.

filed by the insured within the period stipulated. Legal Basis of Subrogation The presentation of the marine insurance policy
If no ascertainment is made within 60 days after (Sun Insurance v. CA, G.R. No. 8974, 1991) If the plaintiff's property has been insured, and he is not necessary for the exercise of the insurer’s
receipt of proof of loss, the loss shall be paid has received indemnity from the insurance right to subrogation. It accrues upon payment of
within 90 days. Time to Commence Actions company for the injury or loss arising out of the insurance claim (Asian Terminals, Inc. v. Malayan
If there is a stipulation in the policy: The wrong or breach of contract complained of, the Insurance, G.R. No. 171406, 2011).
2. GUIDELINES ON CLAIM SETTLEMENT stipulation in the policy, if not contrary to Sec. 63, insurance company shall be subrogated to the
will prevail. (Teal Motor v. Orient Insurance, G.R. rights of the insured against the wrongdoer or the The subrogation receipt, by itself, is sufficient to
a. Unfair claims settlement; sanctions No. 39797, 1934) person who has violated the contract. If the establish not only the relationship of insurer and
amount paid by the insurance company does not the assured shipper of the lost cargo, but also the
Any of the following acts by an insurance If there is no express stipulation in the policy fully cover the injury or loss, the aggrieved party amount paid to settle the insurance claim. The
company, if committed without just cause and As the policy is a written contract, the action shall be entitled to recover the deficiency from the right of subrogation accrues simply upon
performed with such frequency as to indicate a prescribes in 10 years. (Civil Code, Art. 1144) person causing the loss or injury (Civil Code, Art. payment by the insurance company of the
general business practice, shall constitute unfair 2207) insurance claim. (Asian Terminals, Inc. v.
claim settlement practice. It shall be considered Limitation to Period to File Claim Malayan Insurance, G.R. No. 171406, 2011).
sufficient cause for the suspension or revocation A condition, stipulation, or agreement in any Definition
of the company's certificate of authority: policy of insurance, limiting the time for Subrogation: Substitution of one person in place As subrogee of the rights and interest of the
1. Knowingly misrepresenting to claimants’ commencing an action thereunder to a period of of another with reference to a lawful claim or right, consignee, R&B Insurance has the right to seek
pertinent facts or policy provisions less than one year from the time when the cause so that he who is substituted succeeds to the reimbursement from either Loadmasters or
relating to coverage at issue; of action accrues, is void. (Insurance Code, Sec. rights of the other in relation to a debt or claim, Glodel or both for breach of contract and/or tort
2. Failing to acknowledge with reasonable 63) including its remedies and securities (LSC v. (Loadmasters Customs Services, Inc. v. Glodel
promptness pertinent communications Chubb, G.R. No. 147724, 2004) Brokerage Corporation and R & B Insurance
with respect to claims arising under its Note: In Industrial life insurance, the period Corporation, G.R. No. 179446, 2011).
policies; cannot be less than 6 years after the cause of The right of subrogation has its roots in equity. It
3. Failing to adopt and implement action accrues. (Insurance Code, Sec. 231[d]) is designed to promote and to accomplish justice Effect of Subrogation on Prescriptive Period
reasonable standards for the prompt and is the mode which equity adopts to compel to Sue the Person Causing the Loss or Injury
investigation of claims arising under its When does the insured’s cause of action the ultimate payment of a debt by one who in
policies; begin to run? justice and good conscience ought to pay. The insurer acquires a fresh 10-year period
4. Not attempting in good faith to effectuate The prescriptive period for an insured’s action for (Delsan Transport v. CA, G.R. No. 127897, 2001) arising from law. (Vector Shipping v. AHAC, G.R.
prompt, fair and equitable settlement of indemnity should be reckoned from the “final No. 159213, 2013)
claims submitted in which liability has rejection” of the claim (H.H. Hollero Construction Subrogation only applies to property
become reasonable clear; or v. GSIS, G.R. No. 152334, 2014). insurance However, the Court must heretofore abandon
5. Compelling policyholders to institute suits If the plaintiff’s property is insured… (Civil Code, the ruling in Vector that an insurer may file an
to recover amounts due under its policies Rationale: Before such final rejection, there is no Art. 2207) action against the tortfeasor within ten (10) years
by offering without justifiable reason real necessity for bringing suit (Eagle Star v. Chia from the time the insurer indemnifies the insured.
substantially less than the amounts Yu, G.R. No. L-5915, 1955). Note: Subrogation also applies in reinsurance. A Following the principles of subrogation, the
ultimately recovered in suits brought by reinsurer, on payment of a loss, acquires the insurer only steps into the shoes of the insured
them. Action or suit must be brought in proper cases, same rights by subrogation as in similar cases and therefore, for purposes of prescription,
with Commission or the courts within one year where the original insurer pays a loss. (Pioneer inherits only the remaining period within which
b. Prescription of action from the denial of the claim, otherwise, the Insurance Co v. CA, G.R. Nos. 84197 & 84157, the insured may file an action against the
claimant’s right of action shall prescribe 1989) wrongdoer. (Henson vs UCPB General, G.R. No.
Nature of Condition for Filing Claim (Jacqueline Jimenez Vda. De Gabriel v. CA, G.R. 223134, August 14, 2019)
The condition contained in the insurance policy No. 103883, 1996). When subrogation occurs
that claims must be presented within one year 1. If the plaintiff's property has been Guidelines relative to the application of
after rejection is not merely a procedural Compulsory Third Party Liability Insurance insured, and Vector and Henson vis-à-vis the prescriptive
requirement. The condition is an important The claim must be filed within 6 months from the 2. He has received indemnity from the period in cases where the insurer is
matter, essential to a prompt settlement of claims date of accident, otherwise, the claim shall be insurance company for the injury or loss subrogated to the rights of the insured
against insurance companies, as it demands that deemed waived. Action or suit for recovery of arising out of the wrong or breach of against the wrongdoer based on a quasi-
insurance suits be brought by the insured while damage due to loss or injury must be brought, in contract complained of (Civil Code, Art. delict
the evidence as to the origin and cause of proper cases, with the Commissioner or the 2207) 1. Actions that have already been filed and
destruction have not yet disappeared. courts within one (1) year from denial of the claim, are currently pending before the courts at
otherwise, the claimant’s right of action shall It is not dependent upon, nor does it grow out of, the time of the finality of Henson, the
It is in the nature of a condition precedent to the prescribe. (Insurance Code, Sec. 397) any privity of contract or upon written assignment rules on prescription prevailing at the
liability of the insurer, or in other terms, a of claim. It accrues simply upon payment by the time the action is filed would apply.
resolutory cause, the purpose of which is to c. Subrogation insurance company of the insurance claim. Hence:
terminate all liabilities in case the action is not (Delsan Transport v. CA, G.R. No. 127897, 2001)

a. For cases filed by the subrogee- lawfully lay claim against the person causing the capital, reasonably assure the of registered enterprises, to the actual
insurer during the applicability of loss (Rizal Surety v. Manila Railroad, G.R. No. L- safety of the interests of the market value of not less than the amount
the Vector ruling (August 15, 24043, 1968) policyholders and the public. herein required:
2013 up to finality of Henson – 2. If the name of the company is that of any a. At least 50% of such securities
August 14, 2019 is the date of Cases When There is No Right of other known company transacting a shall consist of bonds or other
promulgation) the prescriptive Subrogation: similar business in the Philippines or a instruments of debt of the
a. The insured by his own act releases the name so similar as to be calculated to Government of the Philippines,
period is 10 years from the time
wrongdoer/third person liable for the loss; mislead the public. its political subdivisions and
of payment by the insurer to the
b. Where the insurer pays the insured for a 3. When the insurance company is instrumentalities, or of GOCCs
insured. loss or risk not covered by the policy; transacting in the Philippines both the and entities, including the BSP.
b. For cases filed by the subrogee- c. In life insurance; business of life and non-life insurance b. Provided, further, that the total
insurer prior to the applicability d. For recovery of loss in excess of concurrently; unless specifically investment of a foreign
of the Vector ruling (before insurance coverage. (Malayan Insurance authorized by the Commissioner. insurance company in any
August 15, 2013), the v. CA, G.R. No. 81026, 1990) 4. If the insurance company has equity in an registered enterprise shall not
prescriptive period is 4 years adjustment company or the adjustment exceed 20% of the net worth of
from the time the tort is J. BUSINESS OF INSURANCE; company has equity in an insurance the foreign insurance company
committed against the insured. company. (Insurance Code, Sec. 193) nor 20% of the capital of the
REQUIREMENTS
2. Actions that have not yet been filed at the registered enterprise, unless
time of the finality of this Decision: What is the required paid-up capital for a new previously authorized in writing
domestic life or non-life insurance company? by the Commissioner.
a. Where the tort was committed What is an insurer or an insurance company? It must possess a paid-up capital equal to at least 4. The Commissioner may, as a pre-
and the consequent loss/injury The term insurer or insurance company shall P1 billion. However, a domestic insurance licensing requirement of a new branch
against the insured occurred include all partnerships, associations, company already doing business in the office of a foreign insurance company, in
prior to the finality of Henson, cooperatives or corporations, including Philippines shall have a net worth by 30 June addition to the required asset or net
the subrogee-insurer has a government-owned or -controlled corporations or 2013 of P250 million; worth, require the company to have an
period not exceeding 4 years entities, engaged as principals in the insurance By 31 December 2016, an additional additional surplus fund in an amount to
from the time of finality of business, excepting mutual benefit associations. P300 million in net worth; be determined by the Insurance
Henson to file the action against Unless the context otherwise requires, the term By 31 December 2022, an additional Commission. (Insurance Code, Sec. 197)
the wrongdoer. shall also include professional reinsurers defined P400 million in net worth.
in Section 288. (Insurance Code, Sec. 190.)
i. Provided, that in all
instances, the total NOTE: The Secretary of Finance, upon K. INSURANCE COMMISSIONER AND ITS
What are the requirements to transact any recommendation of the Commissioner, increase
period shall not insurance business in the Philippines? POWERS
exceed 10 years from such minimum paid-up capital stock or cash
1. Must possess the capital and assets assets requirement under such terms and
the time the insurer is required of an insurance corporation Faithful execution of insurance laws
conditions as he may impose, to an amount which
subrogated to the rights doing the same kind of business in the It is the duty of the Commissioner to see that all
in his opinion would reasonably assure the safety
of the insured. PH and invested in the same manner; of the public. laws relating to insurance, insurance companies
b. Where the tort was committed 2. Must obtain a certificate of authority from and other insurance matters, mutual benefit
and the consequent loss/injury the commissioner. What are the requirements for a foreign associations, and trusts for charitable uses are
against the insured occurred 3. Pay the fees prescribed under the Code. insurance company to transact business in faithfully executed.
only upon or after the finality the Philippines?
of this Decision, the Vector Can a Commissioner refuse to issue a 1. Comply with Sec. 196 of the Insurance Regulation of the industry
certificate of authority to any insurance Code. Must designate a resident agent To ensure the efficient regulation of the insurance
doctrine is not applicable.
company? on whom notice, summons, and other industry in accordance with global best practices
Prescriptive period is 4 years
YES. In these instances: legal processes may be served. And that and to protect the insuring public.
from the time the tort is 1. If in his judgment, such refusal will best
committed against the insured. if ever the company left the country, such
promote the interest of the people of this summons, or other legal processes may Note: Except as otherwise specified, decisions
(Henson vs UCPB General, G.R. country. made by the Commissioner shall be appealable
be served on the Insurance
No. 223134, August 14, 2019) a. That the grant of such authority to the Secretary of Finance.
Commissioner.
appears to be justified in the light 2. Must possess unimpaired capital or
of local economic requirements; assets and reserve of not less than P1 Sole and exclusive authority to regulate the
Right of insurer to recover from 3rd party is b. The direction and administration, issuance and sale of variable contracts
limited to the amount recoverable from the billion.
as well as the integrity and 3. Deposit with the Commissioner securities provide for the licensing of persons selling such
latter by the insured responsibility of the organizers contracts, and to issue such reasonable rules and
The insurer cannot recover in full the amount it satisfactory to the Commissioner
and administrators, the financial consisting of good securities of the regulations governing the same.
paid to the insured if it is greater than that to which organization and the amount of
the insured could Philippines, including new issues of stock

1. ADMINISTRATIVE POWERS determined by appropriate rules and costs and attorney’s fees, does not exceed in any When the commissioner may revoke or
regulations single claim P5,000,000. (Insurance Code, Sec. suspend the license of an insurer:
Rule-making power 12. Investigate not oftener than once a year 439) a. If insurance contract is in unsound
The Commissioner may issue such rulings, from the last date of examination to condition
instructions, circulars, orders and decisions as determine whether an institution is Note: b. If it has failed to comply with the
may be deemed necessary to secure the conducting its business on a safe and 1. The power of the Commissioner does not provisions of law or regulations obligatory
enforcement of the provisions of this Code, sound basis: Provided, That, the cover the relationship between the upon it
deficiencies/irregularities found by or insurance company and its c. Its conditions or methods of business is
Powers and functions of the Commissioner discovered by an audit shall be agents/brokers but is limited to such as to render its proceedings
1. Formulate policies and immediately addressed; adjudicating claims and complaints filed hazardous to the public or to its policy
recommendations on issues 13. Inquire into the solvency and liquidity by the insured against the insurance holders
concerning the insurance industry and of the institutions under its supervision company. d. That its paid up capital stock, or its
propose legislation and amendments and enforce prompt corrective action; 2. The filing of a complaint with the available cash assets, or its security
thereto; 14. To retain and utilize, in addition to its Commissioner shall preclude the civil deposits, as the case may be, is impaired
2. Approve, reject, suspend or revoke annual budget, all fees, charges and courts from taking cognizance of a suit or deficient
licenses or certificates of registration other income derived from the involving the same subject matter. e. That the margin of solvency required of
3. Impose sanctions regulation of insurance companies each company is deficient
4. Prepare, approve, amend or repeal and other supervised persons or entities; Power to conduct investigation
rules, regulations and orders, and 15. To fix and assess fees, charges and The Commissioner may authorize any officer or Note:
issue opinions and provide guidance on penalties as the Commissioner may find group of officers under him to conduct In order for a claim for deposit insurance with
and supervise compliance with such reasonable in the exercise of regulation; investigation, inquiry and/or hearing and decide PDIC to prosper, the law requires that a
rules, regulations and orders; and claims and he may issue rules governing the corresponding deposit be placed in the insured
5. Enlist the aid and support of, and/or 16. Exercise such other powers as may be conduct of adjudication and resolution of cases. bank; and a deposit as defined under Section 3(f)
deputize any and all enforcement provided by law as well as those which The Rules of Court shall have suppletory of R.A. No. 3591 may be constituted only if money
agencies of the government in the may be implied from, or which are application. or the equivalent of money is received by a bank.
implementation of its powers and necessary or incidental to the express
functions; powers granted the Commission to Appeal When the evidence shows that the certificates of
6. Issue cease and desist orders to achieve the objectives and purposes of Any decision, order or ruling rendered by the time deposit were issued in consideration of
prevent fraud or injury to the insuring this Code. (Insurance Code, Sec. 437) Commissioner after a hearing shall have the checks received by the issuing bank, which
public; force and effect of a judgment. Any party may checks bounced, then the issuing bank received
7. Punish for contempt of the Power to impose fines appeal from a final order, ruling or decision of the no money therefore, no deposit therefore came
Commissioner, both direct and indirect, The Insurance Commissioner is hereby Commissioner by filing with the Commissioner into existence, and therefore PDIC cannot be
in accordance with the Rules of Court; authorized, at his discretion, to impose upon within thirty (30) days from receipt of copy of such held liable for value of the certificates of time
8. Compel the officers of any registered insurance companies, and/or their agents, for any order, ruling or decision a notice of appeal to the deposit (PDIC v. CA, G.R. No. 118917, 1997).
insurance corporation or association to willful failure or refusal to comply with this Code, Court of Appeals in the manner provided for in the
call meetings of stockholders or or any order of the Insurance Commissioner, or Rules of Court for appeals from the Regional Trial SPECIAL CLASSES OF INSURANCE
members thereof under its supervision; any commission or irregularities, and/or Court to the Court of Appeals.
9. Issue subpoena duces tecum and conducting business in an unsafe or unsound 1. MARINE INSURANCE
summon witnesses to appear in any manner, the following: Power to administer oath
proceeding of the Commission and, in a. Fines not less than Five thousand pesos For the purpose of any proceeding under this Scope of Marine Insurance
appropriate cases, order the (P5,000.00) and not more than Two section, the Commissioner, or any officer thereof 1. Insurance Against Loss or Damage
examination, search and seizure of all hundred thousand pesos (P200,000.00); designated by him is empowered to administer a. Vessels, craft, aircraft, vehicles, goods,
documents, papers, files and records, tax and oaths and affirmation, subpoena witnesses, freights, cargoes, merchandise, effects,
returns, and books of accounts of any b. Suspension, or after due hearing, compel their attendance, take evidence, and disbursements, profits, moneys,
entity or person under investigation as removal of directors and/or officers require the production of any books, papers, securities, choses in action, instruments
may be necessary for the proper and/or Agents. (Insurance Code, Sec. documents, or contracts or other records which of debts, valuable papers, bottomry, and
disposition of the cases before it, subject 438) are relevant or material to the inquiry. respondentia interests and all other kinds
to the provisions of existing laws; of property and interests therein, in
10. Suspend or revoke, after proper notice 2. ADJUDICATORY POWERS Alternative dispute resolution respect to, appertaining to or in
and hearing, the license or certificate In order to promote party autonomy in the connection with any and all risks or perils
of authority of any entity or person The Insurance Commissioner has concurrent resolution of cases, the Commissioner shall of navigation, transit or transportation, or
under its regulation, upon any of the jurisdiction with the regular courts to adjudicate, establish a system for resolving cases through while being assembled, packed, crated,
grounds provided by law; hear and decide claims or complaints for which the use of alternative dispute resolution. baled, compressed or similarly prepared
11. Conduct an examination to determine an insurer may be answerable under any kind of (Insurance Code, Sec. 439) for shipment or while awaiting shipment,
compliance with laws and regulations if policy or contract of insurance where the amount or during any delays, storage,
the circumstances so warrant as of the loss, damage or liability excluding interest, transshipment, or reshipment incident

thereto, including war risks, marine wind, water, and salt conditions. (Cathay Insurable Interest in Marine Insurance Charter Party Contract
builder's risks, and all personal property Insurance v. CA, G.R. No. 76415, 1987) A contract by virtue of which the owner or the
floater risks; 1. Shipowner agent of a vessel binds himself to transport
b. Person or property in connection with or Exception: Unless perils of the ship are covered merchandise or persons for a fixed price. It has
appertaining to a marine, inland marine, by an ALL-RISK POLICY. Over the VALUE OF THE VESSEL, (even if also been defined as a contract by virtue of which
transit or transportation insurance, chartered and the charterer agreed to pay the the owner or the agent of the vessel lets the
including liability for loss of or damage Note: The perils of the sea must be the proximate shipowner the value of the vessel in case of loss, vessel or some principal part thereof for the
arising out of or in connection with the cause of the loss in order that the insurer may be however, the shipowner can recover only the transportation of goods or persons from one port
construction, repair, operation, held liable. amount not recoverable from the charterer). to another.
maintenance or use of the subject matter (Insurance Code, Sec. 102)
of such insurance (but not including life Perils of the Sea v. Perils of the Ship However, if the ship is hypothecated by a Different Types of Charter Parties:
insurance or surety bonds nor insurance PERILS OF THE PERILS OF THE bottomry loan, the insurable interest is only up to 1. Contracts of Affreightment – use of
against loss by reason of bodily injury to SEA SHIP the excess of the value of the vessel over the loan shipping space on vessels leased by the
any person arising out of ownership, Covered by marine Not covered by (Insurance Code, Sec. 103) shipowner in part or as a whole, to carry
maintenance, or use of automobiles); insurance marine insurance goods for others
c. Precious stones, jewels, jewelry, Accidents peculiar to Damage or losses Over EXPECTED FREIGHTAGE. (Insurance a. Time Charter – vessel is leased
precious metals, whether in course of the sea which do not resulting from: Code, Sec. 105) for a fixed period of time
transportation or otherwise; and happen by b. Voyage Charter – vessel is
d. Bridges, tunnels and other intervention of man 1. Natural and Note: Freightage may be derived from: leased for a single voyage
instrumentalities of transportation and nor are to be inevitable action a. The chartering of the ship; 2. Charter by Demise or Bareboat
communication (excluding buildings, their prevented by human of the sea b. Its employment for the carriage of his Charter – the whole vessel is leased to
furniture and furnishings, fixed contents prudence. Casualties 2. Ordinary wear own goods; and the charterer with a transfer to him of its
and supplies held in storage); piers, due to the: and tear of a ship, c. Its employment for the carriage of the entire command and possession and
wharves, docks and slips, and other aids 1. Unusual or good of others (Insurance Code, Sec. consequent control over its navigation
to navigation and transportation, violence; or 3. Negligent failure 104) including the master and crew
including dry docks and marine railways, 2. Extraordinary of the ship owner
dams and appurtenant facilities for the action of wind to provide the 2. Shipper/Cargo Owner Concealment in Marine Insurance
control of waterways. and wave; or vessel with To constitute concealment, it is sufficient that the
3. Other proper equipment Over the CARGO AND EXPECTED PROFITS. insured is in possession of the material fact
2. Marine Protection and Indemnity Insurance extraordinary to convey the (Insurance Code, Sec. 107) concealed although he may not be aware of it.
a. Insurance against, or against legal causes cargo under
liability of the insured for loss, damage, or connected with ordinary 3. Charterer Each party in a marine insurance contract is
expense incident to ownership, navigation conditions bound to communicate the following:
operation, chartering, maintenance, use, Over the VESSEL up to the extent of the amount
repair, or construction of any vessel, craft All-Risks Policy he is liable to the shipowner, if the ship is lost or 1. All facts within his knowledge which are
or instrumentality in use of ocean or It is insurance against all causes of conceivable damaged during the voyage. (Insurance Code, material to the contract and as to which
inland waterways, including liability of the loss or damage. Sec. 108) he makes no warranty, and which the
insured for personal injury, illness or other has not the means of ascertaining.
death or for loss of or damage to the Except: Over his EXPECTED PROFITS OR 2. All the information which he possesses,
property of another person. 1. As otherwise excluded in the policy; or FREIGHTAGE if he accepts cargoes from other material to the risk
2. Due to fraud or intentional misconduct on the persons for a fee. (Insurance Code, Sec. 105)
Risk Insured Against part of the insured (Choa Tek Seng v. CA, Exceptions:
General Rule: It is only PERILS OF THE SEA G.R. No. 84507, 1990) Over his OWN CARGO OR CLIENT’S CARGO. a. Those which the other knows;
which may be insured against b. Those which, in the exercise of
Barratry Bottomry, Respondentia, and Charter Party ordinary care, the other ought to
The insurer does undertake to insure against Willful misconduct on the part of the master or know, and of which the former
perils of the ship. The purpose of a marine crew in pursuance of some unlawful or fraudulent Loan on Bottomry or Respondentia has no reason to suppose him
insurance is to secure an indemnity against purpose without the consent of owners, and to the A loan in which under any condition whatsoever, ignorant;
accidents which may happen and against events prejudice of owner’s interest. This may be the repayment of the sum loaned, and of the c. Those of which the other waives
which must happen. (La Razon Social Go Taico expressly covered by the policy. When so premium stipulated, depends upon the safe communication;
Hermanos v. Union Insurance Society of Canton, covered, proof of willful and intentional act is arrival in port of the goods on which it is made or d. Those which prove or tend to
G.R. No. 13983, 1919) necessary. No honest error or judgment or mere of the price they may receive in case of accident. prove the existence of a risk
negligence, unless criminally gross, can be It is a loan on bottomry when the security is a excluded by a warranty, and
Rusting of steel pipes in the course of the voyage barratry. (Roque v. IAC, G.R. No. L-66935, 1985) vessel, and respondentia when the security is which are not otherwise material;
is a peril of the sea in view of the effects of the cargo. and

e. Those which relate to a risk Representation in Marine Insurance but also provides for coverage of perils of the Deviation
excepted from the policy and If a representation by a person insured by a ship. (Roque v. IAC, G.R. No. L-66935, 1985) Departure of vessel from course of voyage, or an
which are not otherwise material contract of marine insurance, is intentionally false unreasonable delay in pursuing voyage, or the
in any material respect, or in respect of any fact When A Ship Should Be Seaworthy: commencement of an entirely different voyage.
3. State the exact and whole truth in relation on which the character and nature of the risk General Rule: Implied warranty of seaworthiness (Insurance Code, Sec. 125)
to all matters that he represents, or upon depends, the insurer may rescind the entire is complied with if the ship be seaworthy at the
inquiry discloses or assumes to disclose contract. The eventual falsity of a representation time of the commencement of the risk Instances of Deviation Table
(Insurance Code, Sec. 109) as to expectation does not, in the absence of
fraud, avoid a contract of marine insurance. Exceptions: SEC. DEVIATION
In marine insurance, there are instances when (Insurance Code, Secs. 113 and 114) 1. Time Policy – When the insurance is
matters, although concealed, will not vitiate the made for a specified length of time, the - Departure from the agreed voyage
contract but merely exonerates the insurer from implied warranty is not complied with
the loss resulting from the risk concealed: Implied Warranties in Marine Insurance unless the vessel is seaworthy at the 123 Departure from the course of sailing
1. National character of the insured; a. That the ship is seaworthy at the commencement of every voyage it fixed by mercantile usage between
2. Liability of insured thing to capture (or) inception of the insurance (Sec. 115); undertakes during that time; (Insurance the places of beginning and ending
and detention; b. That the ship will not deviate from agreed Code, Sec. 117[a]) specified in the policy
3. Liability to seizure from breach of foreign voyage unless deviation is proper (Secs.
125-127); 2. Cargo Policy – When the insurance is 124 Departure from the most natural,
laws of trade;
direct, and advantageous route
4. Want of necessary documents; and c. That the ship will not engage in an illegal upon the cargo which, by the terms of the
between the places specified if the
5. Use of false or simulated papers. venture; policy, description of the voyage, or
(Insurance Code, Secs. 109-112) course of sailing is not fixed by
d. Warranty of possession of documents of established custom of trade, is to be
mercantile usage
neutrality; that the ship will carry the transshipped at an intermediate port, at
Concealment in Marine Insurance vs. Other requisite documents of nationality or the commencement of each particular
125 Unreasonable delay in pursuing the
Property Insurance neutrality of the ship or cargo where such voyage; (Insurance Code, Sec. 117[b])
voyage
nationality or neutrality is expressly
MARINE OTHER PROPERTY warranted (Sec. 122); 3. Voyage Policy – Where different
INSURANCE INSURANCE 125 The commencement of an entirely
e. Presence of insurable interest. portions of the voyage are contemplated, different voyage
at the commencement of each portion;
Information of Third Persons Seaworthiness (Insurance Code, Sec. 119)
Seaworthiness relates to the vessel’s ACTUAL Kinds of Deviations
The information of The information or
CONDITION at the time of the commencement of 4. When the ship was seaworthy at the 1. Proper Deviations
the belief or belief of a third party
the voyage. The issuance of the certificate neither commencement of the voyage but a. If due to circumstances outside the
expectation of third is not material and
negates the presumption of unseaworthiness becomes unseaworthy during the voyage control of the master or ship owner;
persons in reference need not be
triggered by an unexplained sinking or to which an insurance related, b. If done to comply with a warranty or to
to a material fact is communicated
establishes seaworthiness. (Delsan Transport unreasonable delay in repairing the avoid a peril, whether or not the peril is
material and must be unless it proceeds
Lines v. CA, G.R. No. 127897, 2001) defect exonerates the insurer on ship or insured against;
communicated from an agent of the
shipowner’s interest from liability from c. If made in good faith, and upon
(Insurance Code, insured whose duty
Test of Seaworthiness any loss arising therefrom. (Insurance reasonable ground of belief in its
Sec. 110) is to give information.
Whether or not the ship is reasonably fit to Code, Sec. 120) necessity to avoid a peril;
(Insurance Code,
perform the service and to encounter the ordinary d. If made in good faith, for the purpose of
Sec. 43)
perils of the voyage (Insurance Code, Sec. 117) Coverage of the Warranty of Seaworthiness saving human life or relieving another
Effect of Concealment 1. Condition of the structure of the ship distressed vessel. (Insurance Code, Sec.
Note: The implied warranty of seaworthiness also itself, but requires that it be properly 125)
The concealment of Concealment of a applies to a cargo owner. laden, and provided with a competent
any fact in relation to material fact will master Effect in case of loss or injury: Insurer is
any of the matters vitiate the entire Since the law provides for an implied warranty of 2. Sufficient number of competent officers still liable, as if there was no deviation.
stated in Sec. 112 contract, whether or seaworthiness in every contract of ordinary and seamen
does not vitiate the not the loss results marine insurance, it becomes the obligation of a 3. Requisite appurtenances and equipment, 2. Improper Deviations
entire contract but from the risk cargo owner to look for a reliable common carrier such as ballasts, cables and anchors, Every deviation not specified in the last
merely exonerates concealed. which keeps its vessels in seaworthy condition. cordage and sails, food, water, fuel and section is improper. (Insurance Code, Sec.
the insurer from a risk The shipper of cargo may have no control over lights, and other necessary or proper 127)
resulting from the fact the vessel but he has full control in the choice of stores and implements for the voyage.
concealed. the common carrier that will transport his goods. (Insurance Code, Sec. 118) Effect in case of loss or injury: Insurer is
Or the cargo owner may enter into a contract of not liable (Insurance Code, Sec. 128)
insurance which specifically provides that the
insurer answers not only for the perils of the sea

Kinds of Losses in Marine Insurance 3. Partial Loss (Insurance Code, Sec. 130)
1. Actual Total Loss Effects of Abandonment Exception: When a thing has been hypothecated
a. Total Destruction; Abandonment 1. Transfer of Interest by bottomry or respondentia, before its insurance,
b. Irretrievable loss by sinking or by being The act of the insured by which, after a An abandonment is equivalent to a transfer by the and without the knowledge of the person actually
broken up; constructive total loss, he may declares the insured of his interest to the insurer, with all the procuring the insurance, he may show the real
c. Damage rendering the thing valueless for relinquishment to the insurer of his interest in the chances of recovery and indemnity. (Insurance value (Insurance Code, Sec. 158)
the purpose held; or thing insured. (Insurance Code, Sec. 140) Code, Sec. 148)
d. Total Effective deprivation of owner of 2. Open Policy
possession of thing insured at the port of Requisites of Abandonment 2. Transfer of Agency
destination. (Insurance Code, Sec. 132) Upon an abandonment, acts done in good faith The following rules shall apply in estimating a
SEC. REQUISITE by those who were agents of the insured in loss:
Note: Complete physical destruction of the respect to the thing insured, subsequent to the 1. Value of the ship – value at the beginning
140 There must be an actual
subject matter is not essential to constitute an loss, are at the risk of the insurer, and for his of the risk;
relinquishment by the person
actual total loss. Such a loss may exist where the benefit. (Insurance Code, Sec. 150) 2. Value of the cargo – actual cost when
insured of his interest in the thing
form and specie of the thing is destroyed, laden on board, or market value at the time
insured Acceptance of Abandonment
although the materials of which it consisted still and place of lading;
exist as where the cargo by the process of 141 There must be a constructive total It is not necessary if abandonment is properly 3. Value of freightage – gross freightage
decomposition or other chemical agency no loss made. exclusive of primage; and
longer remains the same kind of thing as before 4. Cost of insurance – in each case, to be
(Pan Malayan Insurance Corp v. CA, G.R. No. 142 The abandonment be neither partial Effects of Acceptance added to the estimated value (Insurance
95070, 1991) nor conditional 1. Insurer admits the existence of the loss; Code, Sec. 163)
2. Insurer admits the sufficiency of the
2. Constructive Total Loss 143 It must be made within a reasonable abandonment; Loss of Profits Separately Insured
a. Actual loss or more than three-fourths time after receipt of reliable 3. Abandonment becomes irrevocable, (Value of property lost / Value of whole property
(3/4) of the value of the object; information of the loss unless the upon which it was made prove insured) * amount of insurance = Amount of
b. Damage reducing value by more than to be unfounded; recovery
three-fourths (3/4) of the value of the 144 It must be factual 4. Freightage earned previous to the loss
vessel and of cargo; and belongs to the insurer of said freightage; Presumption of Loss of Profits
c. Expenses of shipment exceed three- 145 It must be made by giving notice and When profits are valued and insured by a contract
fourths (3/4) of value of cargo. (Insurance thereof to the insurer which may be 5. Freightage subsequently earned belongs of marine insurance, a loss of them is
Code, Sec. 141) done orally or in writing to the insurer of the ship (Insurance conclusively presumed from a loss of the property
Code, Secs. 153-155) out of which they are expected to arise, and the
In case of constructive total loss, insured 146 The notice of abandonment must be valuation fixes their amount. (Insurance Code,
may: explicit and must specify the Rights of Insurer Who Pays Partial Loss as Sec. 162)
1. Abandon the goods or vessel to the particular cause of the Actual Total Loss
insurer and claim for whole insured value abandonment If a marine insurer pays for a loss as if it were an Average
(Insurance Code, Sec. 141); or actual total loss, he is entitled to whatever may Any extraordinary or accidental expense incurred
2. He may, without abandoning vessel, Abandonment where the insurance is remain of the thing insured, or its proceeds or during the voyage for the preservation of the
claim for partial actual loss (Insurance divisible or indivisible salvage, as if there had been a formal vessel, cargo, or both; and all damages to the
Code, Sec. 157). In a case, the policy in question showed that the abandonment (Insurance Code, Sec. 149) vessel and cargo from the time it is loaded and
subject matter insured was the entire shipment of the voyage commenced, until it ends and the
The word “may” in Section 141 is intended to grant 2,000 cubic meters of logs. Insurer’s Liability for Refusal of cargo is unloaded.
the insured the option or direction to make the Abandonment
choice. This option or discretion is expressed as a If an insurer refuses to accept a valid Kinds of Averages: Gross v. Particular
SC held that the fact that the logs were loaded in
right in Section 133. (Keppel Cebu Shipyard v. abandonment, he is liable as upon an actual total
two different barges did not make the contract of GROSS / SIMPLE/PARTICUL
Pioneer Ins. & Surety, G.R. Nos. 180880-81, loss, deducting from the amount any proceeds of
insurance several and divisible as to the items GENERAL AR AVERAGE
2009) the thing insured which may have come to the
insured because the logs on the two barges were
hands of the insured. (Insurance Code, Sec. 156) AVERAGE
not separately valued or separately insured, for
Effect of Total Loss
only one premium was paid for the entire These damages and Includes all damages
Underwriter is liable for the whole amount Measure of Indemnity
shipment making only one cause or expenses are and expenses
insured.
consideration. The logs having been insured as deliberately caused caused to the vessel
one inseparable unit, the totality of the shipment 1. Valued Policy
by the master of the or to her cargo which
of logs should be the basis for the existence of
The parties are bond by the valuation if the vessel or upon his have not inured to the
constructive total loss (Oriental Assurance Corp
insured had some interest at risk and there is no authority, in order to common benefit and
v. CA, G.R. No. 94052, 1991)
fraud (Insurance Code, Sec. 158) save the vessel, her profit of all the

May include loss by lightning, windstorm, tornado mportance of Distinction

cargo, or both at the persons interested in
same time from a the vessel and her When a person insured by a contract of marine or earthquake and other allied risks, when such 1. The rules on constructive total loss and
insurance has a demand against others for risks are covered by extension to fire insurance abandonment only apply in marine
real and known risk. cargo the owners are
contribution, he may claim the whole loss from the policies or under separate policies. insurance; and
not entitled to receive
insurer, subrogating him to his own right to 2. In case of partial loss of a thing insured
contribution from
contribution. But no such claim can be made upon for less than its actual value, the insured
other owners
the insurer after the separation of the interests Nature of Fire in a marine policy is a co-insurer of the
concerned in the
liable to contribution, nor when the insured, Fire may not be considered a natural disaster or uninsured portion (Sec. 159), while the
venture.
having the right and opportunity to enforce calamity since it almost always arises from some insured may only become a co-insurer in
Must be borne These are suffered contribution from others, has neglected or waived act of man or by human means. It cannot be an fire insurance if expressly agreed upon
equally by all of the by and borne alone the exercise of that right. (Insurance Code, Sec. act of God unless caused by lightning or a natural by the parties. (Sec. 174)
interests concerned by the owner of the 167) disaster or casualty not attributable to human
in the venture in cargo or of the agency (Phil. Home Assurance Corp v. CA, G.R. Alteration
proportion to the vessel, as the case Freightage Benefit No. 106999. June 20, 1996) The use of condition of a thing insured from that
value of the property may be. Which is to accrue to the owner of the vessel from to which it is limited by the policy made without
saved. its use in the voyage contemplated or the benefit Friendly Fire v. Hostile Fire the consent of the insurer, by means within the
derived from the employment of the ship. FRIENDLY FIRE HOSTILE FIRE control of the insured, and increasing the risks,
So long as a fire burns When the fire occurs entitles the insurer to rescind a contract of fire
Requisites to Claim General Average Right to Freightage: in a place where it outside of the usual insurance.
1. There must be a common danger. This a. Freightage earned before loss - Belongs was intended to burn, confines or begins as
means, that both the ship and the cargo, to the insurer of freightage and ought to be, it is a friendly fire and Effect of an Alteration in the Use or Condition
after has been loaded, are subject to the b. Freightage earned after loss - Belongs to merely an agency for becomes hostile by of a Thing Insured from that Limited by the
same danger, whether during the insurer of ship the accomplishment escaping from the Policy
voyage, or in the port of loading or of some purpose; not place where it ought The insurer may rescind a contract of fire
unloading; that the danger arises from Co-Insurance a hostile peril. to be to some place insurance, provided the following are present:
the accidents of the sea, dispositions of A form of insurance in which a person who where it ought not to 1. The use or condition of the thing insured
the authority, or faults of men, provided insures his property for less than the entire value be. is specially limited or stipulated in the
that the circumstances producing the is understood to be his own insurer for the Insurer is liable. Insurer is not liable. policy;
peril should be ascertained and imminent difference which exists between the true value of 2. Such use or condition is altered;
or may rationally be said to be certain and the property and the amount of insurance. Also 3. The alteration is made without the
Fire Insurance Policy
imminent. This last requirement excludes applicable to Fire Insurance if stipulated. consent of the insurer;
Instead of paying for actual loss or the valuation
measures undertaken against a distant 4. The alteration is made by means within
stated on the face of the policy, the policy may
peril. When Co-Insurance Applies the control of the insured;
stipulate a:
2. For the common safety part of the vessel 1. Insurance taken is less than the actual 5. The alteration increases the risk; and
1. Co-insurance clause; or
or of the cargo or both is sacrificed value of the thing insured; and 6. There must be a violation of a material
2. Option to rebuild clause - the insurer is
deliberately. 2. Loss is partial (Insurance Code, Sec. policy provision.
given the option to reinstate or replace
3. From the expenses or damages caused 159) the building damaged or destroyed or
follows the successful saving of the Alterations with DO NOT AVOID the policy
any part thereof, in the same condition as
vessel and cargo. “New for Old” Rule it was at the time of the loss. 1. Where risk of loss is not increased;
4. Expenses or damages should have been In the case of a partial loss of ship or its 2. Where the insured property would be
incurred or inflicted after taking proper equipment, the old materials are to be applied useless if questioned acts were
Ocean Marine Policy vs. Fire Policy
legal steps and authority (Magsaysay v. towards payment for the new. prohibited; or
A policy of insurance on a vessel engaged in
Agan, G.R. No. L-6393, 1955) 3. A contract of fire insurance is not affected
navigation is a contract of ocean marine
Unless otherwise stipulated in the policy, a insurance although it insures against fire risks by any act of the insured (which could
Right of the Insured in General Average marine insurer is liable for only 2/3 of the include alteration) subsequent to the
only.
Where it has been agreed that an insurance upon remaining cost of repairs after such deduction, execution of the policy, which does not
a particular thing, or class of things, shall be free except that anchors must be paid in full. violate its provisions, even though it
However, where the hazard is fire alone and the
from particular average, a marine insurer is not (Insurance Code, Sec. 168) increases the risk and is the cause of the
subject is an unfinished vessel, never afloat for a
liable for any particular average loss not depriving loss. (Insurance Code, Sec. 172)
voyage, the contract to insure is a fire risk,
the insured of the possession, at the port of 2. FIRE INSURANCE especially in the absence of an express
destination, of the whole of such thing, or class of Even though the policy contains certain
agreement that it shall have the incidents of
things, even though it becomes entirely It is a contract of indemnity by which the insurer provisions prohibiting specified articles from
marine policy, or where it insures materials in a
worthless; but such insurer is liable for his for a consideration agrees to indemnify the being kept in the insured premises, the policy will
shipyard for use in constructing vessels.
proportion of all general average loss assessed insured against loss of, or damage to, property by not be avoided by a violation of these provisions
upon the thing insured. (Insurance Code, Sec. fire. (Insurance Code, Sec. 169) if the articles are necessary or ordinarily used in
I
138) the business conducted in the insured premises,

like benzine kept in a furniture factory for liability of the insured to the injured third person
Generally, can only May be cancelled
purposes of operating or for cleaning machinery attaches. Prior payment by the insured to the The terms “accident” and “accidental” do not,
be cancelled with the unilaterally either by
(Bachrach v. British American Assur. Co., G.R. injured third person is not necessary in order that without qualification, exclude events resulting in
consent of the the insured or by the
No. L-5715, 1910). the obligation of the insurer may arise. From the damage or loss due to fault, recklessness or
obligee or by the insurer on grounds
moment that the insured became liable to the negligence of third parties. (Pan Malayan
Commissioner or by provided by law.
Comparative Table: Alteration in Insurance third person, the insured acquired an interest in Insurance v. CA, G.R. No. 81026, 1990)
a court of competent (Sec. 64)
Code – Sec. 171 vs. Sec. 77 the insurance contract, which interest may be
jurisdiction.
garnished like any other credit. (Perla Compania “No Fault”
SEC. 171 SEC. 77 de Seguros v. Ramolete, G.R. No. L-60887, The concept of accident is not necessarily
The obligee must The insurance
1991) synonymous with “NO FAULT”. It may be utilized
Alteration in the risk The insurer is given accept before the contract does not
simply to distinguish intentional or malicious acts
or condition of the the right to insert Ts suretyship becomes need the acceptance
Right of the Injured Person to Sue Insurer of from negligent or careless acts of man (Pan
thing insured which and Cs in the policy valid and of any 3rd party.
the Party at Fault Malayan Insurance Corp. v. CA, G.R. No. 81026,
does not increase the which, if violated enforceable.
1990).
risk will not affect a would avoid it. SCENARIO EFFECT
contract of fire 4. SURETYSHIP It includes official recognizances, stipulations,
insurance. The contract 3rd persons, to bonds or undertakings issued under Act 536, as
provides for whom the insured is An agreement whereby one undertakes to amended.
Applies if the policy is Applies if the policy indemnity against liable, CAN sue the answer, under specified terms and conditions, for
silent as to breach of stipulates that breach liability to 3rd insurer. the debt, default or miscarriage of another in favor When does Suretyship arise?
immaterial of an immaterial persons. of a third party. (Insurance Code, Sec. 177) Suretyship arises upon the solidary binding of a
provisions. policy will void the person – deemed the surety – with the principal
insurance. The contract is for 3rd persons Under Sec. 177, a suretyship is: debtor, for the purpose of fulfilling an obligation.
indemnity against CANNOT proceed a. As a contract or agreement
actual loss or against the insured. b. Whereby a party, called the surety, Surety agreement as ancillary contract
3. CASUALTY INSURANCE payment. guarantees Such undertaking makes a surety agreement an
It is an insurance covering loss or liability arising (Guingon v. Del Monte, G.R. No. L-22042, 1967) c. The performance by another party, called ancillary contract as it presupposes the existence
from accident or mishap, the principal or obligor, of a principal contract.
Note: The injured person may sue the insurer and d. Of an obligation or undertaking in favor of
Excluding those falling under those types of the person at fault, notwithstanding the stipulation a third party, called the obligee. Although the contract of a surety is in essence
insurance such as fire, suretyship, life or marine. against suing the insurer (“no-action” clause) in secondary only to a valid principal obligation, the
the policy. (Guingon v. Del Monte, G.R. No. L- Suretyship v. Property Insurance surety becomes liable for the debt or duty of
22042, 1967) another although it possesses no direct or
Accident or Health Insurance SURETYSHIP PROPERTY personal interest over the obligations nor does it
Insurance against specified perils which may INSURANCE
Rules as to Death or Injury Resulting from receive any benefit therefrom.
affect the person and/or property of the insured.
(ex. Personal Accident, Robbery/Theft Insurance) Accidental Means Accessory contract Principal contract And notwithstanding the fact that the surety
Third Party Liability Insurance “Intentional” Parties: Parties:
contract is secondary to the principal obligation,
Implies the exercise of the reasoning faculties, the surety assumes liability as a regular party to
Insurance against specified perils which may give 1. Surety 1. Insurer, and
consciousness and volition the undertaking.
rise to liability on the party of the insured for 2. Principal 2. Insured
claims for injuries to or damage to property of debtor/ obligor,
Where the provision of the policy excludes Liability of Surety
others. (ex. Motor Vehicle Liability, Professional and
intentional injury, the intention of the person The extent of a surety’s liability is determined by
Liability, Product Liability) 3. creditor/ obligee
inflicting is the controlling factory. the language of the suretyship contract or bond
itself. It cannot be extended by implication,
Where the contract is one of indemnity against Credit transaction, Contract of
However, if the injuries suffered by the insured beyond the terms of the contract. Thus, to
liability, it becomes operative as soon as the where the surety indemnity.
clearly resulted from the intentional act of a third determine whether petitioner is liable to
liability of the person indemnified arises assumes primary
person, the insurer is relieved from liability as respondent under the surety bond, it becomes
irrespective of whether or not he has suffered liability.
stipulated (Biagtan v. The Insular Life Assurance necessary to examine the terms of the contract
actual loss (Republic Glass Corp v. Qua, G.R. No.
Co. Ltd., G.R. No. 26194, 1972). itself (First Lepanto-Taisho Insurance
144413, 2004) Surety is entitled to In subrogation, the
Corporation (now known as FLT Prime Insurance
reimbursement from 3rd party against
In a third-party liability insurance contract, the “Accidental” the principal and this whom the insurer
Corporation) vs. Chevron Philippines, Inc.
That which happens by chance or fortuitously, (formerly known as Caltex Philippines, Inc.), G.R.
insurer assumes the obligation of paying the guarantors for the may proceed is not a
without intention or design, which is unexpected, No. 177839, 2012).
injured third party to whom the insured is liable. loss it may suffer party to the contract.
20 The insurer becomes liable as soon as the unusual and unforeseen (Sun Insurance v. CA, under the contract.
G.R. No. 92383, 1992)

Nature of Liability of Surety 3. Where the obligee has accepted the Life Insurance vs. Fire and Marine Insurance
subsidiarily liable. surety is secondary
a. The liability of the sureties under a bond bond, it shall be valid and enforceable
to a valid principal LIFE INSURANCE FIRE AND
is joint and several / solidary (Arts. notwithstanding that the premium has not
obligation. MARINE
1207-1208, NCC) been paid (Philippine Pryce Assurance v.
Guarantor contracts INSURANCE
b. The liability is limited to the amount of CA, G.R. No. 107062, 1994);
to pay if, by use of Surety undertakes
the bond (Republic v. CA, G.R. No. 4. If the contract of suretyship or bond is not
due diligence, the directly the payment Not a contract of Contracts of
103073, 2001). accepted by, or filed with the obligee, the
principal cannot pay w/o reference to indemnity (save that indemnity
c. The liability is contractual as it is surety shall collect only a reasonable
the debt. principal’s solvency. effected by a
determined strictly by the terms of the amount;
contract of suretyship in relation to the 5. If the non-acceptance of the bond be due creditor on the life of
Not bound to take Ordinarily held to the debtor), but of
principal contract between the obligor to the fault or negligence of the surety, no
notice of the non- know every default of investment
and the obligee (Zenith Insurance Corp v. service fee, stamps, or taxes imposed
performance of the his principal.
CA, G.R. No. L-57957, Dec. 29, 1982.). shall be collected by the surety; and
principal. Always regarded as May be open or
6. In the case of a continuing bond (for a
Note: In Suretyship, the obligee accepts the term longer than one year or with no fixed a valued policy valued
Discharged by the Usually not
surety’s solidary undertaking to pay if the obligor expiration date), the obligor shall pay the
mere indulgence of discharged by the May be transferred The transferee or
does not pay. Such acceptance, however, does subsequent annual premium as it falls
the creditor or mere indulgence of or assigned to any assignee must have
not change in any material way the obligee’s due until the contract is cancelled
principal. the creditor or person, even if he an insurable
relationship with the principal obligor. Neither (Insurance Code, Sec. 179)
principal. has no insurable interest in the thing
does it make the surety an active party to the Usually not liable
principal obligee-obligor relationship. Note: Where a contract of surety is terminated interest insured
unless notified of the
under its terms, the liability of the principal for
principal’s default. Unless expressly Such consent, in
Thus, the acceptance does not give the surety the premiums after such termination ceases
right to intervene in the principal contract. (Asset notwithstanding the pendency of a lawsuit to required, the the absence of
Art. 2080 is Surety cannot claim consent of the waiver by the
Builders Corporation vs. Stronghold Insurance enforce a liability that accrued during its
applicable to release from his insurer is not insurer, is essential
Co., Inc., G.R. No. 187116, 2010). stipulated lifetime (Capital Insurance & Surety Co
guarantors. obligation. essential to the in the assignment of
v. Ronquillo Trading, G.R. No. L-36488, 1983).
Continuing Suretyship validity of the a fire or marine
Statute of Frauds Statute of Frauds assignment of a life policy
By executing such an agreement, the principal Suretyship v. Guaranty applies - special does not apply -
places itself in a position to enter into the policy
GUARANTY SURETY promise. suretyship is an
projected series of transactions with its creditor; original promise. Save that effected The insurable
with such suretyship agreement, there would be
Promise to answer for the debt, default, or by a creditor on life interest in the
no need to execute a separate surety contract or
miscarriage of another. 5. LIFE INSURANCE of debtor, insurable property insured
bond for each financing or credit accommodation
interest in the life or must exist not only
extended to the principal debtor. A continuing
Insurer of the Insurer of the debt - Scope health of the person when the insurance
suretyship covers current and future loans,
debtor’s solvency - obligates himself to a. Insurance on human life insured need not takes effect but also
provided that, with respect to future loan
bound to pay when pay when the b. Insurance appertaining thereto or exist after the when the loss
transactions, they are within the description or
the principal is principal does not connected therewith may be payable: insurance takes occurs
contemplation of the contract of guaranty
unable to pay. pay. i. On the death of the insured; effect or when the
(Aniceto G. Saludo, Jr. v. Security Bank
ii. On his surviving a specified loss occurs
Corporation, G.R. No. 184041, 2010).
Undertaking that the Undertaking that the period (endowment/annuities);
debtor shall pay. debt shall be paid. The contingency The contingency
Rules on Payment of Premium and
that is contemplated insured against may
The premium is the consideration for furnishing iii. Otherwise, contingently on the
Liable based on an Liable as a regular (i.e., death) is a or may not occur
the bond or the guaranty and the obligation to pay continuance or cessation of life
independent party to the certain event, the
the same subsists for as long as the liability of the (endowment/annuities)
agreement to pay if undertaking. only uncertainty
surety shall exist. (Reparations Commission v. being the time when
the primary debtor Note: Life insurance policies are always
Universal Deep-Sea Fishing Corporation, A.M. it will take place
fails to do so. VALUED policies.
No. 219091-96, 1978)
1. The premium becomes a debt as soon as Guaranty is a Surety is charged as
the contract of suretyship or bond is collateral an original promisor
perfected and delivered to the obligor undertaking. and debtor from the
(Insurance Code, Sec. 78) beginning.
2. The contract of suretyship or bonding
shall not be valid and binding unless and Secondarily or Primary, although a
until the premium therefor has been paid;

Unless written only Liability is uncertain if the words “industrial” policy are printed upon or not (Sun Life Assur. Co. of Canada v. Ingersoll, Exceptions:
the policy as part of the descriptive matter. G.R. No. 16475, 1921) a. Accidental killing;
for a term, the because the
b. Self-defense; and
liability of the insurer happening of the
Kinds of Life Insurance Necessity of Beneficiary’s Consent to c. Insanity of the beneficiary at the time he
to make payment is peril insured against
a. Whole Life or Ordinary Policies Assignment killed the insured
certain, the only is uncertain. The
The insured agrees to pay annual, semi- The consent of the beneficiary depends if there is
uncertain element amount insured
annual or quarterly premiums while he lives. a waiver of the right to change the beneficiary 6. COMPULSORY MOTOR VEHICLE
being when such may not have to be
The insurer agrees to pay the face value of the LIABILITY INSURANCE (CMVLI)
payment must be paid.
policy upon the death of the insured. See discussion on Parties to An Insurance
made. The amount
Contract (B) A protection coverage that will answer for legal
insured will have to
b. Limited Payment Life Policies liability for losses and damages for bodily injuries
be paid sooner or
A whole life or ordinary policy where premiums Liability of Insurer in Case of Death or Suicide and/or property damage that may be sustained by
later.
are paid only for a specified period of years. another arising from the use and operation of a
Although it may be It may be cancelled 1. Suicide motor vehicle by its owner.
terminated by the by either party and c. Term Policy The insurer is LIABLE in the following cases:
insured, cannot be is usually for a term Insured pays only once and insurer’s liability a. Suicide was committed after the policy It is unlawful for any land transportation operator
cancelled by the of one (1) year arises only upon the death of the insured has been in force for a period of two or owner of a motor vehicle to operate the same
insurer, and, within the agreed term as period. If the latter years from the date of its issue or its last in public highways unless there is an insurance or
therefore, is usually survives the period, the contract terminates reinstatement; guaranty to indemnify the death or bodily injury of
a long-term contract and the insurer is not liable. b. Suicide committed in a state of insanity a third party or passenger arising from the use
regardless of the date of the commission thereof. (Insurance Code, Sec. 387)
d. Endowment Policy of the suicide; or
The "loss" to the The reverse is Insurer agrees to pay a certain sum to the c. If committed after the lapse of a shorter Motor Vehicle
beneficiary caused generally true of the insured if the latter outlives a designated period in the policy (Insurance Code, Shall mean any vehicle propelled by any power
by the death of the loss of property period; if he dies before that time, the Sec. 183) other than muscular power using the public
insured can seldom proceeds are paid to the beneficiary highways (R.A. No. 4136, Sec. 3[a])
be measured Note: Any stipulation extending the two-year
accurately in terms e. Life Annuity period is void. Exceptions: road rollers, trolley cars, street
of cash value Debtor binds (the insurer) himself to pay an sweepers, sprinklers, lawn mowers, bulldozers,
annual pension or income during the life of The insurer is NOT LIABLE in the following cases: graders, forklifts, amphibian trucks, and cranes if
one or more persons in consideration of a a. The suicide is not by reason of insanity not used in public highways, vehicles which run
The beneficiary is The insured is
capital consisting of money or other property, and is committed within the two-year only on rails or tracks, and tractors, trailers and
under no obligation required to submit
whose ownership is transferred to him with the period; traction engines of all kinds used exclusively for
to prove actual proof of his actual
burden of income. b. The suicide is by reason of insanity but is agricultural purposes.
financial loss as a pecuniary loss as a
not among the risks assumed by the
result of the death of condition precedent
Variable Contract insurer regardless of the date of Scope of Coverage Required
the insured in order to collecting the
Any policy or contract on either a group or commission; and
to collect the insurance Owners of Operators of
individual basis issued by an insurance company c. The insurer can show that the policy was
insurance private motor land transportation
providing for benefits or other contractual obtained with the intention to commit
payments or values thereunder to vary so as to suicide even in the absence of any vehicles
Classification of Life Insurance reflect investment results of any segregated suicide exclusion in the policy.
a. Individual Life portfolio of investment. Comprehensive Comprehensive
Insurance on human lives and insurance 2. Killing by the Beneficiary against 3rd party against 3rd party
appertaining thereto or connected therewith; Rules on Transferability of Life Insurance liability for death or liability for death or
Contracts General Rule: The interest of a beneficiary in a bodily injuries bodily injuries
b. Group Life A policy of insurance upon life or health may pass life insurance policy shall be forfeited when the
A blanket policy covering a number of by transfer, will or succession to any person, beneficiary is the principal, accomplice, or In case a private The insurer may
individuals whether he has an insurable interest or not, and accessory in willfully bringing about the death of motor vehicle is being extend additional
such person may recover upon it whatever the the insured. In such a case, the share forfeited used to transport other risks at its
c. Industrial Life insured might have recovered. (Insurance Code, shall pass on to the other beneficiaries, unless passengers for option
A form of life insurance under which the Sec. 184) otherwise disqualified. In the absence of other compensation, such
premiums are payable either monthly or beneficiaries, the proceeds shall be paid in coverage shall, in
oftener, if the face amount of insurance All life insurance policies are declared by law to accordance with the policy contract. If the policy addition, include
provided in any policy is not more than five be assignable regardless of whether the assignee contract is silent, the proceeds shall be paid to the passenger liability
hundred times that of the current statutory has an insurable interest in the life of the insured estate of the insured. (Insurance Code, Sec. 12)
minimum daily wage in the City of Manila and

Rules of Comprehensive Third-Party Liability 1. Passenger Prescription starts to run from the denial of the vehicle by order of a court of law or by
Insurance (CTPL): Any fare paying person being transported and claim by the Insurance Company (Summit reason of any enactment or regulation in
Registration of any vehicle will not be made or conveyed in and by a motor vehicle for Guaranty and Insurance Co. v. Arnaldo, G.R. No. that behalf
renewed without complying with the requirements transportation of passengers for L-48546, 1988)
compensation, including persons expressly Note: If the claimant was able to present a
The protection may be complied with using any of authorized by law or by the vehicle’s operator Payment of Claims driver’s license, the same is presumed to be
the following: or his agents to ride without fare. (Insurance If there is an agreement, the insurance company genuine. The license will still be sustained in the
a. Insurance policy Code, Sec. 386[b]] shall forthwith ascertain the truth and extent of the absence of proof that it was not validly issued
b. Surety bond claim and make payment within five (5) working (CCC Insurance Corporation v. CA, G.R. No.
c. Cash bond 2. Third Party days after reaching an agreement. 26167, 1970).
Any person other than a passenger as defined
The purpose of CTPL is to give immediate in this section and shall also exclude a If no agreement is reached, the insurance A driver (not the insured himself) who holds an
financial assistance to victims of motor vehicle member of the household, or a member of the company shall pay only the no-fault indemnity expired driver’s license is not an authorized driver
accidents and/or their dependents, especially if family within the second degree of without prejudice to the claimant from pursuing (Gutierrez v. Capital Insurance Co., G.R. No.
they are poor regardless of the financial capability consanguinity or affinity, of a motor vehicle his claim further, in which case, he shall not be 30892, 1984).
of motor vehicle owners or operators responsible owner or land transportation operator, as required or compelled by the insurance company
for the accident. (First Integrated Bonding and likewise defined herein, or his employee in to execute any quit claim or document releasing Theft Clause
Ins. Co., Inc. v. Hernando, G.R. No. 51221, respect of death, bodily injury, or damage to it from liability under the policy of insurance or The risks insured against in the policy may
1991). property arising out of and in the course of surety bond issued. include theft. If there is such a provision and the
employment (Insurance Code, Sec. 386[c]) vehicle was unlawfully taken, the insurer is liable
“No Fault” Clause Note: If the policy provides for indemnity against under the theft clause and the authorized driver
The injured third party or passenger or heirs of Proper Insurer to Claim From liability, the insurer can be sued directly by a third clause does not apply. The insured can recover
the deceased is given the option to file a claim for In the case of an occupant of a vehicle, claim shall person. But, if the policy provides for even if the thief has no driver’s license. (Peria
death or injury without the necessity of proving lie against the insurer of the vehicle in which the “reimbursement after actual payment by the Compania de Seguros v. CA, G.R. No. 96452,
fault or negligence of any kind. occupant is riding, mounting or dismounting from. insured”, or for the indemnity against loss, a third 1992)
If not an occupant, claim shall lie against the person has no cause of action against the insurer
Conditions for application of no-fault clause: insurer of the directly offending vehicle. (Bonifacio Brothers v. Mora, G.R. No. 20853, ————- end of topic ————-
a. The claim must be for death or bodily 1967).
injuries only (property damage/liability The claimant is not free to choose from which
not included). insurer he will claim the "no-fault indemnity" as While insurer’s liability may be direct, it does not
b. The total indemnity in respect of any the law, by using the word "shall," makes it mean that the insurer can be held solidarily liable
person shall not be less than fifteen mandatory that the claim be made against the with the insured. The insurer’s liability is based on
thousand pesos (P15,000). insurer of such vehicle. That said vehicle might contract; that of the insured is based on torts.
c. The following proofs of loss, when not be the one that caused the accident is of no Furthermore, the insurer’s liability is limited to the
submitted under oath, shall be sufficient moment since the law itself provides that the party amount of the insurance coverage (Pan Malayan
evidence to substantiate the claim: paying the claim may recover against the owner Insurance Corp. v. CA, G.R. No. 81026, 1990).
i. Police report of accident; and of the vehicle responsible for the accident. (Perla
ii. Death certificate and evidence Compania de Seguros v. Ancheta, G.R. No. L- Authorized Driver Clause
sufficient to establish the proper 49699 August 8, 1988) A stipulation in a motor vehicle insurance which
payee; or, provides that the driver, other than the insured
iii. Medical report and evidence or Note: In all cases, the right of the party paying the owner, must be duly licensed to drive the motor
medical or hospital disbursement claim to recover against the owner of the vehicle vehicle otherwise the insurer is excused from
in respect of which refund is responsible for the accident shall be maintained. liability. The clause means that the insurer
claimed. (Insurance Code, Sec. 391) indemnifies the insured owner against loss or
d. Claim may be made against one motor damage to the car but limits the use of the insured
vehicle only; Periods in Claims Settlement vehicle to the insured himself or any person who
i. Against the insurer of the vehicle Notice of Claim: must be presented within six (6) drove on his order or with his permission.
where one is a passenger months from the date of the accident
ii. in any other case, the offending Authorized driver refers to:
vehicle Otherwise the claim is deemed waived. 1. The insured;
2. Any person driving on the insured’s order
Claimant Bringing an Action or Suit: The action must be or with his permission, provided that the
The claimant or victim may be a “passenger” or a filed in court of the Insurance Commission within person driving is permitted in accordance
“third party” (Insurance Code, Sec. 391) one (1) year from denial of the claim. with the licensing, or other laws or
regulations to drive the motor vehicle and
is not disqualified from driving such motor

ATENEO CENTRAL
II. PRE-NEED A. DEFINITION
TOPIC OUTLINE UNDER THE SYLLABUS

1. PRE-NEED PLANS
A. DEFINITION
1. Pre-need plans "Pre-need plans" are contracts, agreements,
2. Pre-need company deeds or plans for the benefit of the planholders
which provide for the performance of future
B. REGISTRATION OF PRE-NEED service/s, payment of monetary considerations or
PLANS delivery of other benefits at the time of actual
need or agreed maturity date, as specified
C. LICENSING OF SALES COUNSELOR therein, in exchange for cash or installment
AND GENERAL AGENT amounts with or without interest or insurance
coverage and includes life, pension, education,
D. DEFAULT AND TERMINATION interment and other plans, instruments contracts
or deeds as may in the future he determined by
E. CLAIMS SETTLEMENT the Commission. (Pre-need Code, sec 4 (b))
PRE-NEED
Under Sec. 4, pre-need plans are:
1. contracts, agreements, deeds or plans
for the benefit of the planholders
2. for the performance of future service/s,
payment of monetary considerations or
Commercial Law delivery of other benefits at the time of

actual need or agreed maturity date
3. in exchange for cash or installment
amounts with or without interest or
insurance coverage
2. PRE-NEED COMPANY
"Pre-need company" refers to any corporation

registered with the Commission and
authorized/licensed to sell or offer to sell pre-
need plans. ((Pre-need Code, sec 4 (c))
The term "pre-need company" also refers to

schools, memorial chapels, banks, nonbank
financial institutions and other entities which have
also been authorized/licensed to sell or offer to
sell pre-need plans insofar as their pre-need
activities or business are concerned.
B. REGISTRATION OF PRE-NEED PLANS
Registration of Pre-need Contracts/Plans

Within a period of 45 days after the grant of a
license to do business as a pre-need company,
and for every pre-need plan which the pre-need
company intends to offer for sale to the public, the
pre-need company shall file with the Commission
a registration statement for the sale of pre-need
Page 47 of 393
plans pursuant to this Code. (Pre-need Code, sec 3. Solicited, sold or attempted to solicit or Reinstatement 2. Failing to acknowledge with reasonable
14) sell a pre-need plan by means of false or The planholder shall be allowed a period of not promptness pertinent communications
misleading representation and other less than two (2) years from the lapse of the grace with respect to claims arising under its
Documentary Requirements fraudulent means; period or a longer period as provided in the plan;
1. Duly accomplished Registration 4. Terminated for cause from another pre- contract within which to reinstate his plan. Note: 3. Failing to adopt and implement
Statements; need company; No cancellation of plans shall be made by the reasonable standards for the prompt
2. Board resolution authorizing the 5. Willfully allowing the use of one's license issuer during such period when reinstatement investigation of claims arising under its
registration of applicant’s pre-need plans; by a non-licensed or barred individual; may be effected. plan;
3. Opinion of independent counsel on the and 4. Failing to provide prompt, fair and
legality of the issue; 6. Analogous circumstances. Notice Requirement equitable settlement of claims submitted
4. Audited financial statements; 7. Grounds under Section 11 Within thirty (30) days from the expiration of the in which liability has become reasonably
5. Viability study with certification, under a. Conviction of crime involving a grace period and within thirty (30) days from the clear; or
oath, of pre-need actuary accredited by pre-need plan or other financial expiration of the reinstatement period, which is 5. Compelling planholders to institute suits
the Commission; product two (2) years from the lapse of the grace period, or recover amounts due under its plan by
6. Copy of the proposed pre-need plan; and b. Conviction of an offense the pre-need company shall give written notice to offering, without justifiable reason,
7. Sample of sales materials involving moral turpitude or fraud the planholder that his plan will be cancelled if not substantially less than the amounts
or embezzlement, theft or estafa reinstated within two (2) years. ultimately recovered in suits brought by
Note: It must contain appropriate risk factors as c. Enjoined, by reason of any them.
may be determined by the Insurance misconduct, from acting as a Failure to give either of the required notices shall
Commission. director, officer, employee preclude the pre-need company from treating the Note: Any violation of this section shall be
occupying any fiduciary position plans as cancelled. considered sufficient cause for the suspension or
d. Violation of the Pre-need Code, revocation of the company's certificate of
C. LICENSING OF SALES COUNSELOR Insurance Code, Securities Termination of Pre-need plans authority.
Regulation Code or any other Section 24. Termination of Pre-need Plans. - A
AND GENERAL AGENT
related laws planholder may terminate his pre-need plan at Payment of Plan Proceeds
any time by giving written notice to the issuer.
Sales counselor General agent 1. Scheduled benefit plans
"Sales counselors" refers to natural persons who If the issuer should contract the services of a Termination values
are engaged in the sale of, or offer to sell, or general agent to undertake the sales of its plans, A pre-need plan shall contain a schedule of In the case of scheduled benefit plans, the
counsel of prospective planholders for the such general agent shall be required to be termination values to which the planholder is proceeds of the plan shall be paid immediately
purpose of selling, whether or not on commission licensed as such with the Commission, in entitled to upon termination. upon maturity of the contract, unless such
basis, pre-need plans upon the authority of the accordance with the requirements imposed by proceeds are made payable in installments or as
pre-need company. (Pre-need Code, sec. 4(h)) the Commission. The termination value of the pre-need plan shall an annuity, in which case the installments or
be predetermined by the actuary of the pre-need annuities shall be paid as they become due.
Qualifications company upon application for registration of the
1. of good moral character and must not pre-need plans with the Commission and shall be Refusal or failure to pay the claim within fifteen
have been convicted of any crime D. DEFAULT AND TERMINATION
disclosed in the contract. (15) days from maturity or due date will entitle the
involving moral turpitude; beneficiary to collect interest on the proceeds of
2. undergone a training program approved Grace period
the plan for the duration of the delay at the rate
by the Commission and such fact has The pre-need company must provide in all
E. CLAIMS SETTLEMENT twice the legal interest unless such failure or
been certified under oath by a duly contracts issued to planholders a grace period of
refusal to pay is based on the ground that the
authorized representative of a pre-need at least sixty (60) days within which to pay
claim is fraudulent: Provided, That the planholder
company; and accrued installments, counted from the due date
has duly complied with the documentary
3. has passed a written examination of the first unpaid installment. No pre-need company shall refuse, without just
requirements of the pre-need company.
administered by the. Commission or by cause, to pay or settle claims arising under
an independent organization under the Default coverages provided by its plans nor shall any
2. Contingent benefit plans
supervision of the Commission. Nonpayment of a plan within the grace period such company engage in unfair claim settlement
shall render the plan a lapsed plan. practices.
In the case of contingent benefit plans, the
Grounds for the denial, suspension, benefits shall be paid by the pre-need company
revocation of license Payment beyond the grace period Unfair Claims Settlement Practices
thirty (30) days upon submission of all necessary
1. Material misrepresentation relating to: General Rule: Any payment by the planholder Any of the following acts by a pre-need company,
documents.
a. Application requirements after the grace period shall be reimbursed if committed without just cause, shall constitute
b. Terms and conditions of pre- Exception: the planholder duly reinstates the unfair claims settlement practices:
Recovery of Investment
need plans plan. 1. Knowingly misrepresenting to claimants
The planholder may institute the necessary legal
2. Obtained or attempted to obtain a license pertinent facts or plan provisions relating
action in court to recover his/her investment in the
by fraud or misrepresentation; to coverages at issue;

ATENEO CENTRAL
pre-need company thirty (30) days upon

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

The pre-need company shall be liable to pay
damages, consisting of actual damages,
attorney’s fees and legal interest, to be computed
TRANSPORTATION
from the date the claim is made until it is fully
satisfied: Provided, That the failure to pay any
such claim within the time prescribed shall be
considered prima facie evidence of unreasonable
delay in payment.
LAW
Distribution of Profits
A pre-need company may declare dividends:
Provided, That the following shall remain
unimpaired, as certified under oath by the
president and the treasurer with respect to items
(a) and (b); and in the case of item (c), by the trust
officer:
(a) One hundred percent (100%) of the
Commercial Law
capital stock;
(b) An amount sufficient to pay all net losses
reported, or in the course of settlement,
and all liabilities for expenses and taxes;
and
(c) Trust fund.
Note: Any dividend declared shall be reported to

the Commission within thirty (30) days after such
declaration.
Note: Section 30 of R.A. No. 9829 expressly

stipulates that the trust fund is to be used at all
times for the sole benefit of the planholders, and
cannot ever be applied to satisfy the claims of the
creditors of the company. (Securities and
Exchange Commission v. College Assurance
Plan Philippines, Inc., G.R. No. 202052, [March
7, 2018])
————- end of topic ————-
Page 50 of 393
III. TRANSPORTATION LAW D. BILL OF LADING 5. Approval of sale, encumbrance, or A. COMMON CARRIERS
1. Three-fold character lease of property
2. Delivery of goods
a. Period for delivery G. THE WARSAW CONVENTION Contract of Transportation
b. Delivery without surrender of 1. Applicability Natural or juridical persons bind themselves to
III. TRANSPORTATION LAW
bill of lading 2. Limitation of liability transport persons, goods, or both for
A. COMMON CARRIERS
c. Refusal of consignee to a. Liability to passengers compensation offering their services to the public.
1. Diligence required of common carriers
deliver b. Liability for checked
2. Liabilities of common carriers
3. Period for filing claims passengers
3. Classification of transport network Elements of a Common Carrier:
4. Period for filing actions c. Liability for hand-carried
vehicle services and transport network 1. Persons, corporations, firms, or associations;
5. Effects of stipulations baggage
companies 2. Engaged in the business of carrying or
3. Willful misconduct
transporting passengers or goods or both;
E. MARITIME COMMERCE
B. VIGILANCE OVER GOODS 3. By land, water, or air;
1. Charter parties
1. Exempting causes 4. For compensation; and
a. Bareboat/demise charter
a. Requirement of absence of 5. Offering their services to the public. (Civil
b. Time charter
negligence Code, Art. 1732)
c. Voyage/trip charter
b. Absence of delay
2. Liability of shipowners and shipping
c. Due diligence to prevent or
agents Tests to Determine Whether the Entity is a
lessen the loss
a. Liability for acts of captain Common Carrier
2. Contributory negligence
b. Exceptions to limited liability 1. It must be engaged in the business of
3. Duration of liability
3. Accidents and damages in maritime carrying goods for others as a public
a. Delivery of goods to common
commerce employment and must hold itself out as ready
carrier
a. General average to engage in the transportation of goods
b. Actual or constructive delivery
b. Collisions and allisions generally as a business and not as a casual
c. Temporary loading or storage
4. Carriage of Goods by Sea Act occupation;
4. Stipulation for limitation of liability
a. Application 2. It must undertake to carry goods of the kind
a. Void stipulations
b. Notice of loss or damage that to which its business is confined;
b. Limitation of liability to a fixed
c. Period of prescription
amount 3. It must undertake to carry by the method by
d. Limitation of liability
c. Limitation of liability in which his business is conducted, and over its
absence of declaration of established roads;
F. PUBLIC SERVICE ACT
greater value 4. The transportation must be for hire. (First
1. Definition of public utility
5. Liability for baggage of persons Philippine Industrial Corporation v. CA, 360
a. Checked-in baggage 2. Necessity for certificate of public
Phil. 852)
b. Baggage in possession of convenience
passengers a. Requisites
The “true” test for a common carrier is not the
i. Citizenship
ii. Promotion of public
quantity or extent of the business actually
C. SAFETY OF PASSENGERS
transacted, or the number and character of the
1. Void stipulations interests
conveyances used in the activity, but whether the
2. Duration of liability iii. Financial capability
b. Prior operator rule
undertaking is part of an activity engaged in by
a. Waiting for carrier or boarding
of carrier the carrier that he has held out to the general
i. Meaning
b. Arrival at destination public as his business or occupation. (Sps.
ii. Exceptions
3. Liability for acts of others Pereña v. Sps. Zarate, 693 Phil. 373)
iii. Ruinous
c. Employees competition
d. Other passengers and 3. Fixing of rate Parties to the Contract of Transportation
strangers a. Rate of return
4. Liability for delay in the b. Exclusion of income tax as Carriage of Passengers
commencement of voyage expense a) Carrier: Party who binds himself to
5. Liability for defects in equipment and 4. Unlawful arrangements transport persons, goods, or both. It may
facilities a. Boundary system be a common carrier or a private carrier.
6. Extent of liability for damages b. Kabit system b) Passenger: One who travels in a public
conveyance by virtue of an express or

implied contract with the common carrier, to the public as ready to act for all who may desire 2. LIABILITIES OF COMMON CARRIERS
paying fare or what is the equivalent his/her/its services, either gratuitously or for hire. Transportation Network Vehicle Services
thereof (Sps. Pereña v. Sps. Zarate, 693 Phil. 373) General Rule: Common carriers are liable for: (TNVS)
1. The loss, destruction, or deterioration of the Refers to TNC-accredited private vehicle owner
Carriage of Goods Common Carriers v. Private Carriers goods they are transporting using the internet-based technology application
a) Shipper: Person who delivers the goods COMMON PRIVATE  Exceptions: or digital platform technology transporting
to the carrier for transportation and pays CARRIERS CARRIERS a) Natural disaster or calamity; passengers from one point to another for
the consideration, or on whose behalf the Holds himself / herself Engage with b) Act of the public enemy in war, compensation. (DOTr Order 2018-013, Sec. 2)
payment is made / itself for all people particular individuals whether international or civil;
b) Carrier: (see earlier discussion) indiscriminately or groups only c) Act or omission of the shipper or TNVSs are expressly considered to be common
c) Consignee: Party who receives the Governed by the Civil Governed by the Civil owner of goods carriers. Furthermore, TNVSs cannot operate as
goods or cargo. The consignee and the Code provisions Code provisions on d) The character of the goods or common carriers outside of or independent from
shipper may be the same. related to common obligations and defects in the packaging or in the the use of internet-based technology of the TNC
carriers, the Public contracts containers; or TNCs to which they are accredited. (DOTr
Doctrinal Pronouncements Related to the Service Act, Code of e) Order or act of a competent Order 2018-013, Sec. 2)
Determination of Common Carriers Commerce, and other public authority. (Civil Code, Art.
 The Civil Code does not distinguish between special laws 1734) Example: Grab and Angkas are examples of a
one whose principal activity is the carrying of regarding 2. Deaths and injuries caused to passengers. TNC, while a Grab driver and Angkas rider are
goods and one who does such carrying of transportation. (Civil Code, Art. 1756) examples of TNVS.
goods only as an ancillary activity. (A.F. Required to exercise Only required to
Sanchez Brokerage Inc. v. CA, 488 Phil. 430) extraordinary exercise ordinary Disputable Presumption of Fault or
 The Civil Code does not distinguish between diligence diligence Negligence on Common Carriers B. VIGILANCE OVER GOODS
a person or enterprise offering transportation Common carriers are No presumption of Common carriers are presumed to be or
services on a regular or scheduled basis and presumed to be at fault or negligence is negligent if the goods transported by them are
one offering such service on an unscheduled fault or negligent in present for private lost, destroyed, or deteriorated. This also applies General Rule: Common Carriers are responsible
basis. (De Guzman v. CA, 250 Phil. 613) cases of losses of the carriers. to deaths and injuries caused to passengers. for the loss, destruction, or deterioration of the
 The Civil Code does not distinguish between effects of the (Civil Code, Art. 1735 & Art. 1756) goods they are transporting. (Civil Code, Art.
a carrier offering its services to the general passengers or injuries 1734)
population and one who offers its services caused to passengers To overcome this presumption, the common
only from a narrow segment of the general (Sps. Pereña v. Sps. Zarate, 693 Phil. 373) carrier must prove that he exercised Mere proof of delivery of goods in good order to
population (Id.) extraordinary diligence in transporting the goods the common carrier and the arrival of the same
 A Certificate of Public Convenience is not a and/or passengers. goods in bad order at their destination constitutes
1. DILIGENCE REQUIRED OF COMMON
requisite to incur liability under the Civil Code prima facie case of fault or negligence against the
CARRIERS
provisions governing common carriers. (Id.) In order to prove the exercise of extraordinary carrier. (Belgian Overseas Chartering and
 The Civil Code makes no distinction as to the Extraordinary Diligence or Responsibility of diligence, the carrier must do more than merely Shipping N.V. v. The Philippine First Insurance
means of transportation as long as it is done Common Carriers Regarding Passengers and showing the possibility that some other party Co., Inc., 432 Phil. 567)
through land, water, or air. (First Philippine Goods could be responsible for the damage. (Calvo v.
Industrial Corporation v. CA, 360 Phil. 852) Common carriers are required to exercise UCPB General Insurance, Co., Inc., 429 Phil. 1. EXEMPTING CAUSES
244)
 A carrier will be considered a common carrier extraordinary diligence both over the goods and
over the safety of the passengers they are Common carriers are responsible for the loss,
regardless of whether it owns the vehicle it
transporting, according to all the circumstances of 3. CLASSIFICATION OF TRANSPORT destruction, or deterioration of the goods,
used or has to actually hire one as long as the
each case. (Civil Code, Art. 1733) NETWORK VEHICLE SERVICES AND UNLESS the same is due to any of the following
entity holds itself out to the public for
TRANSPORT NETWORK COMPANIES causes ONLY:
transport of goods as a business. (Torres-
Madrid Brokerage, Inc. v. FEB Mitsui Marine The Common Carrier Is Not an Insurer of (1) Flood, storm, earthquake, lightning, or other
Absolute Safety Transport Network Companies (TNCs) natural disaster or calamity;
Insurance Co., 789 Phil. 413)
The common carrier is not required to exercise all Persons or entities that provide pre-arranged (2) Act of the public enemy in war, whether
the care, skill, or diligence the human mind can transportation services for compensation, using international or civil;
Private carriers are persons or entities who
an internet-based technology application or (3) Act or omission of the shipper or owner of
undertake to transport goods or persons from one conceive nor does it free the passenger from all
digital platform technology to connect passengers the goods;
place or another by special agreement in a possible risks. (Japan Airlines v. CA, G.R. No. with drivers using their personal vehicles. (DOTr
118664, 1998) (4) The character of the goods or defects in
particular instance only, without making the Order 2018-013, Sec. 1)
the packing or in the containers;
activity a vocation or without holding himself out

(5) Order or act of competent public authority. A tire blow-out is not considered a fortuitous containers is visible; otherwise, carrier Act or omission of If owner or shipper is
(Civil Code, Art. 1734) event, as there are human factors involved in the may be in estoppel the shipper or owner the proximate cause,
situation (Yobido v. CA, G.R. No. 113003, 1997) of the goods exempting
NOTE: The list of exemptions is an exclusive list. This particular exempting cause only refers to
High jacking is not an exempting cause under Art. cases when goods are lost or damaged while in If there is contributory
(1) Flood, Storm, Earthquake, Lightning, or 1734. However, common carriers are not held transit as a result of: negligence, mitigating
Other Natural Disaster or Calamity liable for the acts or events which cannot be a) Natural decay of perishable goods;
foreseen or are inevitable, provided that they b) Fermentation or evaporation of substances Immediate protest by
Conditions Required: exercised extraordinary diligence (De Guzman v. liable therefor; carrier; else: estoppel
1. Natural disaster was the proximate and CA, G.R. No. L-47822, 1988) c) Necessary and natural wear and tear of The character of the Exercise of due
only cause goods in transport; goods or defects in diligence to forestall
2. Common carrier must have exercised (2) Act of the Public Enemy In War, Whether d) Defects in the packages; or the packing or in the or prevent loss
due diligence to prevent or minimize the International or Civil e) Natural propensities of animals. (Belgian containers
loss before, during, and after the Overseas Chartering and Shipping N.V. v. Immediate protest by
occurrence of the natural disaster (Civil Conditions Required: Philippine First Insurance Co., Inc., 432 Phil. carrier; else: estoppel
Code, Art. 1739) 1. Act was the proximate and only cause; 567) Order or act of Said public authority
3. Common carrier not in delay. (Civil Code, 2. Common carrier must have exercised competent public had the power to
Art. 1740) due diligence to prevent or minimize loss If the improper packaging is known to the carrier authority issue the order
before, during, and after the act; and or his/her/its employees or the improper
Requisites for Caso Fortuito (Force 3. Common carrier not in delay (Civil Code, packaging is apparent under ordinary observation a. Requirement of absence of negligence
Majeure): Art. 1740) but nevertheless accepts it without protest, Art.
1. The event must be independent of 1734, paragraph 4 will not relieve the carrier from In order to avail the defense of natural disasters,
human will; (3) Act or Omission of the Shipper or Owner any liability (Calvo v. UCPB General Insurance it must be shown that the natural disaster must
2. The occurrence must render it impossible of the Goods Co., Inc., 429 Phil. 244) have been the proximate and only cause of the
for the debtor to fulfill its obligation in a loss, destruction, or deterioration. (Civil Code,
normal manner; Conditions Required: (5) Order or Act of Competent Public Authority Art. 1739). This defense cannot be availed then if
3. The debtor must not have participated or 1. If proximate cause, exempting the carrier is negligent.
aggravated the injury to the creditor; and 2. If contributory negligence, mitigating Condition Required:
4. The event must have been 3. Immediate protest by the carrier; 1. Said public authority had the power to b. Absence of delay
unforeseeable, or if it could be foreseen, otherwise, carrier may be in estoppel issue the order. (Civil Code, Art. 1740)
unavoidable. A common carrier is still liable, even though the
When the private respondent did furnish the Similar conditions: the order was lawful; or the loss, destruction, or deterioration of the goods
Fire cannot be considered as a natural disaster or common carrier with an inaccurate weight of the order was issued under legal processes of was caused by a natural disaster, when it incurs
calamity that exempts common carriers from payloader, the common carrier is nonetheless authority. (Ganzon v. CA, 244 Phil. 644) delay in the transportation of goods. (Civil Code,
liability. Fire will only exempt carriers if it was liable, for the damage caused to the machinery Art. 1740)
caused by lightning or by other natural disaster or could have been avoided by the exercise of Summary Table: Art. 1734 and Defenses
calamity (Eastern Shipping Lines, Inc v. reasonable skill and attention on its part in CONDITIONS
DEFENSES c. Due diligence to prevent or lessen the
Intermediate Appellate Court, 234 Phil. 455) overseeing the unloading of such a heavy REQUIRED
losses
equipment. It was the duty of its Chief Officer to Flood, storm, Proximate and only
Heavy seas and rain are not causes for carriers determine the weight of heavy cargoes before earthquake, lightning, cause;
Common carriers are required to exercise due
to be exempted from liability. Rather, those are accepting them (Compania Maritima v. CA, G.R. or other natural
diligence to prevent or minimize the loss,
normal occurrences that a vessel would No. 31379, 1997) disaster or calamity
destruction, or deterioration of the goods in the
encounter (Eastern Shipping Lines, Inc v. Act of the public Exercise of diligence
following exempting causes:
Intermediate Appellate Court, 234 Phil. 455) (4) The Character of the Goods or Defects in enemy in war, to prevent or minimize
1. Natural disasters
the Packing or In The Containers whether international loss; and
2. Acts of public enemy in war
Mechanical defects are not within the ambit of a or civil
3. Character of the goods or defects in the
natural disaster or fortuitous events. (Necesito v. Conditions Required: No delay
packaging or in the containers
Paras, 104 Phil. 75) 1. Exercise of due diligence to forestall or
prevent loss; and
2. Immediate protest by the carrier if the
problem with the goods or the packing or

2. CONTRIBUTORY NEGLIGENCE constructive delivery. After all, the issuance of usual route in cases of loss, destruction, or (7) That the common carrier is not responsible
a bill of lading is prima facie evidence of the deterioration of the goods. (Civil Code, Art. for the loss, destruction, or deterioration of
If the shipper/owner contributed to the loss, receipt of the goods by the carrier (Saludo v. CA, 1747) goods on account of the defective condition
destruction, or deterioration of the goods caused G.R. No. 95536) c) For delay on account of strikes or riots is of the car, vehicle, ship, airplane or other
proximately by the common carrier, the carrier’s valid. (Civil Code, Art. 1748) equipment used in the contract of carriage.
liability shall be equitably reduced. (Civil Code, c. Temporary unloading or storage d) To the value of the goods appearing in the bill (Civil Code, Art. 1745)
Art. 1741) of lading is valid, unless the shipper/owner
General Rule: Common carriers are still required declares a greater value. (Civil Code, Art. b. Limitation of liability to a fixed amount
3. DURATION OF LIABILITY to exercise extraordinary diligence over the 1749)
goods, even if the goods are temporary unloaded A contract can fix the sum that may be recovered
Common carriers are required to exercise or stored in transit. Determination if stipulation is within public by the shipper/owner in case of loss, destruction,
extraordinary diligence over the goods to be policy or deterioration of the goods. It must be:
transported: Exception: Common carriers are not required to The fact that the common carrier has no 1. Reasonable and just under the
 From the time the goods are unconditionally exercise extraordinary diligence anymore if the competitor along the line or route, or a part circumstances; and
placed in the possession of and received by shipper/owner has made use of their right of thereof, to which the contract refers shall be taken 2. Fairly and freely agreed upon. (Civil
carrier until the goods are delivered, actually stoppage in transitu. (Civil Code, Art. 1737) into consideration on the question of whether a Code, Art. 1750)
or constructively, to the consignee or to the stipulation limiting the common carrier's liability is
person who has a right to receive them and a Stoppage In Transitu reasonable, just and in consonance with public c. Limitation of liability in absence of
reasonable time is given to remove the Right of an unpaid seller to stop delivery and policy. (Civil Code, Art. 1751) declaration of greater value
goods. (Civil Code, Art. 1736; Nedlloyd B.V. regain possession of the goods while they
Rotterdam v. Glow Laks, G.R. No. 156330, are in transit to the buyer who has been NOTE: Presumption of negligence against the General Rule: A stipulation limiting the carrier’s
2014) declared bankrupt/insolvent. carrier in cases of loss, destruction, or liability to the value of the goods appearing in the
 Even when the goods are temporarily deterioration of the goods is still present despite bill of lading is valid.
unloaded or stored in transit, unless the 4. STIPULATION FOR LIMITATION OF stipulations limiting liability. (Civil Code, Art.
shipper used right of stoppage in transit. LIABILITY 1752.) Exception: Unless the shipper/owner declares a
 Even during the time of the storage at the greater value. (Civil Code, Art. 1749)
warehouse of the common carrier at place of Degree less than extraordinary diligence a. Void Stipulations
destination, until consignee is advised of the The Common carrier and the shipper/owner can
5. LIABILITY FOR BAGGAGE OF PERSONS
goods’ arrival and has had opportunity to stipulate in limiting the carrier’s liability for the The following are void stipulations in a contract of
remove or dispose them. loss, destruction, or deterioration of the goods to carriage for being unreasonable, unjust, and a. Checked-in baggage
be transported to a degree less than contrary to public policy:
a. Delivery of goods to common carrier extraordinary diligence. This stipulation is valid if (1) That the goods are transported at the risk of Checked-in baggage is considered “goods” and
it is: the owner or shipper; the passenger is considered the
The fact that only a portion of the goods had been 1. In writing, signed by the shipper or (2) That the common carrier will not be liable for shipper/consignee. Thus, extraordinary
delivered and loaded to the carrier does not owner; any loss, destruction, or deterioration of the diligence is required. (Civil Code, Art. 1754)
impair the contract of carriage, as the goods still 2. Supported by a valuable consideration goods;
remained in the custody and control of the carrier. other than the service rendered by the (3) That the common carrier need not observe b. Baggage in possession of passengers
(Ganzon v. CA, 244 Phil. 664) carrier; and any diligence in the custody of the goods;
3. Reasonable, just, and not contrary to (4) That the common carrier shall exercise a
Hand-carried baggage are considered items of
b. Actual or constructive delivery public policy (Civil Code, Art. 1744) degree of diligence less than that of a good
necessary deposit. Common carriers shall be
father of a family, or of a man of ordinary
treated as depositaries. Thus, only ordinary
Actual delivery is when possession has been Other Stipulations Limiting Liability of prudence in the vigilance over the movables
diligence is required. (Civil Code, Art. 1754)
turned over to the consignee or to his duly Common Carrier transported;
authorized agent and a reasonable time is given A stipulation limiting the common carrier’s liability: (5) That the common carrier shall not be
Inspection Duties
to him to remove the goods (Westwind Shipping a) May be annulled by the shipper/owner if the responsible for the acts or omission of his or
General Rule: Carrier may only inquire into the
Corporation v. UCPB General Insurance Co., carrier refused to carry the goods, unless the its employees;
nature of the passenger’s baggage, but not
Inc., 722 Phil. 38) shipper/owner agreed to such stipulation (6) That the common carrier's liability for acts
search nor inspect its contents Inquiry may be
(Civil Code, Art. 1746) committed by thieves, or of robbers who do
made as to the nature of passengers’ baggage,
Delivery of the bill of lading to the consignee or b) Cannot be availed of if the common carrier, not act with grave or irresistible threat,
but beyond this, constitutional boundaries are
any person who has a right to receive the goods without just cause, delays the transportation violence or force, is dispensed with or
already in danger of being transgressed (Nocum
under the bill of lading can be considered as a of the goods or changes the stipulated or diminished;

v. Laguna Tayabas, G.R. No. L-23733, October Presumption of negligence applies so long as: 2. DURATION OF LIABILITY For passengers of ships, the SC has ruled that a
31, 1969). 1. A contract exists between the passenger reasonable time to leave and pick up baggage is
and the common carrier; and The duty to exercise extraordinary diligence an hour after arrival (Id.)
Exception: Airline companies are required to 2. The injury or death took place during the commences when the passenger places himself
inspect each and every cargo brought into the existence of the contract (Sulpicio Lines, in the care and control of the common carrier who
accepts him/her as a passenger 3. LIABILITY FOR ACTS OF OTHERS
aircraft (R.A. No. 6235, Sec. 8) Inc. v. Sesante, G.R. No. 172682)
NOTE: Do not confuse perfection of the contract a. Employees
Hand-Carried Baggage v. Checked-in Defenses available to common carriers
of carriage with the commencement of the duty to
Baggage 1. Proof that they exercised extraordinary Common carriers are liable for the death or
exercise extraordinary diligence. The contract of
HAND- CHECK-IN diligence; or injuries to passengers through its employees’
carriage may be perfected in January while the
CARRIED 2. Proof that the injury or death was caused by negligence or willful acts. This liability exists even
duty to exercise extraordinary diligence may only
Applicable Civil Code, Civil Code, a fortuitous event. (Sanico v. Colapino, G.R. if the employees may have acted beyond the
start or commence in March.
Rule Arts. 1998, Arts. 1733- No. 209969) scope of their authority or in violation of their
2000-2003 1753 orders of the common carriers. (Civil Code, Art.
a. Waiting for carrier or boarding of carrier
Legal Necessary Goods In order for a common carrier to be absolved of 1759)
Nature of deposit liability for accidents caused by fortuitous events,
A public vehicle, once it stops, is in effect making
Baggage the common carrier must still prove that it is not
a continuous offer to prospective passengers. A Common carrier’s liability to the acts or
Diligence Ordinary Extraordinary negligent in causing the injuries resulting from the negligence of its employees will be extinguished
Hence, it becomes the duty of the drivers and
Required diligence diligence accident (Bachelor Express v. CA, 266 Phil. 233) if it is able to show diligence of a good father of a
conductors to do no act which would have the
family in the selection and supervision of its
effect of increasing the peril to a passenger while
The presumption of negligence will not apply if the employees. (Civil Code, Art. 1759)
he/she was attempting to board the vehicle.
injury of the passenger was not caused by any
C. SAFETY OF PASSENGERS (Dangwa Transportation Co., Inc. v. CA, 278 Phil.
defect in the means or method of transport or to Art. 1759 of the Civil Code does not establish a
629)
the negligent or willful acts of the common presumption of negligence similar to Art. 1756.
carrier’s employees. (G.V. Florida Transport, Inc. Instead, it makes the common carrier explicitly
Common Carriers are bound to carry passengers It is the duty of common carriers to stop their
v. Heirs of Battung, G.R. No. 208802) liable for deaths and injuries caused by the fault
as far as human care and foresight can provide, conveyances at a reasonable length of time in
order to afford the passengers an opportunity to or negligence of the carrier’s employees.
using the utmost diligence of very cautious
1. VOID STIPULATIONS (Sulpicio Lines, Inc. v. CA, G.R. No. 172682)
persons, with a due regard for all the board and enter. Carriers become liable for
circumstances. (Civil Code, Art. 1755) injuries suffered by boarding passengers
General Rule: A common carrier’s liability cannot b. Other passengers and strangers
resulting from the starting up or jerking of the
be dispensed with or lessened by stipulation,
Despite the requirement of the exercise of the vehicle while boarding. (Id.)
posting of notices, statements on tickets, or Common Carriers are responsible for injuries to
highest degree of diligence, common carriers
otherwise. A reduced fare also cannot justify passengers caused by other passengers or
should not be considered as insurers of the limited liability. (Civil Code, Art. 1757 & 1760)
b. Arrival at destination
strangers if the carrier’s employees could have
absolute safety of the passengers (Pilapil v. CA,
prevented or stopped the act causing the injury
259 Phil. 1031) The duty to exercise extraordinary diligence
Exception: If the carriage is gratuitous or for free, through the exercise of the diligence of a good
a stipulation limiting liability is valid. terminates, when the passenger alights from the
father of a family. (Civil Code, Art. 1763)
Passenger vehicle at the place of destination and has
One who travels in a public conveyance by virtue Exception to the Exception: The stipulation reasonable opportunity to leave the common
Common carriers should be given sufficient
of an express or implied contract with the
limiting liability does not cover a carrier’s willful carrier’s premises. (Aboitiz Shipping Corporation
leeway in assuming that the passengers they
common carrier paying fare or what is equivalent acts or gross negligence. (Civil Code, Art. 1758) v. CA, 258-A Phil. 665)
take in will not bring in anything that would prove
thereof. (Jesusa Vda. De Nueca v. Manila
Railroad Company, G.R. No. 31731-R, 1968) dangerous to himself/herself or to other
NOTE: Moral damages may be recovered in an All persons who remain on the premises a
passengers unless there is something that will
action for breach of contract of carriage when reasonable time after leaving the conveyance are
require a more stringent search. (Nocum v.
Presumption of Negligence deemed passengers. What constitutes as a
death results. Even if the passenger does not die, Laguna Tayabas Bus Company, 140 Phil. 459)
Common Carriers are presumed to be negligent the passenger can recover moral damages if the “reasonable time” is to determined from all the
in cases of death or injuries to passengers, unless circumstances, which includes a reasonable time
carrier is guilty of fraud or bad faith. However,
they prove extraordinary diligence. (Civil Code, to see after his/her baggage and prepare for
only the passenger is entitled to moral damages
Art. 1756) his/her departure. (Id.)
not anyone else.

4. LIABILITY FOR DELAYS IN THE Rule on Moral Damages The issuance of a bill of lading carries the
COMMENCEMENT OF VOYAGE General Rule: Moral damages are not presumption that the goods were delivered to b. Delivery without surrender of bill of
recoverable in actions for damages predicated on the carrier issuing the bill and is prima facie lading
If the departure of a vessel is delayed, the a breach of contract of carriage. evidence of the receipt of the goods by the
passengers have the right to: carrier (Saludo v. CA, G.R. No. 95536) The surrender of the bill of the original bill of
1. Remain on board; and Exceptions: Moral Damages may be awarded in lading is not a condition precedent for a common
2. Be furnished with food for the account of the a breach of contract caused by the common 2. It is a contract between the parties; and carrier to be discharged of its contractual
vessel. (Code of Commerce, Art. 698) carrier where: obligation.
1. There is death of a passenger (Civil The acceptance of a paper containing the
These rights will not be present if the delay is due Code, Art. 1764) or terms of a proposed contract generally If the surrender is not possible,
to an accidental cause or force majeure. (Code 2. The carrier was guilty of fraud or bad faith constitutes an acceptance of the contract and acknowledgment of delivery by singing the
of Commerce, Art. 698) even if there is no death. (Sulpicio Lines, all of its terms and conditions of which the delivery receipt suffices. (Republic of the
Inc. v. Curso, G.R. No. 157009) acceptor has actual or constructive notice. Philippines v. Lorenzo Shipping Corporation, 491
If the delay exceeds ten days, the passengers (Keng Hua Paper Products, Co., Inc. v. CA, Phil. 151)
are entitled to: 349 Phil. 925)
1. The return of the passage, should the D. BILL OF LADING c. Refusal of consignee to take delivery
passengers request it; and 3. It is a symbolic representation of the
2. Demand indemnity for losses and damages, goods, i.e., it is a document of title Instances When Consignee Can Refuse to
if the delay is caused exclusively by the A Bill of Lading is a written acknowledgment of Accept the Goods
captain or agent. (Code of Commerce, Art. the receipt of the goods and an agreement to In the charter of the entire vessel, the bill of a. Only a PART of the goods are delivered and
698) transport and deliver them at a specified place to lading issued by the master to the charterer it cannot make use of the goods without the
a person named or on his/her order. It is signed is in fact a receipt and document of title, not a others (Code of Commerce, Art. 363)
5. LIABILITY FOR DEFECTS IN by the captain and shipper, and furnished to the contract. (Home Insurance v. American
b. If the goods are DAMAGED and thus
EQUIPMENT AND FACILITIES consignee (Saludo, Jr. v. CA) Steamship Agencies, Inc., 131 Phil. 552)
rendered useless for the purposes of sale or
consumption. In this instance, the consignee
The carrier will be liable for the accident if the NOTE: It is not indispensable to the creation of a 2. DELIVERY OF GOODS may leave the goods to the carrier and
cause of the accident is a mechanical defect of contract of carriage. The contract itself arises demand payment for the goods at its current
the conveyance or the fault of the equipment from the moment the goods are delivered by the Common carriers are obliged to deliver the goods market price (Code of Commerce, Art. 365)
which was easily discoverable if the vehicle had shipper to the carrier and the carrier agrees to in the same condition which they were at the time c. When there is DELAY on account of the fault
been subjected to more thorough or rigid carry them. of their receipt, without any detriment or
of the carrier. This is considered to be an
inspections. (La Mallorca v. De Jesus, 123 Phil. impairment. (Code of Commerce, Art. 363) abandonment. In this case, the carrier shall
857) The bill of lading must state: satisfy the total value of the goods as if the
(1) The name, registry, and tonnage of the This obligation will not apply if the goods
goods were lost or misplaced. (Code of
6. EXTENT OF LIABILITY FOR DAMAGES vessel; suffered damage or impairment: Commerce, Art. 371)
(2) The name of the captain and the captain’s 1. Due to accidents;
Damages can be awarded in cases of injuries domicile; 2. Due to force majeure; or
suffered by or deaths of passengers in 3. By virtue of the nature or defect of the
3. PERIOD FOR FILING CLAIMS
(3) The port of loading and unloading;
accordance to the provisions of the Civil Code on (4) The name of the shipper; goods (Code of Commerce, Art. 363 &
The period of filing of claims will depend on
Damages. (Civil Code, Art. 1764) (5) The name of the consignee, if the bill of lading Code of Commerce, Art. 361)
whether the damage or average can be
is issued to order; determined from the exterior of the packaging:
Kinds of Damages (6) The quantity, quality, number of packages, a. Period of delivery  If the damage CAN BE ASCERTAINED
(1) Actual or Compensatory Damages and marks of the merchandise; and from the exterior of the packaging –
(2) Moral Damages (7) The freight and the primage stipulated (Code The period of delivery will depend on what is Claims should be filed upon the receipt of the
(3) Exemplary Damages of Commerce, Art. 706) provided on the bill of lading. package;
(4) Nominal Damages  No fixed period – First shipment of the same  If the damage CANNOT BE ASCERTAINED
(5) Temperate Damages 1. THREE-FOLD CHARACTER or similar goods which the carrier may make from the exterior of the packaging –
(6) Liquidated Damages to the point of delivery. (Code of Commerce, Claims should be filed within twenty-four (24)
(7) Attorney’s Fees A bill of lading serves three purposes: Art. 358) hours following the receipt of the goods.
 Stipulated period – Within the period
1. It is receipt of the goods shipped; provided in the bill of lading. (Code of
Commerce, Art. 370)

No claims shall be admitted against the Common was agreed upon, the carrier must select the General Categories or Kinds of Charter Party d. Supercargo — the person specially
carrier with regard to the condition of the goods shortest, least expensive, and practically DEMISE / CONTRACT OF employed by the owner of cargo to take
after the lapse of these periods. (Code of passable route. (Id.) BAREBOAT AFFREIGHTMENT charge of and sell to the best advantage
Commerce, Art. 366) The charterer mans The owner of a vessel merchandise which has been shipped, and to
Change in the Consignment of Goods the vessel with its leases the whole or purchase returning cargoes and to receive
Claims are conditions precedent to the accrual The shipper may change the consignment of the own people, and is part of its space to freight
of a right of action to recover damages. (Southern goods delivered to the common carrier as long as considered the owner haul goods for
Lines, Inc. v. CA, 114 Phil. 198) the place of delivery is not changed. The change pro hac vice (for this another. a. Liability for acts of captain
is considered a novation. The carrier shall comply occasion only).
4. PERIOD FOR FILING ACTIONS with this change, provided that the bill of lading be The ship owner and ship agent shall be civilly
returned to the carrier at the time of the making Owner completely Owner retains liable for the:
Actions relating to the delivery of cargo or to the the change of the consignee. (Code of and exclusively possession, 1. Acts of the captain; and
indemnity for delays and damages suffered by Commerce, Art. 360) relinquishing command, and 2. The obligations contracted by the captain to
the goods transported prescribe after one (1) possession, navigation of the ship. repair, equip, and provision the vessel,
year. All expenses arising from the change of command, and provided the creditor proves that the amount
consignment shall be shouldered by the shipper. navigation to the claimed was invested therein. (Code of
The prescriptive period will be counted from: (Code of Commerce, Art. 360) charterer. Commerce, Art. 586)
1. The day of delivery of the cargo at the place Charterer is liable for Shipowner is liable for
of its destination; or damages damages The ship agent shall also be civilly liable for the
2. From the day on which it should be delivered E. MARITIME COMMERCE Carrier is converted Carrier remains as indemnities in favor of third persons which arose
according to the conditions of its to private carrier – common carrier – from the conduct of the captain in the care of the
transportation. (Code of Commerce, Art. 952) ordinary diligence extraordinary goods. However, the agent may exempt himself
1. CHARTER PARTIES diligence from this liability by abandoning the vessel with
Claim vs. Suit all her equipment and the freight he may have
CLAIM File a CLAIM against the carrier: A Charter Party is a contract by virtue of which b. Time charter earned during the voyage. (Code of Commerce,
 Upon receipt of the goods; or the owner or the agent of a vessel binds himself Art. 587)
 Within 24 hours following the to transport merchandise or persons at a fixed The leased vessel is leased to the charterer for a
receipt of the merchandise price. (San Miguel Corporation v. Heirs of Inguito, fixed period of time. (San Miguel Corporation v. When Ship Owner/Ship Agent is NOT Liable
SUIT The CLAIM is a condition precedent 433 Phil. 428) Heirs of Inguito, 433 Phil. 428) The ship owner and ship agent shall NOT be
to the filing of a SUIT. liable for obligations contracted by the captain
A Charter Party may either be: c. Voyage/trip charter which exceeds the powers and privileges granted
The consignee shall file a SUIT 1. Bareboat or demise charters; or to the latter. However, the owner and agent will
within 1 year from either: 2. Contracts of affreightment, which includes The ship is leased for a single voyage. (San be again liable if the amounts claimed were used
 Delivery of the goods; or time charters and voyage charters. (San Miguel Corporation v. Heirs of Inguito, 433 Phil. for the benefit of the vessel. (Code of Commerce,
 Denial of the claim Miguel Corporation v. Heirs of Inguito, 433 428) Art. 588)
Phil. 428)
5. EFFECTS OF STIPULATIONS 2. LIABILITY OF SHIPOWNERS AND b. Exceptions to limited liability
a. Bareboat/demise charter
SHIPPING AGENTS
Change of Route Limited Liability Rule
General Rule: Common carriers cannot change Under a Bareboat/Demise Charter, the charterer Persons Participating in Maritime Commerce General Rule: The liability of the ship owner is
the agreed route to which the transportation is to mans the vessel with his own people and a. Ship owner and/or ship agent – the ship limited to the value of the vessel, its equipment,
be made. (Code of Commerce, Art. 359) becomes, in effect, the owner of the ship for the agent is the person entrusted with the and freight. The rule is “no vessel, no liability.”
voyage or service stipulated, subject to the provisioning of a vessel or who represents (Code of Commerce, Art. 837)
Exception: When the carrier is obliged to change liability for damages caused by negligence. (San her in the port in which she may be found
its route due to force majeure. If the transportation Miguel Corporation v. Heirs of Inguito, 433 Phil. b. Captain or Master — the person in charge of Exceptions:
costs increase in such an instance, the carrier 428) the vessel and navigates it. The captain also 1. The injury or death is due either to the fault of
shall be reimbursed for the increase. (Id.) acts as the general agent of the ship owner. the shipowner or to the concurring negligence
c. Other officers of the vessel (i.e. sailing of the shipowner and captain
NOTE: If the carrier changes its route without just mate, second mate, third mate, marine 2. The vessel is insured
cause, the carrier shall be liable to pay damages engineer)
suffered by the goods for any cause. If no route

3. Workmen’s Compensation Cases (Chua Yek movement. (A. Urrutia Co v. Baco River account of the owners, the part of the wreck which
Hong v. Intermediate Appellate Court, 248 This shall be borne by the owner of the goods Plantation Co., 26 Phil. 632) may be saved belonging to them in the same
Phil. 422) which gave rise to the expense or suffered proportion. (Code of Commerce, Art. 840)
the damage. (Code of Commerce, Art. 810) Rules Governing Collisions
Who Can Exercise the Right of Abandonment (1) If a vessel collides with another through the Exception: If the wreck or stranding should arise
General Rule: Only the ship owner and the ship 2. General or Gross Average – The expenses fault, negligence, or lack of skill of the through the malice, negligence, or lack of skill of
agent can make an abandonment. and damages which are deliberately caused captain, sailing mate, or any other member of the captain, or because the vessel put to sea
in order to save the vessel, her cargo, or the crew, the owner of the vessel at fault shall insufficiently repaired and prepared, the owner or
Exception: in cases of co-ownership of a vessel, both at the same time, from a real known be liable for the suffered losses and damages the freighters may demand indemnity of the
a co-owner may exempt himself from liability by risk. (Code of Commerce, Art. 811) after appraisal (Code of Commerce, Art. 826) captain for the damages caused to the vessel or
the abandonment of the part of the vessel (2) If both colliding vessels are at fault, each cargo by the accident. (Code of Commerce, Art.
belonging to him. This shall be borne by all persons having an vessel shall be liable for its own damages. 841)
interest in the vessel and cargo at the time of Moreover, both vessels shall be solidarily
Abandonment may be done to avoid liability the occurrence of the average. (Code of liable to the damages suffered by their Maritime Protest
in the following cases: Commerce, Art. 812) cargoes. (Code of Commerce, Art. 827) It is a written statement under oath, made by the
a. For civil liability to third persons arising from (3) If it cannot be determined which of the two master of a vessel, after the occurrence of an
the conduct of the captain in the vigilance To incur the expenses and cause of damages vessels are at fault, it will be considered as if accident or disaster in which the vessel or cargo
over the goods which the vessel carried; as general/gross average, there must be: both vessels are at fault. Therefore, both is lost or injured, with respect to the
b. For the proportionate contribution of co- 1) A resolution of the captain, adopted after vessels shall be liable for their own damages circumstances attending such occurrence.
owners of the vessel to a common fund for deliberation with the sailing mate and but solidarily liable for the damages suffered
the results of the acts of the captain referred other officers of the vessel; and by their cargoes. This is also called as the It is intended to show that the loss or damage
to in Art. 587 of the Code of Commerce; and 2) A hearing with the persons interested in Doctrine of Inscrutable Fault. (Code of resulted from a peril of the sea, or some other
c. For the civil liability incurred by the ship the cargo who may be present. (Code of Commerce, Art. 828) cause for which neither master nor owner was
owner in case of collision. Commerce, Art. 813) (4) If a vessel is forced to collide with another by responsible, and concludes with a protest against
reason of accident or force majeure, each any liability of the owner for such loss or damage.
3. ACCIDENTS AND DAMAGES IN b. Collisions and allisions vessel shall be liable for their own damage.
MARITIME COMMERCE (Code of Commerce, Art. 830) It is a condition precedent or prerequisite to
Collisions – The impact of two or more vessels, (5) If a vessel is forced to collide with another by recovery of damages arising from collisions and
a. General Average both of which are moving. a third vessel, the owner of the third vessel other maritime accidents (Code of Commerce,
shall indemnify all losses and damages Art. 835)
Averages are: Allisions – The impact between a moving vessel caused. The captain of the third vessel will
1. All extraordinary or accidental expenses against a stationary object. then be liable to the owner of the third vessel.  Made By Whom: Captain
which may be incurred during the navigation (Code of Commerce, Artlcle 832)  When Made: Within 24 hours from the time
for the preservation of the vessel or cargo, or Zones of Collision and the Doctrine of Error in (6) If a storm or force majeure forces a properly the collision took place (Code of Commerce,
both; or Extremis: anchored and moored vessel to collide with Art. 835); Upon arrival at the place of
2. All damage or deterioration the vessel may 1. First Zone – All the time up to the moment other vessels in her immediate vicinity, the destination, the captain shall ratify the protest
suffer from the time she puts to sea from the the risk of collision begins; damages caused shall be considered as a within 24 hours.
port of departure until she casts anchor in the 2. Second Zone – All the time from the moment simple/particular average. (Code of  Before Whom Made: Competent authority at
port of destination, and those suffered by the the risk of collision begins up to the moment Commerce, Art. 832) the point of collision or at the first port of
merchandise from the time it is loaded in the the collision becomes a practical certainty; arrival, if in the Philippines and to the
port of shipment until it is unloaded in the port and Shipwreck Philippine consul, if the collision took place
of consignment. (Code of Commerce, Art. 3. Third Zone – All the time when the collision It covers all types of loss/wreck of a vessel at sea abroad (Code of Commerce, Art. 835)
806) is certain up to the point of impact. (A. Urrutia either by being swallowed up by the waves or by
Co v. Baco River Plantation Co., 26 Phil. 632) running against another vessel or thing at sea or Maritime Protest is Required In The Following
Averages shall either be: at the coast and the vessel is rendered incapable Cases:
1. Simple or Particular Average – The Doctrine of Error in Extremis of navigation. a. Collision;
expenses and damages caused to the vessel A sudden movement by a faultless vessel during b. Arrival under stress
or to her cargo which have not redounded to the third zone of collision with another vessel Liability in Shipwrecks c. Shipwreck; and
the benefit of all persons interested in the which is at fault during the second zone of General Rule: The losses and deteriorations d. In case the vessel has gone through a
vessel and her cargo. (Code of Commerce, collision will not make the faultless vessel suffered by a vessel and her cargo by reason of hurricane or when the captain believes
Art. 809) responsible for any fault due to the sudden shipwreck or stranding shall be individually for the that the cargo has suffered damages.

Salvor takes Tower has no The carrier shall be bound before and at the In such instances, the Civil Code rules on
Maritime Protest shall also be done if the vessel possession and may possessory lien; only beginning of the voyage, to exercise due prescription shall apply.
having been wrecked, the captain is saved alone retain possession an action for recovery diligence to:
or with part of the crew, in which case, the captain until of sum of money 1. Make the ship seaworthy c. Period of prescription
shall appear before the nearest authority and he is paid 2. Properly man, equip, and supply the ship
make a sworn statement of the facts. Court has power to Court has no power to 3. Make the holds, refrigerating and cooling Actions must be brought within one (1) year after:
reduce the amount of change amount in chambers, and all other parts of the ship 1. Delivery of the goods; or
Salvage - it is the compensation allowed to remuneration if towage even if in which goods are carried, fit and safe 2. The date when the goods should have been
persons by whose voluntary assistance a ship at unconscionable unconscionable for reception, carriage and, preservation. delivered. (COGSA, Sec. 3[6])
sea or her cargo or both have been saved in
whole or in part from an impending peril, or such 4. CARRIAGE OF GOODS BY SEA ACT b. Notice of loss or damage Failure to file within the prescriptive period will
property recovered from actual peril or loss. discharge the common carrier and the vessel
a. Application When there is loss or damage of the goods, there from liability. (COGSA, Sec. 3[6])
In case of shipwreck, derelict or recapture; a must be a written notice that provides:
service which one person renders to the owner of The COGSA is the applicable law for all contracts 1. The general nature of such loss or However, the shipper shall not lose the right to
a ship or goods by his own labor, preserving the of carriage by sea to and from the Philippines in damage initiate an action against the carrier or the vessel
goods or ship which the owner or those entrusted foreign trade. (COGSA, Sec. 1 & Cua v. Wallem 2. Given to the carrier or his agent if no notice of loss or damage is given. (COGSA,
with the care of them either abandoned in distress Philippines Shipping, Inc., 690 Phil. 491) 3. At the port of discharge or at the time of Sec. 3[6])
at sea or are unable to protect and secure. the removal of the goods.
However, it may also apply to domestic trade When The One-Year Period In COGSA Is
Derelict provided there is a Paramount Clause in the If the loss or damage is not apparent, the notice Interrupted:
It is a ship or cargo which is abandoned and contract. must be given within 3 days from delivery. The a. When an action is filed in court; (Universal
deserted at sea by those who are in charge of it, notice of loss or damage may be endorsed upon Shipping Lines v. IAC, G.R. No. 74125,
without any hope of recovering it, or without any Paramount Clause - a stipulation or clause the receipt for the goods given by the person 1990); and
intention of returning to it. either on the bill of lading or charter party taking delivery thereof. b. When there is a contrary agreement between
stipulating the laws that the parties agreed to the parties. (Stevens v. Norddeuscher, G.R.
Elements of a Valid Salvage be used of that particular transport. The notice or writing need not be given if the No. L-17730, 1962)
1. A marine peril state of the goods at the time of their receipt has
2. Service voluntarily rendered when not Responsibility of the Carrier under the been the subject of Joint Survey Inspection. d. Limitation of liability
required as an existing duty or from COGSA (COGSA, Sec. 3(6))
special contract The responsibility of the carrier begins when the Carriers and vessels shall be liable for any loss or
3. Success, in whole or in part, or that the goods are brought to the carrier and crosses one Under COGSA, the filing of a notice of claim is damage in connection with the transportation of
services rendered contributed to such side of the vessel (portside). It ceases only when NOT a condition precedent to filing a suit goods. However, such liability is limited to:
success (Barrios vs. Go Thong, G.R. No. the goods cross the other side (starboard side). (UCPB v. Aboitiz Shipping G.R. No. 168433, 1. Maximum of $500 per package or, if not
L-17192, 1963) This is also known as the “tackle to tackle” rule. 2009) shipped in packages, per customary freight
unit (e.g. metric ton).
Contract of Towage Requisites of Contracts Covered by COGSA “Loss” contemplates merely a situation where 2. Carriers and vessels will be subject to greater
A contract to render service whereby a vessel e. Contracts for the carriage of goods no delivery at all was made by the shipper of the liability if the nature and value of goods are
pulls or tows another from one place to another f. By sea goods because the same had perished, gone out declared by shipper and inserted in bill of
for compensation. It is not a contract of carriage g. To and from Philippine ports of commerce, or disappeared in much a way that lading; declaration is prima facie evidence
or transportation. Only the owner of the towing h. In foreign trade their existence is unknown or they cannot be and not conclusive on carrier.
vessel can ask for compensation. recovered. 3. Shipper and carrier may agree on another
Shipper’s Guaranty upon Delivery of the It does not include a situation where: maximum amount, but not more than amount
Salvage v. Towage Goods to Carrier for Shipment  There was indeed delivery — but delivery of damage actually sustained. The fixed
SALVAGE TOWAGE The shipper guarantees at the time of shipment to the wrong person, or a misdelivery maximum amount must also not be less than
Crew of salvaging Crew of the towing the accuracy of the marks, number, quantity and (Ang. V. American Steamship, G.R. No. $500 per package/per customary freight unit.
ship is entitled to ship does not have weight of the goods. The shipper shall indemnify L-22491, 1967) (COGSA, Sec. 6 [5])
salvage, and can look any interest or rights the carrier against all losses, damages and  Damage arising from delay or late
to the salvaged vessel with the remuneration expenses arising from errors or inaccuracies. delivery (Mitsui O.S.K. Lines v. CA, G.R.
for its share pursuant to the No. 119571, 1998).
contract

F. PUBLIC SERVICE ACT Repormang Samahan ng mga Tsuper v. City of 1. Citizens of the Philippines; or 1. The Certificate of Public Convenience
Mandaluyong, G.R. No. 218593, [June 15, 2020]) 2. Corporations, co-partnerships, associations, granted to the new operator is a maiden
or joint stock companies constituted and certificate (Mandbusco, Inc. v. Francisco, 143
1. DEFINITION OF PUBLIC UTILITY No public utility or public service shall organized under the laws of the Philippines, Phil 372)
operate in the Philippines without securing a 60% of which is owned by Filipinos. (Public 2. The old operator does not offer to meet the
The term “public utility” includes: Certificate of Public Convenience/Certificate Service Act, Sec. 16 [a]) increase in traffic (Isidro v. Ocampo, 105 Phil.
1. Every individual, co-partnership, association, of Public Convenience and Necessity. (Public 911)
corporation, or joint-stock company, whether Service Act, Sec. 15) While the Public Service Act initially allowed 3. The old operator violated the law, in this case
domestic or foreign, their lessees, trustees, or American citizens and juridical entities to be by operating despite the expiration of its
receivers appointed by any court whatsoever, A certificate of public convenience does not vest granted with certificates of public convenience, franchise (Buenaflor v. Camarines Sur
or any municipality province or other property rights to its holder to conduct business this is essentially removed by Art. XII, Sec. 11 of Industry Corporation, 108 Phil. 472)
department of the Government of the along the route covered in it. It is a mere license the 1987 Constitution. The constitutional 4. If the application of the rule results in a
Philippines; or privilege. (Bagong Repormang Samahan ng provision states that no franchise, certificate, or monopoly (Raymundo Transportation Co.,
2. That may own, operate, manage, or control in mga Tsuper v. City of Mandaluyong, G.R. No. any other form for the authorization for the Inc. v. Cervo, 91 Phil. 313)
the Philippines, for hire or compensation, any 218593, 2020) operation of a public utility shall be granted except
common carrier, railroad, street railway, to citizens of the Philippines or corporations or iii. Ruinous competition
traction railway, subway, freight, and/or This privilege is subject to compliance with local associations organized under the laws of the
passenger motor vehicles, with or without traffic regulations because the Land Philippines at least 60% of whose capital is An opposition for an application for Certificate of
fixed route, freight or any other car service, Transportation Franchising and Regulatory owned by Philippine citizens. (1987 Constitution, Public Convenience based on ruinous
express service, steamboat or steamship Board's (LTFRB) authority to issue such Art. XII, Sec. 11) competition must show that that the opposing
line, ferries, small water craft; certificates is only supplemental to the right of party would be deprive of fair profits on the capital
3. Engaged in the business of transportation of local governments to control and regulate traffic ii. Promotion of public interests invested in its business. It must be shown that the
passengers or cargo, shipyard, marine in their localities. (Id.) business would not have sufficient gains to pay a
railway, marine repair shop, public Public necessity is the primary consideration for fair rate of interest on its capital investment. (Halili
warehouse, wharf, dock not under the a. Requisites the authorization of the operation of public v. Daplas, 121 Phil. 789)
jurisdiction of the Insular Collector of services and the issuance of certificates of public
Customs, ice, refrigeration, canal, irrigation, Before a certificate to operate a public service or convenience. (In re: Gregorio, 77 Phil. 906) Ruinous Competition, When Not Applicable
pipe line, gas, electric, light, heat, power, utility may be granted, the applicant must comply The argument of ruinous competition is not
water, oil, sewer, telephone, wire or wireless with three requisites: iii. Financial capability applicable in the following instances:
telegraph system, plant or equipment, and 1. The applicant must be a citizen of the 1. When public necessity requires that a new
broadcasting stations; Philippines, or a corporation, co-partnership, The commission shall have the power, without operator be allowed to put an additional
4. Whether the owner or operator be an association, joint stock company constituted previous hearing, to require any public service to service. (Raymundo Transportation Co., Inc.
individual, co-partnership, association, and organized under the laws of the furnish annual reports of finances and operations. v. Cervo, 91 Phil. 313)
corporation, or joint-stock company, either Philippines 60% at least of the stock or paid- (Public Service Act, Sec. 17 [h]) 2. The opponent only showed a mere possibility
domestic or foreign, or a trustee or receiver up capital of which entirely belongs to citizens of reduction in the earnings of a business
appointed by any court whatsoever, or any of the Philippines; b. Prior operator rule (Raymundo Transportation, Co., Inc. v.
municipality, province, or department of the 2. The applicant must be financially applicable Tanchingco, 97 Phil. 105)
Government of the Philippines, or any other of undertaking the proposed service and i. Meaning
entities. (Public Service Act, Sec. 14) meeting the responsibilities incident to its 3. FIXING OF RATE
operation; and The Prior Operator Rule provides that a public
What constitutes as public utility is not the 3. The applicant must prove that the operation utility operator should be afforded with an a. Rate of return
ownership thereof but their use or service to the of the public service will promote the public opportunity to improve its equipment and service
public. (Tatad v. Garcia, 313 Phil. 296) interest in a proper and suitable manner. The rate of return is a judgment percentage which
before allowing a new operator to serve in the
(Vda. de Lat v. Public Service Commission, provides a fair return on the public utility for the
same territory it covers. (Mandbusco, Inc. v.
2. NECESSITY FOR CERTIFICATE OF 241 Phil. 973) Francisco, 143 Phil 372) use of its property and service to the public. This
PUBLIC CONVENIENCE is fixed by administrative and judicial
i. Citizenship ii. Exceptions pronouncements. (Republic of the Philippines v.
Certificate of Public Convenience Manila Electric Company, 440 Phil. 389)
It is a permit authorizing operations of land Certificates of Public Convenience/Certificates of The invocation of the Prior Operator Rule is not
transportation services for public use. (Bagong Public Convenience and Necessity will be applicable in the following instances:
granted only to:

The jurisprudentially-provided rate of return for motor vehicles to operate them under his/her G. THE WARSAW CONVENTION
public utilities is 12% (Republic of the Philippines license. It is void contrary to public policy. (Lim v. Reason: The principal, in issuing a ticket with
v. Manila Electric Company, 440 Phil. 389) CA, 424 Phil. 457) several trips to be performed by various carriers,
1. APPLICABILITY guarantees the performance of the successive
b. Exclusion of income tax as expense It is a Void Contract for violating Public Policy carriers (i.e. they have a space for him and will
Hence, courts cannot grant affirmative relief to The Warsaw Convention applies to all transport him on a particular segment of the trip).
Income tax is not included in the computation of the parties of such arrangement under the international transportation of persons, baggage, (Lufthansa German Airlines v. CA, GR No.
the operating expenses of a public utility. It is principle of in pari delicto. (Lita Enterprises v. or goods performed by aircraft for hire. It applies 83612, 1994)
inconsistent with the nature of operating Intermediate Appellate Court, 214 Phil. 63) equally to gratuitous carriage by aircraft
expenses (Republic of the Philippines v. Manila performed by an air transport undertaking. Remedy: The remedy of the principal is to file a
Electric Company, 440 Phil. 389) The purpose of the law in enjoining the Kabit (Warsaw Convention, Art. 1[1]) third-party complaint or cross-claim against the
System is to identify the person upon whom the guilty carrier. (China Airlines v. Chiok, GR No.
Income tax is imposed on an individual or entity responsibility may be fixed in cases of accidents, “International Transportation By Air” 152122, 2003)
as a tax on the privilege of earning income. By its with the end view of protecting the riding public. Under the Warsaw Convention, “international
nature, income tax payments of a public utility are The policy then loses its application if the public, transportation by air” shall mean any 2. LIMITATION OF LIABILITY
not expenses which are incurred in connection at large is not deceived or involved; e.g. when the transportation in which the place of departure and
with the production of profit. (Republic of the participants of a Kabit System arrangement are place of destination are either: Quick Summary:
Philippines v. Manila Electric Company, 440 Phil. not being held liable for damages by the public 1. Within the territories of two Contracting a. For each passenger – limited to 250,000
389) arising from the operation of the public vehicle. Parties, regardless of whether or not there be francs
(Lim v. CA, 424 Phil. 457) a break in the carriage or transshipment; or b. For goods and checked-in baggage –
4. UNLAWFUL ARRANGEMENTS 2. Within the territory of a single Contracting limited to 250 francs per kilogram
5. APPROVAL OF SALE, ENCUMBRANCE Party, if there is an agreed stopping place c. For hand carry – limited to 5,000 francs
a. Boundary system OR LEASE OF PROPERTY within a territory subject to the sovereignty, per passenger (Warsaw Convention, Art.
mandate, or authority of another power, even 22)
Under the Boundary System, a driver is engaged The Land Transportation and Traffic Code though that power is not a party to the
to drive an operator’s vehicular unit. On each trip, provides for the compulsory registration of motor Convention. (Warsaw Convention, Art. 1[2]) Any stipulation in the contract relieving the carrier
the driver is required to remit to the operator a vehicles to the Land Transportation Office. of liability or fixing a lower limit of liability shall be
minimum amount – the “boundary”. Whatever the Furthermore, the same law requires all Carriage to Be Performed by Several null and void. (Warsaw Convention, Art. 23)
driver earns in excess of the minimum amount mortgages, attachments, and all other Successive Air Carriers
shall be the driver’s income (Paguio Transport encumbrances to be recorded to the LTO in order Transportation to be performed by several The nullity of the stipulation will not render the
Corporation v. National Labor Relations to be valid against third parties. (Land successive air carriers shall be deemed to be one entire contract of transportation null and void.
Commission, 356 Phil. 158) Transportation and Traffic Code, Sec.s 5 [a] & 5 undivided transportation if it has been regarded Only the stipulation which removed or lowered
[e]) by the parties as a single operation, whether it the carrier’s liability shall be considered void.
Relationship of Operator and Driver has been agreed upon under one contract or a (Warsaw Convention, Art. 23)
The relationship between the driver and the Registered Owner as Primarily Liable series of contracts. (Warsaw Convention, Art.
operator operating under the boundary system is Case law provides that the registered owner of 1[3]) a. Liability of passengers
considered to be an employer-employee the vehicle should primarily be responsible to the
relationship. (Doce v. Workmen’s Compensation public or to third persons for injuries caused while Moreover, such transportation will not lose its The carrier’s liability for each passenger shall be
Commission, 104 Phil. 946) the vehicle is being driven on the highway or international character merely due to one contract limited to 250,000 francs. If the liability of the
streets. (Erezo v. Jepte, 102 Phil. 103) being performed within the territory subject to the carrier is awarded in the form of periodical
Owners and operators of public vehicles who sovereignty of the same Contracting Party. (Id.) payments, the equivalent value of said payment
operate under the Boundary System cannot A sale or lease that is not registered does not shall not exceed 250,000 francs. (Warsaw
argue that they are only mere lessors in order for bind third persons who are aggrieved in tortuous Carrier Who Issued Ticket Deemed Principal Convention, Art. 22[1])
them to be exempted from liability caused by their incidents, for third persons only need to rely on The carrier issuing the passenger’s ticket is
drivers. (Sps. Hernandez v. Sps. Dolor, 479 Phil. the public registration of a motor vehicle as considered the principal party and other carriers The carrier and the passenger may agree to a
593) conclusive evidence of ownership. (PCI Leasing merely subcontractors or agents. higher limit of liability by special contract.
b. Kabit system and Finance, Inc. v. UCPB General Insurance (Warsaw Convention, Art. 22[1])
Co., Inc., 579 Phil. 418) Hence, the principal may be liable for damages
The Kabit System is an arrangement where a even when the breach of contract had occurred
person who is granted a certificate of public not on its own flight but on that of another airline.
convenience allows other persons who own (British Airways v. CA, GR No. 121824, 1998)

ATENEO CENTRAL
b. Liability for checked baggage

When 2-Year Period Does Not Apply
The liability of the carrier for each checked If the cause of action is based on the Civil Code
baggage and goods shall be limited to 250 francs such as 4 years if the action is based on tort or
per kilogram. (Warsaw Convention, Art. 22[2]) quasi-delict (United Airlines v. Uy, G.R. No.
127768, 1999)
The carrier can be subjected to a higher value of
liability if the consignor, at the time when the Where the plaintiff was forestalled from filing an
package was handed to the carrier: action because of the defendant-airline’s delaying
1. A special declaration of the value at delivery; tactics (United Airlines v. Uy, G.R. No. 127768,
and 1999)
2. Paid a supplementary sum, if the case
BUSINESS
requires. (Warsaw Convention, Art. 22[2]) Notice Requirement
 Damage to baggage: within 3 days from
If the consignor made a declaration of value, the receipt
carrier’s liability will be liable to pay a sum not  Damage to goods: within 7 days from receipt
exceeding the declared sum, unless the carrier  Delay: within 21 days from receipt
ORGANIZATIONS
proves that the declared value is greater than the
actual value of the baggage or goods. (Warsaw Source: The Montreal Convention, Art.
Convention, Art. 22[2]) 31(2), to wit:
c. Liability for hand-carried baggage “In the case of damage, the person entitled to
The carrier’s liability for hand-carried baggage

delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the Commercial Law
shall be limited to 5,000 francs per passenger. latest, within seven days from the date of
(Warsaw Convention, Art. 22[3]) receipt in the case of checked baggage and
fourteen days from the date of receipt in the
Instances When a Common Carrier Cannot case of cargo. In the case of delay, the
Avail of the Limitation complaint must be made at the latest within
a. Willful misconduct twenty-one days from the date on which the
b. Default amounting to willful misconduct baggage or cargo have been placed at his or
c. Accepting passengers without ticket her disposal.”
d. Accepting goods without airway bill or
baggage without baggage check This is an amendment to Art. 26(2) of the
Warsaw Convention, which states that notice
3. WILLFUL MISCONDUCT should be done within 14 days from the delay.
The carrier is not entitled to limited liability under NOTE: The notice requirement constitutes a
the Warsaw Convention if the damage was condition precedent. Failure to comply with a
caused by the carrier’s willful misconduct or any condition precedent constitutes failure to state a
default on its part which is considered by the cause of action as a ground for a motion to
courts as willful misconduct. (Warsaw dismiss. (Federal Express Corp. v. American
Convention, Art. 25[1]) Home Insurance Co., GR No. 150094, 2004)
Extinguishment of Right to Damages --------- end of topic ---------

The right to damages shall be extinguished if an
action is not brought within 2 years counted
from date of arrival at the place of destination or
from date on which the aircraft ought to have
arrived or from date on which the transportation
stopped. (Warsaw, Art. 29)
Page 74 of 393
IV. BUSINESS ORGANIZATIONS d. Classification of shares i. Power to declare dividends i Regular or special
i Preferred shares j. Power to enter into ii Notice of meetings
versus common shares management contract iii Place and time of
ii Scope of voting rights k. Limitations meetings
subject to classification i Ultra vires acts iv Quorum
IV. BUSINESS ORGANIZATIONS
iii Founder's shares • (a) Applicability v Minutes and agenda
iv Redeemable shares of ultra vires of meetings
A. PARTNERSHIPS
v Treasury shares doctrine 9. Board of directors and trustees
1. General provisions
6. Incorporation and organization • (b) a. Repository of corporate
a. Definition
a. Promoter Consequences powers
b. Elements
i Liability of promoter of ultra vires acts b. Tenure, qualifications and
c. Characteristics
ii Liability of l. Doctrine of individuality of disqualifications of directors
d. Rules to determine existence
corporation for subscription c. Requirement of independent
e. Partnership term
promoter's contracts m. Doctrine of equality of shares directors
f. Partnership by estoppel
b. Subscription contract n. Trust fund doctrine d. Elections
g. Partnership as distinguished
c. Pre-incorporation subscription o. How exercised i Cumulative voting
from joint venture
agreements i By the shareholders ii Quorum
h. Professional partnership
d. Consideration for stocks ii By the board of e. Removal
i. Management
e. Articles of Incorporation directors f. Filling of vacancies
2. Rights and obligations of partnership
i Contents iii By the officers g. Compensation
and partners
ii Non-amendable 8. Stockholders and members h. Disloyalty
a. Rights and obligations of the
items a. Fundamental rights of a i. Business judgment rule
partnership
e. Corporate name; limitations stockholder j. Solidary liabilities for
b. Obligations of partners
on use of corporate name b. Participation in management damages
among themselves
f. Registration, incorporation, i Proxy k. Personal liabilities
c. Obligations of partners to
and commencement of ii Voting trust l. Responsibility for crimes
third persons
corporate existence iii Cases when m. Special fact doctrine
3. Dissolution and winding up
g. Election of directors or stockholders' action n. Inside information
4. Limited Partnership
trustees is required o. Contracts
h. Adoption of by-laws • (a) By a majority i By self-dealing
B. CORPORATIONS
i Contents of by-laws vote directors with the
1. Definition of corporation
ii Binding effects • (b) By a two- corporation
2. Classes of corporations
iii Amendments thirds vote ii Between
3. Nationality of corporations
i. Effects of non-use of • (c) By corporations with
a. Control test
corporate charter cumulative interlocking directors
b. Grandfather rule Legislative
7. Corporate powers voting p. Executive and other special
power
a. General powers; theory of iv Manner of voting committees
4. Corporate juridical personality
general capacity c. Proprietary rights i Creation
a. Doctrine of separate juridical
b. Specific powers; theory of i Right to dividends ii Limitations on its
personality
specific capacity ii Appraisal right powers
i. Liability for tort and
c. Power to extend or shorten • (a) When q. Meetings
crimes
corporate term available i Regular or special
ii. Recovery of damages
d. Power to increase or • (b) Manner of • (a) When and
b. Doctrine of piercing the
decrease capital stock or exercise of right where
corporate veil
incur, create, increase bonded iii Right to inspect • (b) Notice
c. Grounds for application of
indebtedness iv Preemptive right • (c) Attendance in
doctrine
e. Power to deny pre-emptive v Right to vote meetings
i Test in determining
rights vi Right to dividends ii Who presides
applicability
f. Power to sell or dispose d. Remedial rights iii Quorum
5. Capital structure
corporate assets i Individual suit iv Rule on abstention
a. Number and qualifications of
g. Power to acquire own shares ii Representative suit 10. Capital affairs
incorporators
h. Power to invest corporate iii Derivative suit a. Certificate of stock
b. Subscription requirements
funds in another corporation e. Obligations of a stockholder i Nature of the
c. Corporate term
or business f. Meetings certificate

ii Uncertificated shares i Records to be kept iii Treatment of profits vi Grounds for

iii Negotiability; at principal office iv Plan and distribution revocation of license
requirements for ii Right to inspect of assets upon 13. Merger and consolidation
valid transfer of corporate records dissolution a. Definition and concept
stocks iii Effect of refusal to c. Educational corporations b. Distinguish: constituent and
iv Issuance inspect corporate d. Religious corporations consolidated corporation
• (a) Full payment records i Corporation sole; c. Plan of merger or
• (b) Payment pro- 11. Dissolution and liquidation nationality consolidation
rata a. Modes of dissolution ii Religious societies d. Articles of merger or
v Stock and transfer i Voluntary dissolution e. One person corporations consolidation
book • (a) Where no i Excepted e. Procedure
• (a) Contents creditors are corporations f. Effectivity
• (b) Who may affected ii Capital stock g. Limitations
make valid • (b) Where requirement h. Effects
entries creditors are iii Articles of 14. Investigations, offenses, and
• (c) Stock affected incorporation and by- penalties
transfer agent • (c) By shortening laws a. Authority of Commissioner
vi Lost or destroyed of corporate iv Corporate name i Investigation and
certificates term v Corporate structure prosecution of
vii Situs of the shares of • (d) Withdrawal of and officers offenses
stock dissolution vi Nominee ii Administration of
b. Watered stocks ii Involuntary vii Minutes and records oath and issuance of
i Definition dissolution viii Liability subpoena
ii Liability of directors b. Methods of liquidation ix Conversion of iii Cease and desist
for watered stocks i By the corporation corporation to one power
iii Trust fund doctrine itself person corporations iv Contempt
for liability for ii Conveyance to a and vice-versa b. Sanctions for violations
watered stocks trustee within a f. Foreign corporations i Administrative
c. Payment of balance of three-year period i Bases of authority sanctions
subscription iii By management over foreign ii Prohibited Acts
i Call by board of committee or corporations iii Penalties
directors rehabilitation receiver • (a) Consent iv Who are liable
ii Notice requirement iv Liquidation after • (b) Doctrine of c. Authority of the Securities and
d. Sale of delinquent shares three years "doing business" Exchange Commission
i Effect of delinquency 12. Other corporations ii Necessity of a
ii Call by resolution of a. Close corporations license to do
the board of directors i Characteristics of a business
iii Notice of sale close corporation • (a) Requisites
iv Auction sale ii Validity of restrictions for issuance of a
e. Alienation of shares on transfer of shares license
i Allowable restrictions iii Issuance or transfer • (b) Resident
on the sale of shares of stock in breach of agent
ii Sale of partially paid qualifying conditions • (c) Amendment
shares iv When board meeting of license
iii Sale of a portion of is unnecessary or iii Personality to sue
shares not fully paid improperly held iv Suability of foreign
iv Sale of all of shares v Preemptive right corporations
not fully paid vi Amendment of v Instances when
v Sale of fully paid articles of unlicensed foreign
shares incorporation corporations may be
vi Requisites of a valid vii Deadlocks allowed to sue
transfer b. Non-stock corporations (isolated
vii Involuntary dealings i Definition transactions)
f. Corporate books and records ii Purposes

A. PARTNERSHIPS 3. This does not mean that there could be no A partnership must have a lawful object or
contractual relations amongst the parties; purpose and must be established for the common Use of the term “partner” does not necessarily
there is only no partnership or association benefit or interest of the partners. (Art. 1770) show existence of partnership. Non-use of the
1. GENERAL PROVISIONS with distinct legal personality. terms “partnership” or “partners” are not
Effects of an Unlawful Partnership conclusive as to non-existence or partnership
A. Definition C. Characteristics (a) Void ab initio such that it never existed in but entitled to weight.
the eyes of the law (Art. 1409[1])
Partnership Defined Characteristics of a Partnership E. Partnership term
1. Essentially contractual in nature (Arts. 1767, (b) Profits shall be confiscated in favor of the
1784) government (Art. 1770) Partnership at will
Partnership is a contract whereby two or more
2. Separate juridical personality (Art. 1768) (c) Instruments or tools and proceeds of the
persons bind themselves to contribute money, One in which no fixed term is specified and is not
3. Delectus personae (Arts. 1804, 1813) crime shall also be forfeited in favor of the
property, or industry to a common fund, with the formed for a particular undertaking or venture
4. Mutual Agency (Art. 1803) government (Art. 1770; Revised Penal
intention of dividing the profits among which may be terminated anytime by mutual
5. Personal liability of partners for partnership Code, Art. 45)
themselves. Two or more persons may also form agreement.
debts (Arts. 1816, 1817) (d) The contributions of the partners shall not
a partnership for the exercise of a profession (Art.
be confiscated unless they fall under (c)
1767) D. Rules to determine existence Partnership with a fixed term
(Arts. 1411 and 1412)
B. Elements One in which the partners agree to themselves
General Rule
Judicial decree is not necessary to dissolve an the term of which the partnership is to subsist.
Persons who are not partners as between unlawful partnership.
Elements of a Partnership (ACD)
themselves, cannot be partners as to third Common Types of Partnership
1. Meeting of minds (Agreement)
persons (Art. 1769[1]) That there is no legally constituted partnership 1. Universal v. Particular Partnership
2. To Contribute money, property, or industry to
a common fund; and does not mean that there are no contractual or (a) Universal Partnership
3. Intent to Divide profits (and losses) among the Exception legal relations among the parties.
1. Universal Partnership of All
contracting parties (Jarantilla, Jr. v. Jarantilla, Partnership by estoppel (Art. 1825) [see Section Present Property (Art. 1779)
G.R. No. 154468, 2010) (f) below] Effect of Partial Illegality
Comprises the following:
Where a part of the business of a partnership is
Essential Features of Partnership Other rules to determine whether a legal and a part illegal, an account of that which - Property which belonged to each
(VaLeCLO) partnership exists (Art. 1769) is legal may be had. of the partners at the time of the
1. There must be a Valid contract. The following, alone, do not establish a constitution of the partnership
2. The parties must have Legal capacity to partnership: Where, without the knowledge or participation of - Profits which they may acquire
enter into the contract. (a) Co-ownership or co-possession the partners, the firm's profits in a lawful business from all property contributed
3. There must be a mutual Contribution of have been increased by wrongful acts, the
(b) Sharing of gross returns, whether or not
money, property or industry to a common
the persons sharing them have a joint or innocent partners are not precluded as against
fund. (Art. 1767) 2. Universal Partnership of Profits
4. There must be a Lawful object. (Art. 1770) common right or interest in any property the guilty partners from recovering their share of
the profits. Comprises all that the partners may
5. The purpose or primary purpose must be to from which the returns are derived
acquire by their industry or work
Obtain profits and divide the same among (c) Receipt by a person of a share of the
the parties. (Art. 1767) Formation of Partnership during the existence of the
profits of a business is prima facie
partnership (Art. 1780).
evidence that he is a partner in the a. How Partnership is Formed
Additional Requirement for Juridical business, unless such were received in General Rule: No special form is required for
Personality payment as: the validity of a contract. (Art. 1356) But persons who are prohibited from
1. It is also required that the articles of 1. Debt by installments or otherwise; giving donations or advantage to
partnership must not be kept secret among 2. Wages or rent; b. Burden of Proof and Presumption each other cannot enter into a
the members; otherwise, the association shall 3. Annuity; The existence of a partnership must be universal partnership (Art. 1782).
have no legal personality and shall be 4. Interest on loan; proven, not presumed. Persons acting as - Those made between persons
governed by the provisions on Co-ownership. 5. Consideration for sale of goodwill of partners are presumed to have entered into a who were guilty of adultery or
(Art. 1775) business or other property by contract of partnership. The burden of proof is concubinage at the time of the
2. "Kept secret among the members" where installments or otherwise shifted to the party denying its existence. donation;
secrecy is directed not to third persons but to
- Those made between persons
some of the partners. (Art. 1775) An extant partnership is presumed to exist
found guilty of the same criminal
until proven terminated.

offense, in consideration thereof; Elements to establish liability as a partner on Joint Venture partnership, association or corporation for
and the ground of estoppel: A joint venture is a form of partnership, and the practice of architecture;
- Those made to a public officer or 1. Defendant represented himself as partner or thus, to be governed by the laws on partnership. 2. Registered and licensed architects shall
his wife, descendants and represented by others as such; (Marsman Drysdale Land, Inc. v. Philippine compose at least seventy-five percent (75%)
ascendants, by reason of his 2. Not denied or refuted by defendant; Geoanalytics, G.R. No. 183374, 2010) of the owners, shareholders, members
office. (Art. 739) 3. Plaintiff relied on such representation; and incorporators, directors, executive officers,
4. Statement of defendant not refuted. As a rule, corporations are prohibited from as the case may be;
entering into partnership agreements; 3. Individual members of such firm, partnership
(b) Particular Partnership (Art. 1783) LIABILITIES IN ESTOPPEL association or corporation shall be
consequently, corporations can enter into joint
A particular partnership has for its objects: When all the A partnership act or responsible for their individual and collective
members of an obligation results, venture agreements with other corporations or
a. Determinate things partnerships for certain transactions in order to acts as an entity and as provided by law;
b. Their use or fruits existing partnership therefore the
form “pseudo partnerships.” A joint venture 4. Such firm, partnership, association or
c. Specific undertaking consent to the partnership is liable
representation agreement between and among corporations corporation shall be registered with the
d. Exercise of profession or vocation
Other cases It is the joint act or may be seen as similar to partnerships since the Securities and Exchange Commission and
obligation of the person elements of partnership are present. (Narra Board.
2. General v. Limited Partnership acting and persons Nickel Mining and Dev’t Corp. v. Redmont
(a) General Partnership consenting to the Consolidated Mines Corp., G.R. No. 195580, Other Classifications of Partnership
Consists of general partners who are representation. Person 2014) a. As to Legality of Existence
liable pro rata and subsidiarily and who represented
himself & all those who 1. De jure partnership- one which has
sometimes solidarily with their separate Note: Section 35(h) of the Revised Corporation complied with all the legal requirements
made representation
property for partnership debts liable pro-rata/ jointly Code now expressly allows corporations to form for its establishment
partnerships with both natural and juridical 2. De facto- one which has failed to comply
G. Partnership as distinguished from joint persons. with all the legal requirements for its
(b) Limited Partnership
venture establishment
One formed by two or more persons A verbal agreement to form a joint venture
having as members one or more general The observation that a joint venture is for a single company is valid and binding. The failure to b. As to purpose
partners and one or more limited partners, transaction while a partnership entails a reduce the agreement to writing does not affect 1. Commercial or trading partnership-
the latter not being personally liable for continuing business is not entirely accurate in its validity or enforceability as there is no law or one formed for the transaction of
the obligations of the partnership. Philippine law. A partnership may be universal or regulation which provides that an agreement to business
particular and a particular partnership has for its incorporate must be in writing. (Fong v. Dueñas, 2. Professional or non-trading
F. Partnership by estoppel object a specific undertaking (Roque, Jr. v. G.R. No. 185592, 2015) partnership- one formed for the exercise
Partnership by estoppel, defined COMELEC, G.R. No. 188456, 2009). of a profession
H. Professional partnership
Either by words or conduct, a person does any of Generally understood to mean an organization I. Management
the following: formed for some temporary purpose, a joint General professional partnership
venture is likened to a particular partnership or A general professional partnership exists when POWERS OF THE PARTNER/S APPOINTED
1. Directly represents himself to anyone as a one which “has for its object determinate things, two or more persons may also form a partnership AS MANAGER
partner in an existing partnership or in a non- their use or fruits, or a specific undertaking, or the for the exercise of a profession (Art. 1767 [2]). Partner is Power of Vote of
existing partnership exercise of a profession or vocation. (Realubit v. appointed managing partners
2. Indirectly represents himself by consenting to manager in partner is representing
Jaso, G.R. No. 178782, 2011) The Architecture Act of 2004 (R.A. No. 9266)
another representing him as a partner in an the Articles of irrevocable controlling
1. This law states that a firm, firm, company, partnership without interest is
existing partnership or in a non-existing
Particular Partnership partnership, corporation or association may (Art. 1800) just/lawful necessary to
partnership
In a joint account, the participating merchants can be registered or licensed as such for the cause; revoke power
practice of architecture under the following Revocable (Art. 1800)
When a person has been thus represented to be transact business under their own name, and can
conditions: Only Filipino citizens properly only when in
a partner in an existing partnership, or with one or be individually liable therefor. A partnership
registered and licensed as architects under bad faith (Art.
more persons who are not actually partners, he is generally relates to a continuing business of 1800)
various transactions of a certain kind. (Heirs of this Act may, among themselves, or together
an agent of the persons consenting to such
Tan Eng Kee v. CA, G.R. No. 126881, 2000) with allied technical professionals, form and
representation in order to bind them to the same
obtain registration as a firm, company,
extent and in the same manner as though he
were a partner in fact (Art. 1825).

Partner is Power is ? 2. RIGHTS AND OBLIGATIONS OF B. Obligations of partners among (c) Industry
appointed revocable PARTNERSHIP AND PARTNERS themselves May concur with any or both of the first two or in
manager after any time for the absence of any one or both of them; manual
constitution any just or A. Rights and obligations of the Obligation to Contribute to the Common Fund and/or intellectual in consideration of share in the
of partnership lawful cause partnership
(Art. 1800) by the vote of profits; hence, as generally, partners are not
the partners 1. What May Be Contributed entitled to charge each other. (Marsh’s Appeal,
All partners, including industrial ones, shall be
(Art. 1800) Contribution must be in equal shares unless 69 Pa. St. 30)
liable pro rata with all their property and after all
Two or more Each may In case of otherwise stipulated. (Art. 1790)
the partnership assets have been exhausted, for
persons execute all opposition, Every partner is bound to work to the extent of his
entrusted acts of decision of the contracts which may be entered into in the
ability for the benefit of the whole, without regard
with administratio majority shall name and for the account of the partnership, (a) Money to the services of his co-partners, and without
management n (Art. 1801) prevail; In under its signature and by a person authorized to Failure to contribute promised money makes the comparison of value; for services to the firm
of case of tie, act for the partnership. However, any partner may promissory-partner liable for the amount cannot, from their very nature, be estimated and
partnership decision of enter into a separate obligation to perform a promised including the interest due and damages equalized by compensation of differences.
without partners partnership contract. (Art. 1816) arising from the time he should have complied (Beatty v. Wray, 7 Harris 519)
specification owning
with his or her undertaking. (Art. 1786, Par. 1)
of duties/ controlling Note: Except limited liability partners
stipulation interest shall But: A partner who has agreed to render special
that each prevail (Art. If there is fraud or misrepresentation, action for service to the partnership, for the performance of
Any stipulation against personal liability of rescission may be filed, and the party entitled to
shall not act 1801) which he is qualified, and which is one of the
w/o the partners for partnership debts is void, except as rescind, without prejudice to any other right, has inducements for the other members to enter the
other's among them. (Art. 1817) the right to: partnership, was found liable civilly to account for
consent (Art. 1. Lien on, or right of retention over, the surplus the value of such service upon a finding that he
1801) Partners are liable solidarily with the partnership of partnership property after satisfying wrongfully refused to perform such service.
Stipulated Concurrence Absence or for everything chargeable to the partnership when partnership liabilities to third persons (for any
that none of of all disability of caused by the wrongful act or omission of any sum paid by the injured partner for the But then again: Specific performance not
the managing necessary for any one partner acting in the ordinary course of business purchase of an interest in the partnership and available due to constitutional prohibition against
partners shall the validity of cannot be of the partnership or with authority from the other
act w/o the acts (Art. alleged for any capital or advances contributed by the involuntary servitude.
partners and for partner's act or misapplication of latter)
consent of 1802) unless there properties. (Art. 1824)
others (Art. is imminent 2. Stand in place of creditors of the partnership A limited partner is not allowed to contribute
1802) danger of for any payments made by the injured partner services, only “cash or other property” (Art. 1845);
A newly admitted partner into an existing
grave or in respect of partnership liabilities, after all otherwise, he is considered an “industrial and
irreparable partnership is liable for all the obligations of the liabilities to third persons have been satisfied general partner” and thus, not exempted from
injury to partnership arising before his admission but out 3. Indemnity by the guilty partner against all personal liability.
partnership of partnership property shares. (Art. 1826) partnership debts and liabilities (Art. 1838);
(Art. 1802) relate to Art. 1831: with or without fraud or
Manner of All partners If refusal of Partnership creditors are preferred to those of 2. When Immovables or Real Rights
misrepresentation, injured partner may seek Contributed
management are agents of partner is each of the partners as regards the partnership
not agreed the manifestly judicial dissolution
property. (Art. 1827)
upon (Art. partnership prejudicial to General Rule: Failure to comply with the
1803) Unanimous interest of (b) Property
Upon dissolution of the partnership, the partners requirement of appearance in public instrument
consent partnership, May include intangible or incorporeal (e.g. credit).
shall contribute the amounts necessary to satisfy and SEC Registration will not affect the liability of
required for court's (Lim Tong Lim v. Phil. Fishing Gear, G.R. No.
alteration of intervention the partnership liabilities. (Art. 1839(4), (7)) the partnership and the members thereof to third
136448, 1999) persons. (Art. 1772, [2])
immovable may be
property (Art. sought (Art. A partner’s obligation for partnership liabilities is
Liable for fruits from the time property should Exception: When immovable property or real
1803(1)) 1803(2)) subsidiary in nature - they shall only be liable with
have been delivered without need of demand; rights are contributed.
their property after all partnership properties have
also include obligation to preserve the promised
been exhausted. (Co-Pitco v. Yulo, G.R. No. L-
property with the diligence of a good father of a Public instrument plus inventory made and
3146, 1907)
family pending delivery. (Art. 1786 [1] and [2]) signed by the parties and attached to the public
instrument is required for the benefit of third
persons. (Arts.1771 and 1773)

EFFECT OF ABSENCE OF A. Requisites: c. He may be ousted form the partnership,

REQUIREMENTS UNDER ARTICLES 1771 In the event that there is a failure to contribute 1. There is an imminent loss of the business of especially if there was a warning. (Art. 1808)
AND 1773 property promised: the partnership
No Public Instrument,  Partners become ipso jure a debtor of the
Void 2. The majority of the capitalist partners are of INDUSTRIAL CAPITALIST
No Inventory partnership even in the absence of any the opinion that an additional contribution to PARTNER PARTNER
With Public Instrument, demand (Art. 1169[1])
Void the common fund would save the business
No Inventory Cannot engage in Cannot engage in
 Remedy of the other partner is not rescission 3. The capitalist partner refuses deliberately to
No Public Instrument, business (w/n same business (with same
Void but specific performance with damages from contribute (not due to financial inability)
With Inventory line of business with kind of business with
With Public Instrument, defaulting partner (Art. 1788) 4. There is no agreement to the contrary
Valid the partnership) the partnership) for
With Inventory unless partnership his own account,
In the event that there is a failure to contribute B. Fiduciary Duty expressly permits him unless there is a
Note: Partnerships void under Art.1773, in money promised: A partnership is a fiduciary relation—one entered to do so. (Art. 1789) stipulation to the
relation to Art. 1771 may still be considered either  To contribute on the date fixed the amount he into and to be maintained on the basis of trust and contrary. (Art. 1808)
de facto or estoppel partnerships vis-à-vis third has undertaken to contribute to the confidence. With that, a partner must observe the
persons; may even be treated as an ordinary partnership utmost good faith, fairness, and integrity in his As a rule, an industrial partner may not engage in
contract from which rights and obligations may  To reimburse any amount he may have taken dealings with the others: any business during the existence of the
validly arise, although not exactly a partnership from the partnership coffers and converted to i. He cannot directly or indirectly use partnership, unless the capitalist partners
under the Civil Code. (Torres v. CA, G.R. No. his own use partnership assets for his own benefit; expressly permit him to do so (Art. 1789). The
134559, 1999)  To pay for the agreed or legal interest, if he ii. He cannot carry on a business of the reason is that his industry must be given only to
fails to pay his contribution on time or in case partnership for his private advantage; the partnership. This is true even if the business
Failure to prepare an inventory of the he takes any amount from the common fund iii. He cannot, in conducting the business of the
is not competitive. (Albano Civil Law Reviewer, p.
immovable property contributed, in spite of Art. and converts it to his own use partnership, take any profit clandestinely;
iv. He cannot obtain for himself that which he 822, 2008 ed.)
1773 declaring the partnership void would not  To indemnify the partnership for the damages
render the partnership void when: should have obtained for the partnership
caused to it by delay in the contribution or
(e.g. business opportunity) When a partner engages in a separate business
1. No third party is involved (since Art. 1773 was conversion of any sum for his personal v. He cannot carry on another business in enterprise that is competitive with that of the
intended for the protection of 3rd parties); benefit (Art. 1788) competition with the partnership; and partnership, the other partner’s withdrawal
2. Partners have made a claim on the vi. He cannot avail himself of knowledge or becomes thereby justified and for which the latter
partnership agreement. A partner who promises to contribute to information, which may be properly regarded
cannot be held for damages. (Rojas v. Maglana,
partnership becomes a promissory debtor of the as the property of the partnership.
G.R. No 30616, 1990)
3. Consequence of Failure to Contribute partnership, including liability for interests and
damages caused for failure to pay, and which 1. Prohibition to Engage in Competitive
Business 2. Managing Partner who Collects Debt from
amounts may be deducted upon dissolution of the Third Party
Each partner has the obligation:
1. To contribute at the beginning of the partnership from his share in the profits and net
assets. (Rojas v. Maglana, G.R. No. 30616, If an industrial partner engages in any Obligation of a managing partner who collects
partnership or at the stipulated time the
December 10, 1990) business debt from person who also owed the partnership
money, property or industry which he may
have promised to contribute. (Art. 1786) a. He can be excluded from the partnership; or (Art. 1792):
4. Obligations with respect to Contribution to b. The capitalist partners can avail of the benefit a. Apply sum collected to 2 credits in proportion
2. To answer for eviction in case the partnership
Partnership Capital he obtained from the business; or to their amounts.
is deprived of the determinate property
c. The capitalist partners have the right to file an b. If he received it for the account of
contributed (Art. 1786)
Partners must contribute equal shares to the action for damages against the industrial partnership, the whole sum shall be applied
3. To answer to the partnership for the fruits of
capital of the partnership unless there is partner, in either case. (Art. 1789) to partnership credit.
the property the contribution of which he
delayed, from the date they should have been stipulation to contrary. (Art. 1790)
contributed up to the time of actual delivery Requisites:
Capitalist partners must contribute additional If the capitalist partner engages in a business
(Art. 1786) (which competes with the business of the 1. There exist at least two debts, one where the
4. To preserve said property with the diligence capital in case of imminent loss to the business of collecting partner is creditor and the other,
the partnership and there is no stipulation partnership)
of a good father of a family pending delivery where the partnership is the creditor
otherwise; refusal to do so shall create an a. He may be required to bring to the common
to partnership (Art. 1163) 2. Both debts are demandable
obligation on his part to sell his interest to the fund the profits he derived from the other
5. To indemnify partnership for any damage 3. The partner who collects is authorized to
other partners. (Art. 1790) business; or
caused to it by the retention of the same or by manage and actually manages the
b. He shall personally bear the losses; or
the delay in its contribution (Arts.1788, 1170) partnership

C. Rules for Distribution of Profits and Losses c. As provided by Art. 1807, whenever Partners and the partnership are solidarily liable
3. Partner who Receives Share of Partnership (Art. 1797) other circumstances render it just and to third persons for the partner's tort or breach of
Credit PROFITS LOSSES reasonable trust. (Art. 1824)
With According to According to iii. Duty to render on demand true and full
Obligation of partner who receives share of agreement agreement agreement information affecting partnership to any Liability of incoming partner is limited to:
partnership credit: Without Share of If sharing of partner or legal representative of any 1. His share in the partnership property for
agreement capitalist profits is
deceased partner or of any partner under existing obligations
partner is in stipulated -
Obliged to bring to the partnership capital what he legal disability (Civil Code, Art. 1806) 2. His separate property for subsequent
proportion to apply to
has received even though he may have given his capital sharing of iv. Duty to account to the partnership as obligations (Art. 1826)
receipt for his share only (Art. 1793) contribution losses fiduciary (Art. 1807)
Creditors of partnership preferred in
Requisites: Share of E. Responsibility of Partnership to Partners partnership property & may attach partner's share
If no profit i. To refund the amounts disbursed by partner
industrial in partnership assets. (Art. 1827)
1. A partner has received in whole or in part, his sharing
partner is not in behalf of the partnership plus
share of the partnership credit stipulated:
fixed - as may corresponding interest from the time the Power of Partner as an Agent of the
2. The other partners have not collected their losses shall
be just and expenses are made (loans and advances Partnership (Art. 1818)
shares be borne
equitable made by a partner to the partnership aside ACTS EFFECT
according to
3. The partnership debtor has become insolvent under the from capital contribution)
capital Acts for carrying on in Every partner is an
circumstances
contribution ii. To answer for obligations partner may have the usual way the agent and may
BEARING THE RISK OF LOSS OF THINGS business of the execute acts with
contracted in good faith in the interest of the
CONTRIBUTED (Art. 1795) partnership binding effect even if
Purely partnership business
Specific and Risk is borne by he has no authority
industrial iii. To answer for risks in consequence of its
determinate things partner Except: when 3rd
which are not fungible partner not management
person has
where only the use is liable for knowledge of lack of
contributed losses C. Obligations of partners to third persons
authority
Specific and Risk is borne by Act which is not Does not bind
determinate things the partnership All partners shall be liable for contractual
NOTE: A stipulation which excludes one or more apparently for the partnership unless
ownership of which is obligations of the partnership with their property,
partners from any share in the profits and losses carrying of business authorized by other
transferred to the after all partnership assets have been exhausted:
is void. (Art. 1799) in the usual way partners
partnership i. Pro rata
Fungible things Risk is borne by D. Other Rights and Obligations of Partners ii. Subsidiary (Art. 1816).
(consumable) partnership Acts of strict dominion
Things contributed to Risk is borne by Every partnership shall operate under a firm Admission or representation made by any partner or ownership:
be sold partnership name. Persons who include their names in the concerning partnership affairs within scope of his a. Assign
Things brought and Risk is borne by partnership name even if they are not members authority is evidence against the partnership. (Art. partnership
appraised in the partnership shall be liable as partners. (Art. 1815) 1820) property in trust
inventory for creditors
Specific and Risk is borne by i. Right to associate another person with him b. Dispose of good-
General rule: Notice to partner of any matter
determinate things partner in his share without consent of other partners will of business
which are not fungible relating to partnership affairs operate as notice to c. Do an act which
(sub-partnership) (Art. 1804) partnership.
where only the use is would make it
ii. Right to inspect and copy partnership books
contributed impossible to
at any reasonable hour (Art. 1805) Exception: Except in case of fraud. carry on ordinary
iii. Right to a formal account as to partnership  Knowledge of partner acting in the particular business of
affairs (even during existence of matter, acquired while a partner partnership
partnership): (Art. 1809)  Knowledge of the partner acting in the d. Confess a
a. If he is wrongfully excluded from particular matter then present to his mind judgment
partnership business or possession of e. Enter into
 Knowledge of any other partner who
its property by his copartners compromise
reasonably could and should have concerning a
b. If right exists under the terms of any communicated it to the acting partner
agreement partnership claim
(Art.1821) or liability

f. Submit Title in name of all Conveyance will pass iii. By any event which makes it unlawful for right, to dissolve the partnership (Ortega v. Court
partnership claim partners, title business to be carried on/for the members to of Appeals, G.R. 109248, July 3, 1995).
or liability to Conveyance in name carry it on for the partnership
arbitration of all partners iv. Loss of specific thing promised by partner B. Effects of Dissolution
g. Renounce claim before its delivery
of partnership 1. Authority of Partner to Bind Partnership
v. Death of any partner
Acts in contravention Partnership is not 3. DISSOLUTION AND WINDING UP General rule: Authority of partners to bind
vi. Insolvency of a partner/partnership
of a restriction on liable to 3rd persons partnership is terminated. (Art. 1832)
authority having actual or vii. Civil interdiction of any partner
Dissolution is the change in the relation of the
presumptive viii. Decree of court under Art. 1831.
partners caused by any partner ceasing to be Exceptions:
knowledge of the associated in the carrying on of the business;
If a partnership has no fixed term, then it is a 1. To wind up partnership affairs
restrictions
partnership is not terminated but continues until 2. Complete transactions not finished (Art. 1834)
partnership at will and can be dissolved by the
the winding up of partnership affairs is completed.
Effects of Conveyance of Real Property will of any partner. However, such partner must
(Art. 1828) 2. Qualifications
Belonging to Partnership (Art. 1819) be in good faith, otherwise, he will be liable for
TITLE EFFECT damages. Among partners, mutual agency arises
Winding up is the process of settling the (a) With respect to Partners (Art. 1833)
Title in partnership Conveyance passes and the doctrine of delectus personae allows
name, Conveyance in title but partnership business or partnership affairs after dissolution,
them to have the power, but not necessarily the
partnership name can recover if: which includes the paying of previous obligations, Authority of partners to bind partnership by new
right, to dissolve the partnership (Ortega v. Court
1. Conveyance was collecting of assets previously demandable. (Idos contract is immediately terminated when
of Appeals, G.R. 109248, 1995).
not in the usual v. Court of Appeals, G.R. No. 110782, 1998) dissolution is not due to act, death, or
way of business, insolvency (ADI) of a partner.
Grounds for dissolution by decree of court
or Termination is that point when all partnership (Art. 1831):
2. Buyer had affairs are completely wound up and finally If due to ADI, partners are liable as if partnership
knowledge of lack i. Partner declared insane in any judicial
settled. It signifies the end of the partnership life. proceeding or shown to be of unsound mind not dissolved, when the following concur:
of authority
(Idos v. Court of Appeals, G.R. No. 110782, 1998) ii. Incapacity of partner to perform his part of a. If cause is act of partner, acting partner
Title in partnership Conveyance does not
name, Conveyance in pass title but only the partnership contract must have knowledge of such
A. Causes of Dissolution (Art. 1830) dissolution; and
partner's name equitable interest, iii. Partner guilty of conduct prejudicial to
unless: business of partnership b. If cause is death or insolvency, acting
i. Without violation of the agreement between
1. Conveyance was iv. Willful or persistent breach of partnership partner must have knowledge/ notice.
the partners
not in the usual agreement or conduct which makes it
way of business, a. By the termination of the definite term/
reasonably impracticable to carry on (b) With respect to Persons not Partners (Art.
or particular undertaking specified in the
partnership with him 1834)
2. Buyer had agreement
knowledge of lack b. By the express will of any partner, who v. Business can only be carried on at a loss
vi. Other circumstances which render Partner continues to bind partnership even
of authority must act in good faith, when no definite
dissolution equitable after dissolution in following cases:
Title in name of 1 or Conveyance passes term or particular undertaking is
vii. Upon application by purchaser of partner's i. Transactions in connection to winding up
more partners, title but partnership specified
Conveyance in name can recover if: interest: partnership affairs/completing unfinished
c. By the express will of all the partners
if partner/partners in 1. Conveyance was a. After termination of specified transactions
who have not assigned their interests to
whose name title not in the usual term/particular undertaking ii. Transactions which would bind partnership if
be charged for their separate debts,
stands way of business, b. Anytime if partnership at will when not dissolved, when the other party/obligee:
either before or after the termination of
or interest was assigned/charging order
2. Buyer had any specified term or particular
issued Situation 1
knowledge of lack undertaking
1. Had extended credit to partnership prior
of authority d. By the bona fide expulsion of any
If a partnership has no fixed term, then it is a to dissolution; and
Title in name of Conveyance will only partner from the business in
partnership at will and can be dissolved by the will 2. Had no knowledge/notice of dissolution
1/more/all partners or pass equitable accordance with power conferred by
3rd person in trust for interest the agreement of any partner. However, such partner must be in
partnership, good faith, otherwise, he will be liable for Situation 2
ii. In contravention of the agreement between
Conveyance damages. Among partners, mutual agency arises 1. Did not extend credit to partnership;
the partners, where the circumstances do
executed in and the doctrine of delectus personae allows 2. Had known partnership prior to
not permit a dissolution under any other
partnership name if in them to have the power, but not necessarily the dissolution; and
provision of Article 1830, by the express will
name of partners
of any partner at any time

3. Had no knowledge/notice of 3. Partners as investors—return of capital partner, his legal representative or his assignee,
dissolution/fact of dissolution not 2. Rights of Partner where Dissolution in contribution upon cause shown, may obtain winding up by the
advertised in a newspaper of general Contravention of Agreement (Art. 1837) 4. Partners as investors—share of profits if any court (Primelink Properties and Development
circulation in the place where partnership (Art. 1839 [2]) Corp. v. Lazatin-Magat, G.R. No. 167379, 2006).
is regularly carried on (a) Partner who did not cause dissolution
wrongfully The partners will contribute the amount A partner’s share cannot be returned without first
3. Post Dissolution (Art. 1834) a. Apply partnership property to discharge necessary to satisfy the liabilities based on the dissolving and liquidating the business for the
Partner cannot bind the partnership anymore liabilities of partnership rules for distribution of profits and losses in Art. partnership’s outside creditors have preference
after dissolution: b. Apply surplus, if any to pay in cash the net 1797 (Art. 1839 [4]). Even the individual property over the enterprise’s assets. The firm’s property
i. Where dissolution is due to unlawfulness to amount owed to partners of a deceased partner shall be liable for such cannot be diminished to their prejudice.
carry on with business (except: winding up of c. Indemnity for damages caused by partner contributions (Art. 1839 [7]). (Magdusa v. Albaran, G.R. No. L-17526, 1962)
partnership affairs) guilty of wrongful dissolution
ii. Where partner has become insolvent d. Continue business in same name during D. When Business of Dissolved Due to its separate juridical personality from the
iii. Where partner unauthorized to wind up agreed term Partnership is Continued individual partners, it is thus the partnership –
partnership affairs, except by transaction e. Possess partnership property if business is having been the recipient of the capital
with one who: continued Effects: contributions – which must refund the equity of
1. Creditors of old partnership are also creditors retiring partners. Such duty does not pertain to
Situation 1 (b) Partner who wrongly caused dissolution of the new partnership, which continues the partners who managed the business. The amount
1. Had extended credit to partnership prior business of the old one w/o liquidation of the to be refunded consistent with the partnership
to dissolution, and 1. If business not continued by others partnership affairs (Art.1840) being a separate and distinct entity, must
2. Had no knowledge/notice of dissolution; a. Apply partnership property to discharge necessarily be limited to the firm’s total
or liabilities of partnership 2. Creditors have an equitable lien on the resources. It can only pay out what it has for its
b. Receive in cash his share of surplus less consideration paid to the retiring /deceased total assets. But this is subject to the priority
Situation 2 damages caused by his wrongful dissolution partner by the purchaser when enjoyed by outside creditors. “After all the (said)
1. Did not extend credit to partnership prior retiring/deceased partner sold his interest w/o creditors have been paid, whatever is left of the
to dissolution 2. If business continued by others final settlement with creditors (Art. 1840) partnership assets becomes available for the
2. Had known partnership prior to a. Have the value of his interest at time of payment of partners’ shares. (Villareal v.
dissolution dissolution ascertained and paid in The retired or deceased partner or his legal Ramirez, G.R. No. 144214, 2003)
3. Had no knowledge/notice of cash/secured by bond representatives may
dissolution/fact of dissolution not b. Be released from all existing/future a. Have the value of his interest
4. LIMITED PARTNERSHIP
advertised in a newspaper of general partnership liabilities ascertained as of the date of dissolution
circulation in the place where partnership b. May receive as ordinary creditor the A. Characteristics of Limited Partnership
is regularly carried on 3. Rights of Injured Partner where Partnership value of his share in the dissolved
Contract is Rescinded on Ground of partnership with interest or profits i. Formed by compliance with statutory
C. Rights of Partners upon Dissolution Fraud/Misrepresentation by One Party (Art. attributable to use of his right, at his requirements (Art. 1843)
option (Art. 1841) ii. One or more general partners control the
1838)
General rule: Dissolution does not discharge business (Art. 1843)
a. Right to lien on surplus of partnership One or more general partners and one or
existing liability of partner E. Persons Authorized to Wind Up iii.
property after satisfying partnership liabilities more limited partners. (Art. 1843) Limited
b. Right to subrogation in place of creditors after partners contribute cash or other property,
Exceptions: Except by agreement. i. Partners designated by the agreement
payment of partnership liabilities but not services (Art. 1845) and share in the
i. Between the partner and himself ii. In absence of agreement, all partners who
c. Right of indemnification by guilty partner profits but do not participate in the
ii. Between the person/partnership continuing have not wrongfully dissolved the
against all partnership debts & liabilities management of the business (Art. 1848) and
the business partnership are not personally liable for partnership
iii. Between partnership creditors (Art. 1835) iii. Legal representative of last surviving partner obligations beyond their capital contributions
4. Settlement of Accounts between Partners
Assets of the partnership (Art. 1836) iv. May ask for the return of their capital
1. Rights of Partner where Dissolution not in contributions under conditions prescribed by
1. Partnership property (including goodwill)
Contravention of Agreement (Art. 1837) Unless otherwise agreed, the partners who have law (Art. 1857)
2. Contributions of the partners (Art. 1839 [1])
a. Apply partnership property to discharge not wrongfully dissolved the partnership or the v. Partnership debts are paid out of common
liabilities of partnership legal representative of the last surviving partner, fund and the individual properties of general
Order of Application of Assets partners (Art. 1857)
b. Apply surplus, if any to pay in cash the net not insolvent, has the right to wind up the
1. Partnership creditors
amount owed to partners partnership affairs, provided, however, that any
2. Partners as creditors

B. General Partnership v. Limited Certificate must be filed with the SEC. 3. Certificate is cancelled/amended as to set Note: Any person who suffers loss by reliance on
Partnership i. To validly form a limited partnership, all that forth withdrawal /reduction of contribution false statement in certificate may hold liable for
is required is substantial compliance in (Art. 1857) damages any party to the certificate who knew
GENERAL LIMITED good faith with all the requirements under the statement to be false at the time the latter
Personally liable for Liability extends only Art. 1844 as enumerated above. G. Liabilities of A Limited Partner signed the certificate or came to know such falsity
partnership to his capital ii. If no substantial compliance, then the firm subsequently but within sufficient time before
obligations (Art. 1816) contributions ( Art. becomes a general partnership as far as 1. To the Partnership reliance to enable such party to cancel or amend
1843) third persons are concerned (but as amongst a. For the difference between his contribution as the certificate or file the proper petition for such
When manner of No participation in the partners, still limited) (Jo Chung Cang v. actually made and that stated in the purpose (under Art. 1865). (Art. 1847; Walraven
management not management (Art. Pacific Commercial Co., 45 Phil 142) certificate as having been made, and v. Ramsay, 55 N.W.d 853, 1952)
agreed upon, all 1848) b. For any unpaid contribution which he agreed
general partners have D. Consent/Ratification of All Limited in the certificate to make in the future time A general partner’s DIIC (Death, Insolvency,
an equal right in the Partners Needed (Art. 1858) Insanity, or Civil interdiction) dissolves the
management of the partnership unless the business is continued by
business (Art. 1803) i. Any act in contravention of the certificate 2. As a Trustee for the Partnership the surviving general partners under a right stated
Contribute cash, Contribute cash or ii. Any act which would make it impossible to in the certificate or with their common (i.e. all)
carry on the ordinary business of the a. For the specific property stated in the consent (Civil Code, Art. 1860). Still, even if
property or industry property only, not certificate as contributed by him but which he
(Art. 1767) industry (Art. 1845) partnership allowed under the certificate or consented to by
iii. Confess judgment against partnership had not contributed; all, there must be an amendment further to Arts.
Proper party to Not proper party to b. For the specific property of the partnership
proceedings by/ proceedings by/ iv. Possess partnership property/assign rights 1864 and 1865. Otherwise, limited partners will
in specific partnership property other than for which had been wrongfully returned to him; not be able to avail of the protection of the law as
against partnership against partnership and
(Art. 1866) (Art. 1866) partnership purposes regards liability. The partnership will be
v. Admit person as general partner c. Money or other property wrongfully paid or considered general. (Lowe v. Arizona Power &
Interest not Interest is freely conveyed to him on account of his
vi. Admit person as limited partner - unless Light Co., 427 P. d. 366, 1967)
assignable w/o assignable (Art. 1859) contribution. (Art. 1858)
consent of other authorized in certificate
vii. Continue business with partnership property A limited partner shall not become liable as a
partners (Art. 1804) H. Dissolution of Limited Partnership
on death, retirement, civil interdiction, general partner, unless in addition to the exercise
Name may appear in Name must appear in
insanity, or insolvency of gen partner unless of his rights and powers as a limited one, he takes
firm name (Art. 1815) firm name (Art. 1846) 1. Priority in Distribution of Assets
authorized in certificate (Art.1850) part in the control (and management) of the
Prohibition against No prohibition against a. Those due to creditors, including limited business (Art. 1848; Holzman v. Escamilla, 195
engaging in business engaging in business E. Specific Rights of Limited Partners partners P. d. 833, 1948)
(Art. 1789, Art. 1808) b. Those due to limited partners in respect of
Retirement, death, Does not have same i. Right to have partnership books kept at their share in profits/compensation A person may be general and limited at the
insolvency, insanity of effect; rights principal place of business c. Those due to limited partners of return of same time provided it is stated in the certificate.
general partner transferred to legal ii. Right to inspect/copy books at reasonable capital contributed He shall have all the powers, rights, and
dissolves partnership representative (Art. hour d. Those due to general partner other than restrictions of a general partner; but with respect
(Art. 1830) 1861) iii. Right to have on demand true and full info of capital and profits to his capital contribution, his right against the
all things affecting partnership e. Those due to general partner in respect to other members of the firm would be that of a
iv. Right to have formal account of partnership profits limited partner (Art. 1853).
C. Requirements for Formation of Limited affairs whenever circumstances render it just f. Those due to general partner for return of
Partnership and reasonable capital contributed (Art. 1863) General rule: A limited partner may also loan
v. Right to ask for dissolution and winding up money to and transact other business with the
Certificate of articles, of the limited partnership by decree of court I. Amendment of Certificate of Partnership firm.
must state the following matters: vi. Right to receive share of profits/other
1. Name of partnership plus the word "Limited" compensation by way of income Instances when Certificate of Partnership may Exceptions: Except that he cannot:
2. Character of business vii. Right to receive return of contributions be amended 1. Receive or hold as collateral any partnership
3. Location of principal place of business provided the partnership assets are in 1. In case any of the ten enumerated changes property; or
4. Name/place of residence of members excess of all its liabilities (Art. 1851) and circumstances in Art. 1864, par. 2 are 2. Receive from a general partner or from the
5. Term for partnership is to exist present. firm any payment, conveyance, release if at
6. Amount of cash/value of property contributed F. Requisites for Return of Contribution of 2. It must be signed and sworn to by all the that time assets of the firm are not sufficient
7. Additional contributions Limited Partner members including the new members if some to discharge liabilities to outside creditors.
8. Time agreed upon to return contribution of are added; in case of substitution, the
limited partner 1. All liabilities of partnership have been paid/if assigning limited partner must also sign. Any violation would be fraud on such creditors
9. Sharing of profits/other compensation (Art. not yet paid, at least sufficient to cover them 3. The cancellation or amendment must be (Art. 1854).
1844) 2. Consent of all members has been obtained recorded in the SEC.(Art.1864)

Note: The remedy of a general partner who B. CORPORATION Restricted due to Subject to the to a special charter or through a general
suffers from or faces interference from his limited powers agreement of partners enabling act such as the Corporation Code.
partners is dissolution. (Weil v. Diversified Authority of Those Who Compose It b. Public corporations - Formed or organized
Properties, 319 F. Supp., 1970) CORPORATION LAW Stockholders are not Mutual agency for the government of a portion of the state
Republic Act No. 11232 – Revised Corporation agents of the between partners (e.g., barangay, municipality, city and
Liability of a Limited Partner Whose Surname Code corporation in the province) Created for political purposes
Appears in the Partnership Name absence of express connected with the public good in the
GENERAL PRINCIPLES authority administration of the civil government
Transfers of Interest
General Rule: A limited partner whose surname
1. DEFINITION OF CORPORATION Freely transferable Cannot be transferred Public Corporation v. Private Corporation
appears in the partnership name is liable as a
without the consent of without the consent of
general partner to the partnership creditors who PUBLIC PRIVATE
An artificial being created by operation of law, other stockholders the other partners
extended credit without actual knowledge that he CORPORATION CORPORATION
having the right of succession and the powers, (unless there is a
is not a general partner. stipulation to the Government holds Government may
attributes and properties expressly authorized by
contrary) the controlling hold the controlling
law or incident to its existence. (RCC,1 Sec. 2)
Exceptions: interest interest
Succession
i. If the surname is also the surname of a Created under the
Attributes of a Corporation (Sec. 2) Existence continues Death of a partner
general partner; or Corporation Code
a. Artificial Being even as persons who ends the partnership
ii. If prior to the time the partner became a
b. Created by operation of law compose it change Created by its charter
limited partner, the business has been However, GOCCs
carried under such name. c. Has right of succession – A corporation has may also be created
the capacity for continuous existence Corporations as partners in a partnership
by special charter
despite changes in stockholders/members Created for a public
--------- end of topic --------- d. Has only the powers, attributes, and Corporations have the power to enter into a
purpose
properties authorized by law or incident to its partnership, joint venture, merger, consolidation,
or any other commercial agreement with natural Exists primarily for
existence. the government of a Generally created for
and juridical persons (Sec. 35(h)).
portion of the state profit generation
Corporate Fiction Can a defective corporation result into a Subject to control and
partnership? (Two Views) supervision by the
A corporation has a personality separate and State or its agency
distinct from the persons composing it. (Civil No Partnership: When investors intended only to
Code, Arts. 44-47; PNB v. Andrada Electric & Note:
invest in a corporate venture with no intention of
Engineering Co., G.R. No. 142936, 2002).
participating in its corporate affairs, and the ● Ownership of the government of the majority
corporation was not formed, no partnership of the shares of a corporation does not by
Corporation v. Partnership relation is established by the failure to itself constitute such an entity as a public
CORPORATION PARTNERSHIP incorporate, such investors cannot even be held corporation (National Coal Co., v. Collector of
Manner of Creation liable for the contracts and transactions sued Internal Revenue, G.R. No. L-22619, 1994).
Commences only By mere agreement upon. (Pioneer Insurance v. CA, G.R. No. 84197, ● When the law vests corporate powers in a
from the issuance of a 1989) government instrumentality, it does not
Certificate of necessarily become a corporation; a GOCC
Incorporation by the Partnership Exists: However, when there was a must be organized as a stock or non-stock
SEC, or, in proper clear intention to form a partnership venture
cases, passage of a corporation. (MIAA v. CA, G.R. No. 155650,
through a corporate vehicle (there was intention
special law 2006)
to be active participants in the corporation’s
Number of Organizers ● Test to determine whether a corporation is
business), even those who did not directly
Any person/s but not At least 2 participate in the contract or transaction being public or private: If the corporation is
more than fifteen sued upon, but benefitted therefrom may be held created by the State as the latter’s own
(15).2 liable as general partners. (Lim Tong Lim v. agency or instrumentality to help it in carrying
Powers Philippine Fishing Gear, G.R. No. 136448, 1999) out its governmental functions, then that
corporation is considered public; otherwise it
2. CLASSES OF CORPORATIONS is private. (Philippine Society for the
Prevention of Cruelty to Animals v. COA,
1 For purposes of this part of the reviewer, unless 2Note- There is no 5 person minimum anymore for the In Relation To The State G.R. No. 169752, 2007)
otherwise specified, all references refer to the Revised number of organizers (i.e., incorporators) of a a. Private corporations – Formed by private
Corporation Code, Republic Act no. 11232. Corporation under the RCC. (see discussion at page
15, Subheading 5.A) persons alone, by or with the State pursuant
(hereinafter RCC)

a. Quasi-public corporation However, there is now formal administrative and ● Under the Rules of Court Rule 66, inquiry b. Nonstock corporation (Secs. 86-87)
A species of private corporations created by statutory recognition of “government must be done by the Solicitor General in ● A corporation where no part of its income
special law and required to render public instrumentalities with corporate a quo warranto proceeding where the is distributable as dividends to members,
service or supply public wants. (Id.) Usually powers/government corporate entities,” which main issue is the right to exist as a trustees or officers
covers school districts, water districts and the corporation ● Any profit obtained as an incident to its
may not fall within the definition of stock and non-
like. operations shall, whenever necessary or
stock corporations, but are government
Elements of a de facto corporation proper, be used for the furtherance of the
b. Government owned and controlled instrumentalities that are vested with corporate
a. Valid law under which incorporated; purpose for which the corporation was
corporations (GOCCs) powers. (LRTA v. Quezon City, G.R. No. 221626, b. Attempt in good faith to incorporate or organized.
Created under a special law or charter, or any 2019) “colorable compliance;”
agency organized as a stock or non-stock c. Assumption of corporate powers; and As To Control
corporation, vested with functions relating to Under the Constitution, the COA has audit d. Issuance of certificate of incorporation. a. Holding company – one that controls
public needs whether governmental or jurisdiction over both GOCCs with original (Arnold Hall v. Piccio, G.R. No. L-2598, 1950) another as a subsidiary or affiliate by the
proprietary in nature, and owned by the
charters (subject to COA pre-audit) and those power to elect its management; one which
Government of the Republic of the
without original charters (those organized under Note: A corporation which has failed to file its by- holds shares in other companies for purposes
Philippines directly or through its
the Corporation Code—subject to post-audit). laws within the prescribed period does not ipso of control rather than for mere investment.
instrumentalities either wholly or, where
(Alejandrino v. COA, G.R. No. 245400, 2019). facto lose its powers as such (Sawadjaan v. CA, (SEC Opinion No. 15-15)
applicable as in the case of stock
G.R. No. 141735, 2005). b. Affiliate company – one that is subject to
corporations, to the extent of at least a
majority of its outstanding capital stock (R.A. As to Place of Incorporation common control of a parent or holding
c. Corporation by estoppel (Sec. 20);
No. 10149) a. Domestic – one incorporated under laws of company and operated as part of a system.
All persons who assume to act as a corporation
the Philippines (SEC Opinion No. 15-15)
Note: A GOCC when organized under the knowing it to be without authority to do so shall be
b. Foreign – one formed, organized or existing liable as general partners for all debts, liabilities c. Parent and subsidiary companies – when
Corporation Code is still a private corporation. under any laws other than those of the a corporation has a controlling financial
But being a GOCC makes it subject to laws and and damages incurred or arising as a result
Philippines, and whose laws allow Filipino thereof interest in one or more corporations, the one
provisions applicable to the Government or its
citizens and corporations to do business in its having control is known as the “parent
entities and subject to the control of the
Government (Cervantes v. Auditor General, G.R.
own country. (Sec. 140) When such ostensible corporation is sued on any company” and the controlled corporations are
No. L-4043, 1952). transaction entered by it as a corporation or on known as the “subsidiary companies”.
As To Legal Status any tort committed by it as such, it shall not be
The GOCC Governance Act (R.A. 10149), which a. De jure corporation allowed to use its lack of corporate personality as As To Purpose of Incorporation
governs compensation and position classification ● Corporation organized in accordance a defense. a. Municipal corporation
systems within the GOCC Sector, does not with requirements of law; b. Religious corporation
distinguish between chartered and non-chartered ● Every corporation is deemed to be a de Anyone who assumes an obligation to an c. Educational corporation
GOCCs, and its provisions apply equally to both. jure until proven otherwise ostensible corporation as such cannot resist d. Charitable, Scientific or Vocational
(GSIS Family Bank Employees Union v. performance thereof on the ground that there was corporation
Villanueva, G.R. No. 210773, 2019). b. De facto corporation (Sec. 19) in fact no corporation.
e. Business corporation
● A corporation claiming in good faith to be
d. Corporation by prescription
In order to qualify as a GOCC, one must be a corporation under the Corporation As To Number of Members
organized either as a stock or non-stock The Roman Catholic Church is a corporation by
Code but where there exists a flaw in its a. Aggregate - a corporation which consists of
corporation. Section 31 defines a stock prescription, with acknowledged juridical
incorporation or it falls short of the personality inasmuch as it is an institution which many persons united to form a body politic
corporation as one whose “capital stock is divided requirements provided by law. and corporate (IEMELIF v. Lazaro, G.R. No.
into shares and ... authorized to distribute to the antedated by almost a thousand years any other
● It is the result of an attempt to incorporate personality in Europe (Barlin v Ramirez, G.R. No. 184088, 2010).
holders of such shares dividends.” Although b. Corporation sole – Formed by one person
under an existing law coupled with the L-2832, 1906).
BCDA has an authorized capital of P100 Billion,
exercise of corporate powers. who may be the chief archbishop, bishop,
however, it is not divided into shares of stock; it
has no voting shares; and has no provision which ● A de facto corporation will incur the same As To Existence of Stocks minister, rabbi, or other presiding elder of any
authorizes the distribution of dividends and obligations; have the same powers and a. Stock corporation religious denomination, sect or church. (Sec.
allotment of surplus and profits to BCDA’s rights as a de jure corporation. ● Stock corporations are those which have 108)
stockholders. It cannot qualify also as a non-stock ● The due incorporation of any corporation capital stock divided into shares and are Purpose: created to administer and
corporation because its primary purpose do not claiming in good faith to be a corporation authorized to distribute to the holders of manage the affairs, properties,
fall within the purposes enumerated under under the Corporation Code, and its right such shares, dividends, or allotments of temporalities of the church to which the
Section 88. (BCDA v. CIR, G.R. No. 205925, 20 to exercise corporate powers, shall not the surplus profits on the basis of the holder of the office belongs and also to
June 2018) be inquired into collaterally in any private shares held. (Sec. 3) transmit the same to his successor in
office.
suit.

c. Close Corporation- a corporation where: Corp. v. Redmont Consolidated Mines Corp., Opinion No. 04-14 in reference to the Foreign
a. stockholders of record shall not In order to determine the nationality of a G.R. No. 195580, 2014). Investments Act)
exceed twenty (20); corporation, the following steps should apply:
b. all the issued stock shall be The required percentage of Filipino Some instances wherein the control test
subject to one or more specified 1st Step: The nationality of a corporation is ownership shall be applied to both: applies:
restrictions on transfer permitted determined by the country under whose laws it is a. The total number of outstanding shares of a. Exploitation of natural resources (> 60%)
by this Title; and incorporated (Place of Incorporation Test). stock entitled to vote in the election of ● Sec 2, Art XII, 1987 Constitution – policy
c. the corporation shall not list in directors, and of the State is to ensure that the
2nd Step: If the corporation is applying for a (2nd) b. The total number of outstanding shares of exploitation of natural resources or the
any stock exchange or make any
franchise for public utility and etc. which requires stock, whether or not entitled to vote in the pursuit of the activities deemed to be of
public offering of its stocks of any
a certain percentage of control of stock, the Test election of directors. (SEC Memorandum public or national interest are in the
class. of Controlling Ownership would be applied.
Notwithstanding, a corporation shall not Circular No. 8, s. 2013, Sec. 2) control of the Filipinos
be deemed a close corporation when at ● The State may directly undertake such
3rd step: If there is doubt as to the domestic Mere legal title is not enough. Full beneficial
least 2/3 of its voting stock is owned or activities, or it may enter into co-
control of the percentage of stock in a corporation ownership of 60 percent of the outstanding capital
controlled by another corporation which production, joint venture, or production
with corporate stockholders, Grandfather test stocks, coupled with 60 percent of the voting
is not a close corporation within the would be applied (Narra Nickel Mining and sharing agreements with:
meaning of this Code. (Sec. 95) rights, is constitutionally required for the State's o Filipino citizens; or
Development Corp. v. Redmont Consolidated grant of authority to operate a public utility. Thus,
d. One Person Corporation- a corporation with Mines Corp., G.R. No. 195580, 2014) o Corporations or associations, at
a single stockholder. Only a natural person, voting rights of stocks which have been assigned
least 60% owned by such
or transferred to aliens cannot be considered held
trust, or an estate may form a One Person MAIN TESTS citizens
by Philippine citizens or nationals (cannot give
Corporation. Banks and quasi-banks, pre- A. Place of Incorporation Test b. Public Utilities (> 60%)
proxies to vote). (Roy III v. Herbosa, et al., G.R.
need, trust, insurance, public and publicly- A corporation is a national of the country under No. 207246, 2016) ● Sec 11, Art XII, 1987 Constitution –
listed companies, and non-chartered whose laws it has been organized and registered requires that only domestic corporations
government-owned and -controlled The definition of “beneficial owner or beneficial with at least 60% of the capital stock
corporations may not incorporate as One B. Control Test ownership in the SRC-IRR, which is in owned by Filipinos may own and operate
Person Corporations. A natural person who is In cases involving properties, business or consonance with the concept of “full beneficial public utilities in the Philippines
industries reserved for Filipinos, in addition to the ownership” in the FIA-IRR, is relevant in resolving
licensed to exercise a profession may not ● The nationality test for public utilities
place of incorporation test, the nationality of a only the question of who is the beneficial owner
organize as a One Person Corporation for the applies not at the time of the grant of the
corporation is determined by the nationality of the or has beneficial ownership of each “specific
purpose of exercising such profession except “controlling stockholders”. primary franchise that makes a
as otherwise provided under special laws. stock” of the public utility whose stocks are under corporation a juridical person, but at the
(Sec. 115) review. If the Filipino has the voting power of the grant of the secondary franchise that
Absent any doubt, the Control Test shall be used “specific stock”, i.e., he can vote the stock or
in determining the nationality of a corporation authorizes the corporation to engage in a
direct another to vote for him, or the Filipino has
3. NATIONALITY OF CORPORATIONS specially in cases where foreign ownership nationalized industry. (People v. Quasha,
the investment power over the “specific stock”,
restrictions apply. (SEC OGC Opinion No. 16-19) i.e., he can dispose of that “specific stock” or G.R. No. L-6055, 1953)
Nationality of Corporation direct another to vote or dispose it for him, then ● The Constitution requires a franchise for
Serves as a legal basis for subjecting the [T]here are two cases in determining the such Filipino is the “beneficial owner” of that operating a public utility; however, it does
enterprise or its activities to the laws, the nationality of the Investee Corporation. The first “specific stock.” Being considered Filipino, that not require a franchise before one can own
economic and fiscal powers, and various social case is the ‘liberal rule’, later coined by the SEC “specific stock” is then to be counted as part of
and financial policies of the state to which it is as the Control Test in its 30 May 1990 Opinion, the facilities needed to operate a public
the 60% Filipino ownership requirement under utility so long as it does not operate them to
supposed to belong. and pertains to the portion in said Paragraph 7 of the Constitution. The right to the dividends, jus
the 1967 SEC Rules which states, ‘(s)hares fruendi—a right emanating from ownership of that
serve the public.(Tatad v. Garcia, Jr., G.R.
Tests: belonging to corporations or partnerships at least “specific stock” necessary accrues to its Filipino No. 114222, 1995).
1. Place of Incorporation 60% of the capital of which is owned by Filipino “beneficial owner.” (Roy III v. Herbosa, G.R. No. c. Mass Media (100%)
2. Control Test citizens shall be considered as of Philippine 207246 (Resolution), 18 April 2017.) ● Sec 11, Art XVI, 1987 Constitution –
3. Grandfather Rule3 nationality.’ Under the liberal Control Test, there ownership of mass media shall be limited
4. War-time – in times of war, nationality of is no need to further trace the ownership of the General rule: The Control Test cannot overcome to the citizens of the Philippines, or to
corporation is determined by the character or 60% (or more) Filipino stockholdings of the the Place of Incorporation Test. corporations, cooperatives or
citizenship of its controlling stockholders Investing Corporation since a corporation which
is at least 60% Filipino-owned is considered as associations, wholly-owned and
5. Investment Test Exception: A corporation organized abroad and managed by such citizens (100% Filipino
Filipino. (Narra Nickel Mining and Development registered as doing business in the Philippines
6. Place of Principal Business management of the entity)
under the Corporation Code, whose capital ● Cable Industry - CATV as “a form of mass
outstanding stock and entitled to vote is wholly
3 Emphasis on no. 2 & 3 for they are expressly media which must, therefore, be owned
owned by Filipinos is a Philippine National. (SEC
indicated in the bar syllabus. and managed by Filipino citizens, or
Page 100 of 393 Page 101 of 393

corporations, cooperatives or OTHER TESTS officers, trustees and shareholders (Doctrine of The failure of the corporate employer to comply
associations, wholly-owned and Separate Juridical Personality). with a legal duty, such as under the Labor Code
managed by Filipino citizens pursuant to A. War-Time Test to grant separation pay to employees constitutes
the mandate of the Constitution.” (DOJ Exception: When the corporation is used as a tort and its stockholder who was actively engaged
Opinion No. 95, series of 1999). In times of war, nationality of corporation is cloak for fraud, illegality, or in other certain in the management of the business should be
d. Advertising Industry (> 70%) determined by the character or citizenship of its held personally liable (Naguiat v. NLRC, G.R. No.
circumstances, the courts may disregard the
controlling stockholders 116123, 1997).
● Sec 11, Art XVI, 1987 Constitution – only separate and distinct personality of the
Filipino citizens or corporations or corporation and treat the corporation as a mere
B. Investment Test A corporation can be held liable for the tortious
associations at least 70% of the capital of collection of individuals undertaking business as acts of a corporate officer, in the absence of a
which is owned by such citizens shall be a group (Doctrine of Piercing the Veil of
“Philippine National” prior express direction from the BOD, if such was
allowed to engage in the advertising a. A corporation organized under Philippine Corporate Fiction). connected to the business of the corporation.
agency laws of which at least 60% of the outstanding
e. NEDA could advise Congress to set limitations capital stock entitled to vote is owned and A. Doctrine of Separate Juridical The remedy of the corporation is to recover
of stock ownership in Corporations vested with held by Filipino citizens; and Personality damages against the acting corporate officer
Public Interests (Sec. 176) responsible for the tortious act.
b. A corporation organized abroad and
registered as “doing business” in the A corporation is a juridical entity with a legal
C. Grandfather Rule personality separate and distinct from those b) On Crimes
Where corporate shareholders are present (and Philippines under the Corporation Code of
acting for and on its behalf, and, in general, from General rule: Corporations cannot commit
when the Filipino-foreign equity ownership is in which 100% of the capital stock entitled to felonies under the RPC for it is incapable of the
the people comprising it; the obligations incurred
doubt), the percentage of the Filipino equity in vote belong to Filipinos (R.A. No. 7042, Sec. by the corporation, acting through its directors, requisite intent to commit these crimes.
corporations is computed by attributing the 3[a], as amended or Foreign Investment Act officers and employees are its sole liabilities
nationality of the second or subsequent tier of of 1991) (Santos v NLRC, G.R. No. 101699, 1996). It also cannot commit crimes that are punishable
ownership to determine the nationality of the under special laws because crimes are personal
corporate shareholder Double 60% Rule While a share of stock represents a proportionate in nature requiring personal performance of overt
Where a corporation and its non-Filipino or aliquot interest in the property of the acts.
Example: MV Corporation and AC Corporation stockholders own stock in a SEC-registered corporation, it does not vest the owner thereof
have equal interest in XYZ Company. MV enterprise, at least 60% of the outstanding capital with any legal right or title to any of the corporate A corporation cannot be arrested and imprisoned;
Corporation is 60% owned by Filipinos, while AC stock and entitled to vote of both corporations and property, his interest in such property being hence, cannot be penalized for a crime
Corporation is 50% owned by Filipinos. By the at least 60% of the members of the Board of equitable or beneficial in nature. Shareholders punishable by imprisonment.
grandfather rule, MV Corporation would have a Directors of both corporations must be Filipino are in no legal sense the owners of corporate
30% Filipino interest in XYZ Company (60% of citizens (R.A. No. 7042, Sec. 3[a], as amended) property, which is owned by the corporation as a Exceptions: If the crime is committed by a
50%), while AC Corporation would have a 25% distinct legal person (Magsaysay-Labrador v CA, corporation, the directors, officers, employees or
Filipino interest in XYZ Company (50% of 50%). C. Place of Principal Business Test G.R. No. 58168, 1989). other officers thereof responsible for the offense
Hence, the total Filipino interest is only 55%. Residence of a corporation is the place where its shall be charged and penalized for the crime,
principal office is located, as stated in its Articles Corporate Liability precisely because of the nature of the crime and
The Control test is still the prevailing mode of of Incorporation. the penalty therefore. However, the corporation
determining whether or not a corporation is a i. Liability for Torts and Crimes may be charged and prosecuted for a crime if the
Filipino corporation within the ambit of the natural The place where the principal office of the imposable penalty is fine (Ching v. Secretary of
resources provisions of the Constitution. But corporation is to be located is one of the required a) On Torts Justice, G.R. No. 164317, 2006).
when in the mind of the court there is doubt based contents of the articles of incorporation to be filed A corporation is civilly liable in the same manner
on attendant facts and circumstances, in the 60- with the SEC (Hyatt Elevators v. Goldstar, G.R. as natural persons for torts, because the rules When a law expressly provides that a corporation
40 Filipino equity ownership in the corporation, No. 161026, 2005). governing the liability of a principal for a tort may be proceeded against criminally, the
then it may apply the grandfather rule (Narra committed by an agent are the same whether the responsible officer will be held personally liable
Nickel Mining and Development Corp. v. Applied to determine whether a state has principal be a natural person or a corporation, and for the crimes committed by the corporation.
Redmont Consolidated Mines Corp., G.R. No. jurisdiction over the existence and legal character whether the agent be a natural or artificial person. However, such liability will only attach to the
195580, 2014). of a corporation, its capacity or powers, internal That a principal is liable for every tort which he officer when the corporation is directly required by
organization, capital structure, the rights and expressly directs or authorizes, is just as true of a law to do an act in a given manner, and the same
liabilities of directors, officers, and shareholders corporation as a natural person (PNB v. CA, G.R. law makes the person who fails to perform the act
The “grandfather rule” does not eschew, but in fact
towards each other and to creditors and third No. L-27155, 1978). in the prescribed manner expressly liable
supplements the “control test”, as the latter persons. criminally (Sia v. Court of Appeals, G.R. No.
implements Filipinization provisions of the 108222, 1997). For example:
A corporate officer who caused the tort act to be
Constitution. (Narra Nickel Mining and Development 4. CORPORATE JURIDICAL PERSONALITY committed in the name of the corporation is also 1) Under the Anti-Money Laundering Act,
Corp. v. Redmont Consolidated Mines Corp., G.R. personally liable as a joint-tortfeasor. juridical persons are also defined as
No. 195580, 2015). General Rule: The Corporation has a separate offenders.
and distinct juridical personality from its directors,
Page 102 of 393 Page 103 of 393

2) The RCC provides situations where Note: The right against self-incrimination has no Note: A corporation may not be made to answer shareholders in corporate property is purely
corporations are liable for criminal application to juridical persons. (Bataan Shipyard for acts or liabilities of its stockholders or those of inchoate (Saw v. CA, G.R. No. 90580, 1991).
sanctions: v. PCGG, G.R. No. 75885, 1987) the legal entities which it may be connected and
a) SEC. 161. Violation of Duty to ● The right against self-incrimination refers vice-versa (ARB Constructions Co., Inc. v. Court The interests of payees in promissory notes
Maintain Records, to Allow their only to testimonial compulsion; of Appeals, G.R. No. 126554, 2000). cannot be off-set against the obligations between
Inspection or Reproduction; ● A corporation cannot testify; and the corporations to which they are stockholders
● The State can freely open the books of c) Pertaining to privileges enjoyed absent any allegation, much less, even a scintilla
b) SEC. 165. Fraudulent Conduct
the corporation to ensure that it does not The tax privileges enjoyed by a corporation do not of substantiation, that the parties interest in the
of Business;
exceed its powers extend to its stockholders. A corporation has a corporation are so considerable as to merit a
c) SEC. 166. Acting as personality distinct from that of its stockholders, declaration of unity of their civil personalities
Intermediaries for Graft and enabling the taxing power to reach the latter when (CKH Industrial and Development Corp. v. CA,
Corrupt Practices; Implications of the Existence of the Corporate
they receive dividends from the corporation. It G.R. No. 111890, 1997).
d) SEC. 167. Engaging Veil or a Separate and Distinct Juridical
must be considered as settled in this jurisdiction
Personality
Intermediaries for Graft and that dividends of a domestic corporation which Even when the foreclosure on the assets of the
Corrupt Practices are paid and delivered in cash to foreign corporation was wrongful and done in bad faith,
a) Controlling interest of and/or dealings in
corporations as stockholders are subject to the the stockholders of the corporation have no
shareholdings
ii. Recovery of Moral Damages payment of the income tax, the exemption clause standing to recover for themselves moral
Ownership of a majority of capital stock and the
to the charter [of the domestic corporation] damages. Otherwise, it would amount to the
fact that majority of directors of a corporation are
General rule: A corporation cannot recover moral notwithstanding. (Manila Gas Corporation. v. appropriation by, and the distribution to, such
the directors of another corporation creates no
damages as it cannot suffer physical suffering Collector of Internal Revenue, G.R. No.L-42780, stockholders of part of the corporation’s assets
employer-employee relationship with the latter’s
and mental anguish (Prime White Cement v IAC, 1936). before the dissolution of the corporation and the
employees (DBP v. NLRC, G.R. No. 86932,
G.R. No. L-68555, 1993). liquidation of its debts and liabilities (APT v. CA,
1990; Francisco, et al. v. Mejia, G.R. No. 141617,
d) Assumption as a corporate officer G.R. No. 121171, 1998).
2001).
Exception: A corporation with a good reputation, Being an officer or stockholder of a corporation
if besmirched, is allowed to recover moral does not by itself make one’s property also of the Where real properties included in the inventory of
The mere fact that a stockholder sells his shares
damages upon proof of existence of factual basis corporation, and vice-versa, for they are separate the estate of a decedent are in the possession of
of stock in the corporation during the pendency of
of damage (actual injury) and its causal relation entities, and that shareholders are in no legal and are registered in the name of the
a collection case against the corporation, does
(Crystal v. BPI, G.R. No. 172428, 2008). sense the owners of corporate property which is corporations, in the absence of any cogency to
not make such stockholder personally liable for
owned by the corporation as a distinct legal shred the veil of corporate fiction, the
the corporate debt, since the disposing
The following Constitutional rights apply to a person (Good Earth Emporium, Inc. v. CA, G.R. presumption of conclusiveness of said titles in
stockholder has no personal obligation to the
corporation: No. 82797, 1991). favor of said corporations should stand
creditor, and it is the inherent right of the
undisturbed (Lim v. CA, G.R. No. 124715, 2000).
stockholder to dispose of his shares of stock
a. Due process - The due process clause is The mere fact that one is president of the
anytime he so desires (Remo, Jr. v. IAC, G.R. No.
universal in its application to all persons corporation does not render the property he owns f) Third-parties to corporate acts
L-67626, 1989).
without regard to any differences of race, or possesses the property of the corporation, The fact that respondents are not stockholders of
color, or nationality. Private corporations, since that president, as an individual, and the the disputed corporations does not make them
Mere substantial identity of the incorporators of
likewise, are “persons” within the scope of the corporation, are separate entities (Cruz v. non-parties to the case. In this case, it is alleged
the two corporations does not necessarily imply
Dalisay, A.M. No. R-181-D, 1987). that the aforementioned corporations are mere
guaranty insofar as their property is fraud, nor warrant the piercing of the veil of
alter egos of the directors-petitioners, and that the
concerned.” (Smith Bell & Co. v. Natividad, corporate fiction. In the absence of clear and
e) Properties, obligations and debts former acquired the properties sought to be
G.R. No. 15574, 1919). convincing evidence to show that the corporate
A corporation has no legal standing to file a suit reconveyed to FGSRC in violation of directors-
b. Equal protection of the law (Smith Bell & personalities were used to perpetuate fraud, or
for recovery of certain parcels of land owned by petitioners’ fiduciary duty to FGSRC.
Co. v. Natividad, G.R. No. 15574, 1919) circumvent the law, the corporations are to be
its members in their individual capacity, even
c. Unreasonable searches and seizures - treated as distinct and separate from each other
when the corporation is organized for the benefit The notion of corporate entity will be pierced or
(Laguio v. NLRC, G.R. No. 108936, 1996).
(Stonehill v. Diokno, G.R. No. L-19550, of the members (Sulo ng Bayan v. Araneta, Inc., disregarded and the individuals composing it will
1967). G.R. No. L-31061, 1976). be treated as identical if, as alleged in the present
b) Transaction amongst the corporation and
case, the corporate entity is being used as a cloak
stockholders
In organizing itself as a collective body, the The corporate debt or credit is not the debt or or cover for fraud or illegality; as a justification for
corporation waives no constitutional immunities credit of the stockholder nor is the stockholder’s a wrong; or as an alter ego, an adjunct, or a
The transfer of the corporate assets to the
applicable to it. Its property cannot be taken debt or credit that of the corporation (Traders business conduit for the sole benefit of the
stockholder is not in the nature of a partition but
without compensation; can only be proceeded Royal Bank v. CA, G.R. No. L-78412, 1989). stockholders (Gochan v. Young, G.R. No.
is a conveyance from one party to another
against by due process of law; and is protected 131889, 2001).
(Stockholders of F. Guanzon and Sons, Inc. v.
against unlawful discrimination (Bache & Co. Stockholders have no personality to intervene in
Register of Deeds of Manila, G.R. No. L-18216,
(Phil.), Inc. v. Ruiz, G.R. No. 32409, 1971, citing a collection case covering the loans of the
1962).
Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.). corporation on the ground that the interest of
Page 104 of 393 Page 105 of 393

B. Doctrine of Piercing the Veil of pertaining to the corporation against perpetuate the violation of a statutory or ● The parent corporation uses the property of
Corporate Fiction corporate officers or stockholders. other positive legal breach of duty, or a the subsidiary as its own.
dishonest and an unjust act in contravention ● The directors or executives of the subsidiary
Under certain circumstances, the courts may Example cases: of the plaintiff’s legal right; and, do not act independently in the interest of the
disregard the separate and distinct personality of a) Where a stockholder, who has absolute c. The said control and breach of duty must subsidiary but take their orders from the
the corporation from its members or stockholders control over the affairs of the corporation, have Proximately caused the injury or parent corporation.
and treat the corporation as a mere collection of entered into a contract with another unjust loss complained of (Concept Builders ● The formal legal requirements of the
individuals or an aggregation of persons corporation through fraud and false Inc. v. NLRC, 108734, 1996). subsidiary are not observed (Phil. National
undertaking business as a group such as when representations, such stockholder shall be Bank v. Ritratto Group, Inc., GR No. 142616,
the corporate legal entity is used as a cloak for liable solidarily with co-defendant corporation These were expanded as three-pronged tests: 2001).
fraud or illegality (Kukan Int’l v Reyes, G.R. No. even when the contract sued upon was
182729, 2010). entered into on behalf of the corporation The first prong is the "instrumentality" or Note: Mere ownership by a single stockholder or
(NAMARCO v. Associated Finance Co.,G.R. "control" test. This test requires that the by another corporation of all or substantially all of
It is an equitable doctrine used as a last resort No. L-20886, 1967). subsidiary be completely under the control and the capital stock of the corporation does not justify
only when the objective is to hold the officers b) Piercing is allowed where the corporation is domination of the parent corporation or the application of the doctrine (Francisco v. Mejia,
and/or stockholders liable. Thus, in one case, it used as a means to appropriate a property by shareholder. It seeks to establish whether the G.R. No. 141617, 2001).
cannot be applied in order to declare a fraud which property was later resold to the corporation has no autonomy and the parent
foreclosure proceeding a nullity (Umali v. CA, GR controlling stockholders. (Heirs of Ramon corporation or shareholder "is operating the Example Cases:
No. 89561, 1990). Durano, Sr. v. Uy, G.R no.136456, 2000). business directly for itself or themselves." a) Where the stock of a corporation is owned by
c) Fraud and bad faith on the part of certain one person whereby the corporation
Being merely an equitable remedy, employment corporate officers or stockholders may warrant The second prong is the "fraud" test. This test functions only for the benefit of such
of the piercing doctrine can only be for the the piercing of the veil of corporate fiction so requires that the conduct in using the corporation individual owner, the corporation and the
“protection of the interests of innocent third that the said individual may not seek refuge be unjust, fraudulent or wrongful. individual should be deemed the same
persons dealing with the corporate entity therein, but may be held individually and (Arnold v. Willets and Patterson, Ltd., G.R.
which the law aims to protect by this doctrine” personally liable for his or her actions. The third prong is the "harm" test. This test No. L-20214, 1923).
(Traders Royal Bank v. Court of Appeals, G.R. (Lafarge Cement Phils., Inc. v. Continental requires the plaintiff to show that the defendant’s b) When the corporation is merely an adjunct,
No. 93397, 1997). Cement Corp., G.R. no. 155173, 2004) control, exerted in a fraudulent, illegal or business conduit or alter ego of another
otherwise unfair manner toward it, caused the corporation, the fiction of separate and
Classification of piercing cases: For Alter-ego Cases: harm suffered (PNB v. Hydro Resources distinct corporation entities should be
a. Fraud piercing – when a corporate entity is ● The doctrine applies in this case even in the Contractors Corporations, G.R. no. 167530, disregarded (Tan Boon Bee & Co. v.
used to commit fraud or justify a wrong or to absence of evil intent; it applies because of 2013). Jarencio, G.R. No. L-41337, 1988).
defend a crime. the direct violation of a central corporate law c) Employment of same workers; single place of
b. Alter-ego piercing – when a corporate principle of separating ownership from Factors to Consider in cases of Parent and business, etc. (La Campana Coffee Factory
entity is used to defeat public convenience management. Subsidiary corporations in Alter-ego Piercing: v. Kaisahan ng Manggagawa, G.R. No. L-
or is merely a farce since the corporation is ● The doctrine in such cases is based on ● The parent corporation owns all or most of 5677, 1953).
merely the alter ego, business conduit, or estoppel: if stockholders do not respect the the capital of the subsidiary. d) Use of nominees (Marvel Building v. David,
instrumentality of a person or another entity. separate entity, others cannot also be ● The parent and subsidiary corporations have G.R. No. L-508, 1951)
c. Equity cases – when piercing the corporate expected to be bound by the separate common directors or officers. e) Avoidance of tax. (Yutivo Sons Hardware v.
fiction is necessary to achieve justice or juridical entity. ● The parent company finances the subsidiary. Court of Tax Appeals, G.R. No. L-13203,
equity. ● Piercing in alter ego cases may prevail even ● The parent company subscribed to all the 1961; Liddell& Co. v. Collector of Internal
when no monetary claims are sought to be capital stock of the subsidiary or otherwise Revenue, G.R. No. L-9687, 1961).
Note: The three cases may appear together in enforced against the stockholders or officers caused its incorporation. f) Mixing of bank deposit accounts. (Ramirez
one application (R.F. Sugay & Co. v. Reyes, G.R. of the corporation. ● The subsidiary has grossly inadequate Telephone Corp. v. Bank of America, G.R.
No. L-20451, 1964). capital. No. L-22614, 1969).
ii. Tests for Applicability of the Doctrine of ● The parent corporation pays the salaries and g) Where it appears that two business
i. Grounds for application of the different Piercing the Veil of Corporate Fiction: (CUP) other expenses or losses of the subsidiary. enterprises are owned, conducted, and
types of piercing a. Control – not mere stock control but ● The subsidiary has substantially no business controlled by the same parties, both law and
Complete Domination – not only of except with the parent corporation or no equity will, when necessary to protect the
For Fraud Cases: finances, but of policy and business practice assets except those conveyed to or by the rights of third persons, disregard the legal
1. There must have been fraud or an evil in respect to the transaction attacked and parent corporation. fiction that two corporations are distinct
motive in the affected transaction, and must have been such that the corporate ● The papers of the parent corporation or in the entities and treat them as identical (Sibagat
the mere proof of control of the corporation entity as to this transaction had at the time statements of its officers, the subsidiary is Timber Corp. v. Garcia, G.R. No. 98185,
by itself would not authorize piercing; and no separate mind, will or existence of its described as a department or subdivision of 1992)
2. The main action should seek for the own. the parent corporation, or its business or h) Thinly-capitalized corporations (McConnel v.
enforcement of pecuniary claims b. Such control must have been Used by the financial responsibility is referred to as the Court of Appeals, G.R. No. L-10510, 1961).
defendant to commit a fraud or wrong to parent corporation’s own.
Page 106 of 393 Page 107 of 393

i) Parent-subsidiary relationship. (Koppel Union-PTGWO v. Calica, G.R. No. 96490, Decree No. 902-A, on the ground that the They must:
(Phil.), Inc. v. Yatco, G.R. No. L-47673,1946; 1992). petitioning individuals should be treated as a. Be a natural person, partnership,
Philippine Veterans Investment Development the real petitioners to the exclusion of the association or corporation, singly or
Corporation v. CA, G.R. No. 85266, 1990) Note: However, piercing in alter ego cases petitioning corporate debtor (Union Bank v. jointly with others but not more than
j) Affiliated companies (Guatson International may prevail even when no monetary claims CA, G.R. No. 131729, 1998). fifteen (15)5 ;
Travel and Tours, Inc. v. NLRC, G.R. No. are sought to be enforced against the (h) Changing of the petitioner’s subsidiary i. may be composed of any
100322, 1994) stockholders or officers of the corporation. liabilities by converting them to guarantors of combination of natural person/s,
(e.g. piercing for other purposes such as bad debts cannot be done by piercing the veil
SEC-registered partnership/s,
Summary of Probative Factors (Philippine laborer’s rights) of corporate identity (Ramoso v. CA, G.R. No.
SEC-registered domestic
National Bank vs. Ritratto Group, Inc., et al., G.R. 117416, 2000)
No. 142616, 2001; Concept Builders, Inc. v. (d) Piercing is forbidden when the personal (i) Piercing doctrine is meant to prevent fraud, corporation/s or associations, and
NLRC, G.R. No. 108734, 1996): Whether the obligations of an individual are sought to and cannot be employed to perpetrate foreign corporation/s (SEC MC
separate personality of the corporation should be be enforced against the corporation fraud or a wrong (Araneta, Inc. v. Tuason, no. 16-19)
pierced depends on questions of facts, (Robledo v. NLRC, G.R. No. 110358, 1994). G.R. No. L-2886, 1952). b. If natural persons, be of Legal Age;
appropriately pleaded. Mere allegation that a (j) Corporate persons are entitled to due c. Each owns or subscribes to at least
corporation is the alter ego of the individual Note: As an exception to this rule, the process protection. Thus, failure to implead one share for stock corporations and
stockholders is insufficient. The presumption is Supreme Court allowed such piercing by a corporation in a suit for recovery of ill- be a member for non-stock
that the stockholders or officers and the applying the concept of “reverse piercing”. gotten wealth against its stockholders corporations.
corporation are distinct entities. The burden of In a traditional veil-piercing action, a court cannot bind the corporation itself; Note: Natural persons who are licensed to
proving otherwise is on the party seeking to have disregards the existence of the corporate otherwise, its fundamental right to due practice a profession, and partnerships or
the court pierce the veil of corporate entity entity so a claimant can reach the assets of a process will be violated. (COCOFED v. associations organized for the purpose of
(Ramoso v. CA, G.R. No. 117416, 2000). corporate insider. In a reverse piercing Republic, G.R. No. 177857-58, 2016) practicing a profession, shall not be allowed to
action, however, the plaintiff seeks to reach (k) Mere ownership of all or nearly all of the organize as a corporation (for the practice of such
For Equity Cases: the assets of a corporation to satisfy claims capital stocks of a corporation is not in itself a profession) unless otherwise provided under
These are cases, where there is no fraud or alter against a corporate insider." sufficient reason for disregarding the fiction of special laws.(Sec. 10)
ego circumstances that can warrant the piercing separate corporate personalities. The
of the corporate veil. This mainly used to render Reverse piercing has two (2) types: probate court applied doctrine of piercing the Additional Guidelines issued by the SEC(SEC
justice in the situation at hand, or to brush aside 1. Outsider reverse - piercing occurs when corporate veil since Rosario had no other MC no. 16-19):
technical defenses. a party with a claim against an individual or properties that comprise her estate other than 1) For Partnership as Incorporators:
corporation attempts to be repaid with assets her shares. Although the intention to protect ● Application for registration must be
For example: of a corporation owned or substantially the shares from dissipation is laudable, it is accompanied with an affidavit, executed
a) When used to confuse legitimate issues controlled by the defendant. still an error to order tenants to remit
by all the partners, indicating that they
(Telephone Engineering and Service Co., 2. Insider reverse piercing - the controlling payments to the estate. Also, the court has
Inc. V. WCC, G.R. No. L-28694, 1981). members will attempt to ignore the corporate not acquired jurisdiction over Primrose and its authorized the partnership to be an
b) When used to raise issues relating only to fiction in order to take advantage of a benefit properties. Piercing applies to the incorporator and have designated one of
technicalities (Emilio Cano Ent. v. CIR, G.R. available to the corporation, such as an determination of liability not of the partners to sign the incorporation
No. L-20502, 1965). interest in a lawsuit or protection of personal jurisdiction. It is not available to confer documents.
assets. (International Academy of jurisdiction over a party not impleaded in ● Partnerships under Dissolved or Expired
The veil may not always be pierced, especially Management and Economics vs. Litton and a case. (Mayor v. Tiu, G.R. No. 203770, status with the SEC shall not be
in the following circumstances: Company, G.R. No. 191525, 2017). 2016) authorized to become an incorporator.
2) For Domestic Corporations or Associations
(a) Piercing is a remedy of last resort and is not (e) To disregard the separate juridical 5. CAPITAL STRUCTURE as Incorporators:
available when other remedies are still personality of a corporation, the wrongdoing ● Its investment in the new corporation must
available (Umali v. CA, G.R. No. 89561, must be clearly and convincingly A. Number and Qualifications of be approved by a majority of the board of
1990). established. It cannot be presumed (DBP vs. Incorporators directors or trustees ratified by the
(b) One cannot successfully invoke the piercing CA, G.R. No. 126200, 2001).
stockholders representing at least two-
doctrine when it was proven that the act done (f) Piercing of the veil of corporate fiction is not 1) Incorporators4 – Incorporators are those
was contrary to the existing rules, which allowed when it is resorted to justify under thirds (⅔) of the outstanding capital stock,
stockholders or members mentioned in the or at least two-thirds (⅔) of the members
were well-known to the officers of the one a theory of co-ownership the continued
articles of incorporation as originally forming in cases of nonstock corporations.
invoking it (Traders Royal Bank v. Court of use and possession by stockholders of
Appeals, G.R. No. 93397, 1997). corporate properties (Boyer-Roxas v. Court and composing the corporation and who are ● A Directors'/Trustees' Certificate or a
(c) Piercing is forbidden unless the remedy of Appeals, G.R. No. 100866, 1992). signatories thereof (Sec. 5). Secretary's Certificate, indicating the
sought is to make the stockholder, officer (g) The piercing doctrine cannot be availed of in
or another corporation pecuniarily liable order to dislodge from the jurisdiction of 4 5
Note: Amendments were introduced by the RCC A corporation with a single stockholder is considered
for corporate debts (Umali v. CA, G.R. No. the SEC the petition for suspension of
removing the qualifications to be natural persons, and either as an One Person Corporation or a Corporation
89561, 1990; Indophil Textile Mill Workers payments filed under Section 5(e) of Pres. majority must be residents of the Philippines; Sole.
Page 108 of 393 Page 109 of 393

necessary approvals, as well as the General Rule: A corporate term for a specific 1) Generally, a corporation whose term has a favorable recommendation of the
authorized signatory to the incorporation period may be extended or shortened by expired; appropriate government agency:
documents, shall be executed under oath amending the articles of incorporation. 2) An Expired Corporation whose Certificate of 1) Banks,
and submitted by the applicant. Limitation: No extension may be made Registration has been revoked for non-filing 2) Banking and quasi banking institutions,
● Domestic corporations under "delinquent", earlier than three (3) years prior to the of reports, 3) Preneed, Insurance and trust companies,
"suspended", "revoked" or "expired" original or subsequent expiry date(s) 3) An Expired Corporation whose Certificate of 4) Non-stock savings and loan associations
Registration has been suspended (NSSLAs),
status with the SEC shall not be
Exception: There are justifiable reasons for an 5) Pawnshops,
authorized to become an incorporator.
earlier extension as may be determined by the Note for 2) & 3): it shall file the proper Petition to
3) For Foreign Corporations as incorporators: 6) Corporations engaged in money service
SEC. Lift its Suspended Status, which may be
● The application for registration must be incorporated in its Petition to Revive, and must
business, and
accompanied by a copy of a document Effects: settle the corresponding penalties thereof 7) Other financial intermediaries (Sec. 11)
duly authenticated by a Philippine If extended:
Consulate or with an apostille affixed Such extension of the corporate term shall take 4) An Expired Corporation whose corporate Required Vote to Initiate Revival:
thereto, authorizing the foreign effect only on the day following the original or name has already been validly re-used, and is
corporation to invest in the corporation subsequent expiry date(s). currently being used, by another existing The required number of votes for the Revival of
being formed and specifically naming the corporation duly registered with the SEC, an Expired Stock Corporation is at least a majority
If not extended or expired: provided that the former shall change its vote of the board of directors, and the vote of at
designated signatory on behalf of the
Upon expiration of the period fixed in the articles corporate name within thirty (30) days from the least majority of the outstanding capital stock. For
foreign corporation.
of incorporation, in the absence of compliance issuance of its Certificate of Revival of nonstock corporations, at least a majority vote of
with the legal requisites for the extension of the Corporate Existence. (SEC Memo. Circ. no. the board of trustees, and the vote of at least
B. Minimum Capital Stock And
period, the corporation ceases to exist and is 23-19) majority of the members. (SEC MC no. 23-19)
Subscription Requirements
dissolved ipso facto (PNB v. CFI Rizal, G.R. No.
63201, 1992) Who may not file? D. Classes of Shares of Stock (Sec. 6)
Stock corporations shall not be required to have
a minimum capital stock, except as otherwise The classification of shares, their corresponding
Doctrine of Relations or Relating Back 1) An Expired Corporation which has completed
specifically provided by special law (Sec 12). 6 rights, privileges, or restrictions, and their stated
Doctrine the liquidation of its assets;
Where the delay in affecting the amendment is 2) A corporation whose Certificate of par value, if any, must be indicated in the articles
C. Corporate Term (Sec. 11)
due to the neglect of the officer with whom the Registration has been revoked for reasons of incorporation.
New Rule: certificate is required to be filed, or to a wrongful other than non-filing of reports;
refusal on his part to receive it, the same will be 3) A corporation dissolved by virtue of Sections Doctrine of Equality of Shares
General rule: A corporation shall have perpetual
treated as having been filed before the expiry 6(c) and 6(d) of SEC Reorganization Act; Each share shall be equal in all respects to every
existence,
date. The doctrine does not apply where the delay 4) An Expired Corporation which already other share, except as otherwise provided in the
Exception: Unless its articles of incorporation
is attributable to the corporation (Alhambra Cigar articles of incorporation and in the certificate of
provide otherwise. availed of re-registration or other
v. SEC, G.R. No. L-23606, 1968) stock. (sec. 6)
memorandum circulars issued by the SEC
For Corporations with certificates of pertaining to re-registration, except when:
Revival: i. Common and Preferred shares
incorporation issued prior to the effectivity of a) The re-registered corporation has given
this Code, and which continue to exist shall have - Common shares are also called
If a corporation’s term has expired, it may apply its consent to the Petitioner to use its ordinary shares and they share in profits
perpetual existence, unless: corporate name, and has undertaken to
● upon a vote of its stockholders for a revival of its corporate existence, pro-rata
together with all the rights and privileges under its undergo voluntary dissolution - Preferred shares may be preferred (a)
representing a majority of its outstanding
certificate of incorporation and subject to all of its immediately after the issuance of the as to dividends, or (b) as to distribution of
capital stock
duties, debts and liabilities existing prior to its Petitioner's Certificate of Revival; or assets during liquidation, or (c) as to any
● the corporation notifies the SEC that it revival. Upon approval by the SEC, the b) The re-registered corporation has given other manner stated in the Articles, not
elects to retain its specific corporate corporation shall be deemed revived and a its consent to the Petitioner to use its violative of the Corp Code. If authorized
term pursuant to its articles of incorporation. certificate of revival of corporate existence shall corporate name, and has undertaken to by Articles, Board may fix terms. It is
Any change in the corporate term under this be issued, giving it perpetual existence, unless change its corporate name immediately ALWAYS with a stated par value.
section is without prejudice to the appraisal right its application for revival provides otherwise. after the issuance of the Petitioner's
of dissenting stockholders in accordance with the
provisions of this Code. Certificate of Revival. (SEC Memo. ii. Par Value and No-Par Value
Who may file for petition for revival of
Circ. no. 23-19) ● Par value shares - with a pre-stated
corporate existence:
Extension: amount or denomination
No application for revival of certificate of ● Non- par value - no pre-stated value
incorporation of following corporations shall be
6 The RCC completely removed sec. 13 of the old approved by the SEC unless accompanied by
corporation code which provided for the 25-25 rule
upon incorporation.
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Non-par value shares are deemed fully paid and or deny the right of members of any class, the Exception: Investors who were not the “moving C. Pre-incorporation subscription (Sec. 60)
non-assessable so holders of such are not liable specific provision of Section 7 to founders’ share spirit” behind the organization of the corporation,
to the corporation or its creditors. must prevail, and that the nonstock corporation but who were merely convinced to invest in the
can lawfully suspend or define the voting rights of proposed corporate venture on the basis of the It is entered into before the incorporation and
The consideration received is treated as capital its members, but with respect to founders’ share, feasibility study undertaken, are not liable irrevocable for a period of six (6) months from the
and cannot be declared as dividends. the exclusive right to vote and be voted for of the personally with the corporation for the cost of date of subscription unless:
founders’ share should expire after five years such feasibility study.(Caram, Jr. v. CA, G.R. No. i. All other subscribers consent to the
Because they are vested with public interest, from the approval of the SEC. (Forest Hills and L-48627, 1987) revocation, or
the following types of corporations may only Country Club, Inc. v. Kings Properties Corp., G.R. ii. The corporation failed to materialize after
issue par value shares: No. 212833, 2019). ii. Liability of Corporation for Promoter’s 6 months or within the stipulated period.
a. Banks Contracts It cannot be revoked after filing the Articles of
b. Trust Companies b. Redeemable shares – Expressly General Rule: Corporation is not bound to a Incorporation with the SEC.
c. Insurance Companies provided in articles; may be contract made by a promoter before its
d. Public Utilities purchased/taken up upon expiration of incorporation (Cagayan Fishing v. Sandiko, G.R. In contrast
e. Building and Loan Associations. the period of said shares purchased No. L-43350, 1937) Post-incorporation subscription – entered into
whether or not there are unrestricted after incorporation, such as for the unsubscribed
iii. Voting and Non- Voting Shares retained earnings; may be deprived of Exceptions: portion of the authorized capital stock and for the
a) Adopts or ratifies the contract; or
● Voting share with complete voting rights voting rights. purchase of increased capital stocks after an
b) Accepts its benefits with knowledge of the amendment of the article of incorporation.
● Non - voting shares are preferred or c. Treasury stocks – stocks previously
terms thereof (Rizal Light v. Morong, G.R.
redeemable shares that have limited issued and fully paid for and reacquired
No. L-20993, 1968) D. Consideration for Stocks (Sec. 61)
voting rights. by the corporation through lawful means
(purchase, donation, etc.); not entitled to
Ratification is the key element in upholding the Stocks shall not be issued for a consideration less
Non-Voting Shares Have Voting Rights In The vote and no dividends could be declared
validity and enforceability of promoter's contracts. than the par or issued price thereof.
Following Matters: thereon as corporations cannot declare Without ratification by a corporation after its due
a. Amendment of Articles dividends to itself. incorporation, a contract entered into on behalf Consideration for issuance of stock may be by
b. Adoption/ Amendment of By- Laws any or a combination of any two or more of the
of a corporation yet to be organized or still in the
c. Sale, lease, exchange, mortgage, pledge or Escrow shares – those held by a third person to process of incorporation is void as against the following:
dispose of all or substantially all of corporate be released only upon the performance of a corporation (Cagayan Fishing Development Co., a. Cash actually paid
property condition or the happening of a certain event Inc. v. Teodoro Sandiko, G.R. No. L-43350, b. Property (tangible or intangible) actually
d. Incur, create, increase bonded indebtedness contained in the agreement. 1937). received and necessary or convenient for the
e. Increase, decrease capital stock corporation’s use
f. Merger/ consolidation with another Preferred cumulative participating share of Although a franchise may be treated as a c. Labor performed or service actually rendered
corporation stock - Share entitling its holder to preference in contract, to the corporation
g. Investment of funds in another corporation the payment of dividends ahead of common 1. The eventual incorporation of the applicant
stockholders and to be paid the dividends due for d. Debts incurred previously by the corporation
h. Dissolution of corporation corporation after the grant of the franchise; (for subscriptions after incorporation)
prior years and to participate further with common and
stockholders in dividend declarations. e. Amounts from unrestricted dividends (for
Other Classes of Shares: (Secs. 7, 8, 9) 2. Its acceptance of the franchise as shown declaration of stock dividends)
a. Founder’s shares – Given rights and by its action in prosecuting the application
Over-Issued Stock – Stock issued in excess of f. Outstanding shares exchanged in
privileges not enjoyed by owners of other authorized capital stock; null and void. filed with the SEC for the approval of said reclassification or conversion
stocks; exclusive right to vote/be voted in franchise, g. Shares of stock in another corporation;
the election of directors shall not exceed 6. INCORPORATION AND ORGANIZATION and/or
5 years. …not only perfected a contract between the
h. Other generally accepted forms of
Note: such exclusive right shall not be respondent municipality and Morong Electric but
A. Promoter consideration.
allowed if its exercise will violate the cured the deficiency in the application of Morong
“Anti-Dummy Law”; the “Foreign Electric (Rizal Light & Ice Co., v. Municipality of
A person who, acting alone or with others, takes Other Rules pertaining to consideration of
Investments Act of 1991”; and other Morong, Rizal, G.R. No. L-20993, 1968).
initiative in founding and organizing the business stocks
pertinent laws. or enterprise of the issuer and receives
B. Subscription Contracts a. Where the consideration is other than actual
consideration therefor. (Securities Regulation cash, or consists of intangible property such
Since Section 7 makes no distinction (and is Code, Sec. 3.10. [R.A. 8799])
found under General Provisions), then it must Any contract for the acquisition of unissued stock as patents of copyrights, the valuation thereof
mean that founders’ shares may be applied to shall be deemed a subscription, notwithstanding shall initially be determined by the
i. Liability of a Promoter
both stock and nonstock corporations. Although the fact that the parties refer to it as a purchase incorporators or the board of directors,
General rule: Promoter is personally liable in the
[Section 88 of the Revised Corporation Code] or some other contract. (Sec. 59) subject to approval by the SEC.
event the corporation is not duly incorporated.
allows in a nonstock corporation to limit, broaden
Page 112 of 393 Page 113 of 393

b. No issuance of shares on promissory notes not include a purpose which would change or outstanding capital stock, without prejudice to 3) Names of original subscribers to capital stock
or future services. contradict its nature as such; the appraisal right of dissenting stockholders and subscribed and paid-up capital
c. The same considerations under sec. 61 c. The place where the principal office of the if available, or if it be a non-stock corporation, 4) Treasurer-in-trust elected by original
whenever applicable are to be used for bonds corporation is to be located, which must be two-thirds (2/3) of the members. subscribers
issued by the corporation. within the Philippines; c. The original and amended articles together 5) Members who contributed to the initial capital
d. The issued price of no par value shares is the d. The term for which the corporation is to exist, shall contain all provisions required by law to of non-stock corporation
amount fixed: IF not elected the perpetual existence; be set out in the articles of incorporation. 6) Witnesses and acknowledgments
i. In the Articles e. The names, nationalities and residences of d. Indication in the articles, by underscoring, the
ii. By the Board if authorized by its the incorporators; change or changes made. F. Corporate Name (Sec. 17)
Articles or By-Laws, or f. The number of directors or trustees, which e. A copy of amended articles duly certified
iii. if not so fixed, by the stockholders shall not more than fifteen (15); under oath by the corporate secretary and a A corporation’s right to use its corporate and trade
representing the majority of the g. The names, nationalities and residences of majority of the directors or trustees stating the name is a property right, it is a right in rem which
it may assert or protect against the whole world in
outstanding capital stock (Sec. 61) persons who shall act as directors or fact that said amendment or amendments
the same manner as it may protect its tangible
trustees until the first regular directors or have been duly approved by the required property against trespass or conversion (Philips
Note: A special stipulation contained in a trustees are duly elected and qualified in vote of stockholders or members, as the case Export v. CA, G.R. No. 96161, 1992)
subscription to corporate stock which, if valid, accordance with the Corporation Code; may be.
would lessen the capital of the company and h. If it be a stock corporation, the amount of its Statutory Limitations on Use of Corporate
relieve the subscriber from liability to be sued authorized capital stock in lawful money of When would take effect: Name (NPC)
upon the subscription, is illegal (National the Philippines, the number of shares into a. The amendments shall take effect upon their No corporate name shall be allowed by the SEC
Exchange v. Dexter, G.R. No. L-27872, 1928). approval by the SEC or if:
which it is divided, and in case the share are
par value shares, the par value of each, the b. From the date of filing with the said a. it is Not distinguishable from that
E. Articles of Incorporation
names, nationalities and residences of the Commission, if not acted upon within six (6) already reserved or registered for the use
Nature and Function of Articles original subscribers, and the amount months from the date of filing for a cause not of another corporation,
The Articles of Incorporation is a basic contract subscribed and paid by each on his attributable to the corporation. b. if such name is already Protected by
document in Corporate Law which defines the subscription, and if some or all of the shares law, or
charter of the corporation. Section 13 of the are without par value, such fact must be Grounds for Rejecting Incorporation or c. when its use is Contrary to existing law,
Corporation Code provides that the Articles of stated; Amendment to Articles of Incorporation (Sec. rules and regulations.
Incorporation do not become binding as the i. If it be a non-stock corporation, the amount 16)
charter of the corporation unless they have been a. Not in prescribed form; Not Distinguishable
of its capital, the names, nationalities and
filed with and registered with the SEC. b. Illegal purpose;
residences of the contributors and the
c. False Treasurer’s affidavit; and A name is not distinguishable even if it contains
amount contributed by each; and
Note: The Articles of Incorporation defines the d. Non-compliance with required Filipino stock one or more of the following:
j. Such other matters as are not inconsistent
contractual relationships between the State and ownership. a) The word “corporation”, “company”,
with law and which the incorporators may
the corporation, the stockholders and the State, “incorporated”, “limited”, “limited liability”,
and between the corporation and its stockholders deem necessary and convenient.
The SEC shall give the corporation a reasonable or an abbreviation of one of such words;
(Lanuza v. CA, G.R. No. 131394, 2005). time to correct or modify objectionable portions. and
An arbitration agreement may be provided in the
articles of incorporation pursuant to Section 181 b) Punctuations, articles, conjunctions,
i. Contents (Sec. 13) Note: A favorable recommendation of the
of this Code. contractions, prepositions, abbreviations,
All corporations shall file with the SEC articles of appropriate government agency to the effect that different tenses, spacing, or number of
incorporation in any of the official languages, duly such article or amendment is in accordance with
signed and acknowledged or authenticated, in Note: The articles of incorporation and the same word or phrase.
law is required in the following types of
such form and manner as may be allowed by the applications for amendments thereto may be
corporation:
SEC, containing substantially the following filed with the SEC in the form of an electronic Effects if Statutory Limitations are Violated:
● Banks, banking and quasi-banking
matters, except as otherwise prescribed by this document, in accordance with the SEC’s rules a) SEC may summarily order the
institutions,
Code or by special law: and regulations on electronic filing. corporation to immediately cease and
● Preneed, insurance and trust companies,
a. The name of the corporation; desist from using such name and require
Amendments ● Non-stock savings and loan associations
b. The specific purpose or purposes for which the corporation to register a new one.
(NSSLAS),
the corporation is being incorporated. Where b) The SEC shall also cause the removal of
Requirement for Amending Articles of ● Pawnshops, and
a corporation has more than one stated all visible signages, marks,
Incorporation (Sec. 15) ● Other financial intermediaries
purpose, the articles of incorporation shall advertisements, labels, prints and other
a. A legitimate purpose for the amendment;
state which is the primary purpose and which effects bearing such corporate name.
b. Majority vote of directors or trustees and the ii. Non-Amendable Items:
is/are the secondary purpose or purposes: 1) Names of incorporators
vote or written assent of the stockholders
Provided, That a non-stock corporation may 2) Names of incorporating directors/trustees
representing at least two-thirds (2/3) of the
Page 114 of 393 Page 115 of 393

c) Upon the approval of the new corporate of the partners gives its consent to the or that another corporation may use the holding that a corporation may be sued under the
name, the SEC shall issue a certificate of applied name. names of absorbed/constituent name by which it makes itself known to its
incorporation under the amended name. d) A name that consists solely of special corporation if consent of the surviving workers (Pison-Arceo Agricultural Development
Note: If the corporation fails to comply with the symbols, punctuation marks or corporation is obtained Corp. v. NLRC, G.R. No. 117890, 1997).
SEC’s order, the SEC may hold the corporation specially designed characters shall not
be registered. Doctrine of Secondary Meaning To determine the existence of confusing similarity
and its responsible directors or officers in
e) The name of an internationally known General Rule: A corporation whose corporate in corporate names, the test is whether the
contempt and/or hold them administratively,
foreign corporation cannot be used by a name is a word or phrase which is generally similarity is such as to mislead a person,
civilly and/or criminally liable under this Code and
domestic corporation unless it is its descriptive or geographical cannot prevent using ordinary care and discrimination. In so
other applicable laws and/or revoke the
subsidiary and the parent corporation another corporation, which uses the same or doing, the court must examine the record as well
registration of the corporation.(Sec. 17) has consented to such use. phrase as its corporate name, from using such. as the names themselves. Proof of actual
f) A name written in a foreign language,
Other Limitations on the Use of Corporate confusion need not be shown. It suffices that
even if registered in another country, Exception: A word or phrase originally incapable
Name: shall not be registered if the name confusion is probably or likely to occur.
a) The Corporate Name of the following entities of exclusive appropriation with reference to an (Indian Chamber of Commerce Phils, Inc. v.
violates good morals, public order or
public policy article on the market because geographically or Filipino Indian Chamber of Commerce in the
shall include:
g) The name of a local geographical unit, otherwise descriptive, might nevertheless have Philippines, Inc., G.R. No. 184008, 2016)
i. For a Corporation- "Corporation" or been used so long and so exclusively by one
"Incorporated," or the abbreviations site or location cannot be used as a
producer with reference to his article that, in that G. Registration, Incorporation and
"Corp." or "Inc." corporate or partnership name unless it
trade and to that branch of the purchasing public, Commencement of Corporate Existence
ii. For One Person Corporations- is accompanied by a descriptive word the word or phrase has come to mean that the
or phrase. (Sec. 18)
“OPC” article was his product. (Lyceum v. CA, G.R. No.
iii. Partnerships- h) The name of a corporation or 101897, 1993)
partnership that has been dissolved or Registration
1) General Partnerships -
"Company" or "Co." whose registration has been revoked Change of Corporate Name A person or group of persons desiring to
2) limited partnership, the shall not be used by another A corporation may change its name by the incorporate shall submit the intended corporate
word "Limited" or "Ltd." corporation or partnership within five amendment of its articles of incorporation, but the name to the SEC for verification. If the SEC finds
3) Professional partnership (5) years from the approval of same is not effective until approved by the SEC that the name is distinguishable from a name
dissolution or five (5) years from the (Philippine First Insurance Co. v. Hartigan, G.R. already reserved or registered for the use of
- "Company,"
date of revocation, unless its use has No. L-26370, 1970). another corporation, not protected by law and not
"Associates," or
"Partners," or other been allowed at the time of the contrary to law, rules and regulations, the name
A change in the corporate name does not make a shall be reserved in favor of the
similar descriptions; dissolution or revocation by the
new corporation, and whether affected by special incorporators. The incorporators shall then
iv. For Foundations- “Foundation” stockholders, members or partners who
act or under a general law, has no effect on the submit their articles of incorporation and
v. For engaging in microfinance represent a majority of the outstanding identity of the corporation, or on its property,
capital stock or membership of the bylaws to the SEC.
activities - "Microfinance" or rights, or liabilities (Republic Planters Bank v. CA,
"Microfinancing" dissolved corporation or partnership, as G.R. No. 93073, 1992). Issuance of Certificate of Incorporation:
vi. Other words or phrases, authorized the case may be.
by law or other rules and i) A corporate or partnership name, which Other Doctrines: Corporate Name If the SEC finds that the submitted documents
regulations, to be used by specific was previously used but become the Similarity in corporate names between two
subject of amendment, shall not be and information are fully compliant with the
corporations or partnerships corporations would cause confusion to the public requirements of this Code, other relevant laws,
re-registered or used by another especially when the purposes stated in their
b) A term that describes the business of a corporation or partnership for a period rules and regulations, the SEC shall issue the
corporation in its name should refer to charter are also the same type of business certificate of incorporation.
of three (3) years from the date of the (Universal Mills Corp. v. Universal Textile Mills
its primary purpose. If there are two approval of the adoption of the new
such terms, the first should refer to the Inc., G.R. No. L-28351, 1977). Commencement of Corporate Existence
corporate or partnership name. An
primary purpose and the second to earlier period may be allowed for the
the secondary purpose. A corporation has no right to intervene in a suit A private corporation organized under this Code
registration or use of the former
c) If the name is similar to a registered corporate or partnership name provided using a name other than its registered name; if a commences its corporate existence and juridical
corporation or partnership, the applicant that the corporation or partnership, corporation legally and truly wants to intervene, it personality from the date the SEC issues the
shall add distinctive word/s to the which previously owned the used should have used its corporate name as the law certificate of incorporation under its official
proposed name to remove the similarity corporate or partnership name, gives its requires and not another name which it had not seal and thereupon the incorporators,
consent. registered (Laureano Investment & Development stockholders/ members and their successors
from the registered name
j) Names of absorbed/constituent Corp. v. CA, G.R. No. 100468, 1997). shall constitute a body corporate under the name
Note: This shall not be allowed if the
corporation may not be used unless stated in the articles of incorporation for the
registered name is coined or unique
it is the surviving corporation There would be no denial of due process when a period of time mentioned therein, unless said
unless the board of directors or majority
intending to use the said corporation is sued and judgment is rendered period is extended or the corporation is sooner
absorbed/constituent corporate name, against it under its unregistered trade name, dissolved in accordance with law. (Sec. 18)
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H. Election of Directors or Trustees (Sec. Binding Effects Failure to Adopt and Maintain the Bylaws Now of the corporation (Rural Bank of Salinas, Inc. v.
23)7 The by-laws of the corporation are its own private Specifically Criminally Punishable and CA, 1992; quoting from Thompson on
laws that have the same effect as the laws of the Subject to SEC’s Contempt Power (Sec. 161, Corporation Sec. 4137, cited in Fleischer v.
Manner of Election corporation. They are deemed written into the please see discussion below) Nolasco, G.R. No. L-23241, 1925).
● In any form; or charter. Thus, they become part of the
● By ballot when requested by any voting fundamental laws of the corporation which are Common Law Limitations on By-Laws ● By-law provisions cannot discriminate
stockholder or member binding upon the corporation and its officers, and among its stockholders or members
● In stock corporations, voting may be in the litigating parties who are not part of the ● By-laws cannot be contrary to law and
corporation in accordance with their terms (Peña articles of incorporation i. Contents of by-laws (Sec. 46)
person or by proxy
v. CA, G.R. No. 91478, 1991; Forest Hills Golf A private corporation may provide the following in
Club v. Gardpro Inc., G.R. No. 164686, 2014). A by-law provision granting to a stockholder a its bylaws:
Time to Determine Voting Right
● At the time fixed in by- laws permanent representation in the Board of a) The time, place and manner of calling and
Procedure on Adoption of By-Laws (Sec. 45) Directors is contrary to the Corporation Code conducting regular or special meetings of
● If by- laws are silent, at time of election a. After Incorporation: requiring all members of the Board to be elected the directors or trustees;
i. Approval by the majority of outstanding by the stockholders or members. Even when the b) The time and manner of calling and
I. Adoption of By-Laws
shares/members members of the association may have formally conducting regular or special meetings and
ii. By-laws must be signed by adopted the provision, their action would be of no mode of notifying the stockholders or
By-laws
stockholders/members voting for avail because no provision of the by-laws can be
Relatively permanent and continuing rules of members thereof;
them adopted if it is contrary to law (Grace Christian
action adopted by the corporation for its own c) The required quorum in meetings of
iii. Kept in the principal office of the High School v. CA, G.R. No. 108905 , 1997).
government and of the individuals composing it stockholders or members and the manner of
and those having direction, management and corporation voting therein;
Although the right to amend by-laws lies solely in
control of its affairs, in whole or in part, in the iv. Subject to inspection by stockholders d) The modes by which a stockholder,
the discretion of the employer, this being in the
management and control of its affairs and or members member, director, or trustee may attend
exercise of management prerogative or business
activities. v. Certified copy signed by majority of judgment, such right cannot impair the obligation meetings and cast their votes;
directors, countersigned by the of existing contracts or rights or undermine the e) The form for proxies of stockholders and
Regulations, ordinances, rules or laws adopted corporate secretary, filed w/ SEC and right to security of tenure of a regular employee. members and the manner of voting them;
by an association or corporation or the like for its attached to original Articles of Otherwise, it would enable an employer to f) The directors’ or trustees’ qualifications,
internal governance, including rules for routine
Incorporation remove any employee from employment by the duties and responsibilities, the guidelines for
matters such as calling meetings and the like
b. Prior to Incorporation: simple expediency of amending its by-laws and setting the compensation of directors or
(San Miguel Corp. v. Mandaue Packing Products
i. such by-laws shall be approved and providing the position shall cease to exist upon trustees and officers, and the maximum
Plants Union-FFW, G.R. No. 152356, 2005).
signed by all the incorporators and occurrence of a specified event (Salafranca v.
number of other board representations that
ii. submitted to the SEC, together with Philamlife (Pamplona) Village Homeowners
By-laws are intended merely for the protection of an independent director or trustee may have
the articles of incorporation. Association, Inc., G.R. No. 121791, 1998)
the corporation, and prescribe regulation, not which shall, in no case, be more than the
restrictions, they are always subject to the charter number prescribed by the SEC;
Note: A certification of the appropriate By-laws that prohibit directors who have interests
of the corporation (Rural Bank of Salinas v. CA, g) The time for holding the annual election of
government agency to the effect that such bylaws in competitor corporations are reasonable in
GR No. 96674, 1992). directors or trustees and the mode or
or amendments are in accordance with law is order to protect the interests of the company
(Gokongwei v. SEC, G.R. No. L-45911, 1979) manner of giving notice thereof;
Requisites of Valid By-Laws: required before he SEC shall accept for filing the
a. It must be consistent with the Corporation bylaws or any amendment thereto of the h) The manner of election or appointment and
● By-laws cannot be unreasonable or be the term of office of all officers other than
Code, other pertinent laws and regulations. following:
1) Bank, contrary to the nature of by-laws (GPI v. El directors or trustees;
b. It must be consistent with the Articles of
2) Banking institution, Hogar Filipino, G.R. No. L-26649, 1927). i) The penalties for violation of the bylaws;
Incorporation.
c. It must be reasonable and not arbitrary or 3) Building and loan association, j) In the case of stock corporations, the
4) Trust company, Authority granted to a corporation to regulate the manner of issuing stock certificates; and
oppressive. transfer of its stock does not empower
d. It must not disturb vested rights, impair 5) Insurance company, k) Such other matters as may be necessary for
corporation to restrict the right of a stockholder to the proper or convenient transaction of its
contract or property rights of stockholders or 6) Public utility, transfer his shares, but merely authorizes the
members or create obligations unknown to 7) Educational institution, or corporate affairs for the promotion of good
adoption of regulations as to the formalities and
law. 8) Other special corporations governed by governance and anti-graft and corruption
procedure to be followed in effecting transfer
special laws (Thomson v. CA, G.R. No. 116631, 1998). measures.
By-laws are intended merely for the protection of Note: An arbitration agreement may be provided
the corporation, and prescribe regulation, not in the bylaws pursuant to Section 181 of this
7This will be discussed extensively under the heading restrictions; they are always subject to the charter Code.
Board of Directors and Trustees (9.D).
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ii. Binding effect of by-laws: adopt new bylaws, duly certified under 7. CORPORATE POWERS k. Other powers essential or necessary to carry
● As to the corporation and its components oath by the corporate secretary and a out its purposes.
– Binding not only upon the corporation but majority of the directors or trustees. A. General Powers; Theory of General
also on its stockholder, members and those Capacity B. Specific Powers: Theory of Specific
having direction, management and control of The amended or new by-laws shall only be Capacity
its affairs. They have the force of contract effective upon the issuance by the SEC of a The general capacity theory maintains that a
between the members/stockholders. certification that the same is in accordance with corporation is said to hold such powers as are not The specific capacity theory maintains that the
● As to third persons – Not binding unless this Code and other relevant laws. prohibited or withheld from it by general law. corporation cannot exercise powers except those
there is actual knowledge. Third persons are expressly/impliedly given.
J. Effects Of Non-Use Of Corporate Charter a. Express powers – Those expressly
not even bound to investigate the content
(Sec. 21) authorized by the Corporation Code and Specific Powers Granted by the RCC:
because they are not bound to know the by-
other laws, and its Articles of Incorporation or 1) Power to extend or shorten corporate
laws which are merely provisions for the
a) If a corporation does not formally organize Charter term (Sec. 36)
government of a corporation and notice to
them will not be presumed (China Banking
and commence its business within five b. Implied/necessary powers – Those that can 2) Power to increase or decrease capital
(5) years from the date of its be inferred from or necessary for the exercise stock or incur, create, increase bonded
Corp. v. CA, G.R. No. 118332 1997).
incorporation, its certificate of of the express powers or for the pursuit of its indebtedness (Sec. 37)
incorporation shall be deemed revoked as purposes as provided in the Charter. 3) Power to deny pre-emptive rights (Sec.
iii. Amendment or Revision (Sec. 47)
of the day following the end of the five-year Examples are powers related to the same line 38)
1) With stockholders or members approval
- Majority vote of the members of the period. of business (e.g. stevedoring services to 4) Power to sell or dispose corporate assets
b) If a corporation has commenced its unload coal to its pier for corporations (Sec. 39)
Board; and
- Majority of the outstanding capital business but subsequently becomes supplying electric power) 5) Power to acquire own shares (Sec. 40)
stock or majority of the members in
inoperative for a period of at least five (5) c. Incidental/inherent powers – Those that 6) Power to invest corporate funds in
case of non- stock corporation, in a consecutive years, the SEC may, after due are deemed to be within the capacity of another corporation or business (Sec.
notice and hearing, place the corporation corporate entities. These “necessarily flow” 41)
meeting duly called for the purpose
under delinquent status. from the business and attach at the moment 7) Power to declare dividends (Sec. 42)
2) The board may be delegated to have the
power to amend or repeal any by- laws or of creation without regard to express powers 8) Power to enter into management contract
Delinquent Corporation: (Sec. 43)
adopt new by- laws, by a vote of: or primary purpose.
A Corporation placed by the SEC under
- 2/3 of the shareholders representing delinquency status after due notice and hearing,
General Express Powers under the C. Power to Extend or Shorten corporate
the outstanding capital stock; or because it commenced its business but
Corporation Code (Sec. 35) term (Sec. 36)
- 2/3 of the members in a non- stock subsequently becomes inoperative for a period of
at least five (5) consecutive years. a. Sue and be sued in its corporate name;
corporation. There should be a written notice of
b. Succession;
c. Adopt and use a corporate Seal; stockholders/members meeting stating:
Such power of the Board may be revoked by Effects of Delinquency Status:
d. Amend Articles of Incorporation ● Proposed action and time and place of
majority vote of the outstanding capital stock or A delinquent corporation shall have a period of
two (2) years to resume operations and comply e. Adopt, amend or repeal By-laws; meeting
majority of the members in a non- stock
with all requirements that the SEC shall f. For stock corporations – Issue stocks to ● Addressed to each stockholder/ member
corporation
prescribe. subscribers and to sell treasury stocks; for ● Deposited to the addressee in post office,
Note: The power to adopt the first original by- a) Upon compliance by the corporation, the non-stock corporations – admit members; with postage prepaid or served
laws cannot be delegated to the board of directors SEC shall issue an order lifting the g. Purchase, receive, take, or grant, hold, personally;
or trustees; only the power to amend or repeal delinquent status. convey, sell, lease, pledge, mortgage and Note: When allowed in the by-laws or done with
any by- laws or adopt new by- laws that will b) Failure to comply with the requirements and otherwise deal with real and personal the consent of the stockholder, sent
supplant the old by- laws can be validly resume operations within the period given electronically in accordance with the rules and
property, pursuant to its lawful business;
delegated. by the SEC shall cause the revocation of the regulations of the SEC on the use of electronic
h. Enter into Partnership, joint venture, merger,
data messages
corporation’s certificate of incorporation. consolidation, or any other commercial
Filing and Effectivity
agreement with natural and juridical persons; Vote needed:
Corporations under special regulatory
Whenever the bylaws are amended or new i. Reasonable Donations for public welfare, ● Board majority (in board meeting) and
jurisdiction
bylaws are adopted, the corporation shall file with The SEC shall give reasonable notice to, and hospital, charitable, cultural, scientific, civil or ● Ratified by 2/3 of OCS or members in a
the SEC coordinate with the appropriate regulatory agency similar purposes (Prohibited: for partisan meeting – mere written assent is not
a) amended or new bylaws and, prior to the suspension or revocation of the political activity); enough
b) if applicable, the stockholders’ or certificate of incorporation of companies under j. Establish pension, retirement and other
members’ resolution authorizing the their special regulatory jurisdiction. Plans for the benefit of directors, trustees,
delegation of the power to amend and/or officers and employees; and
Page 120 of 393 Page 121 of 393

Appraisal rights available to dissenting Note: No decrease of capital stock shall be Power to Sell or Dispose All or Substantially ● If the proceeds of sale or disposition is
stockholders approved by the SEC if it will prejudice the rights All Corporate Assets Including its Goodwill appropriated for the conduct of the
● In case of extension of term – right of of corporate creditors remaining business
appraisal exists Needs vote of:
● In shortening of term – right of appraisal From and after the approval by the SEC and the 1) Majority Vote by Board of Directors or G. Power to Acquire Own Shares (Sec. 40)
recognized in Sec 81(1) – amendment of issuance of its certificate of filing, capital stock Trustees
Articles to shorten or extend corporate shall stand increased or decreased as the 2) 2/3 of OCS or members Requirements:
certificate may declare 1) Corporation has unrestricted retained
term
Note: In nonstock corporations where there earnings in its books to cover the shares to
Incur, create, or increase bonded are no members with voting rights, the vote of be purchased or acquired,
D. Power to Increase or Decrease Capital
indebtedness (non-stock)- There should be no at least a majority of the trustees in office will 2) It is for a legitimate corporate purpose or
Stock or Incur, Create, Increase Bonded be sufficient authorization for the corporation to purposes, including the following cases:
incurring, creating or increasing any bonded
Indebtedness (Sec. 37) indebtedness unless : enter into any transaction authorized by this ● To eliminate fractional shares arising out
● Approved by majority of the board section. of stock dividends;
Power to increase or decrease capital stock - ● Approved by at least 2/3 of members in a ● To collect or compromise an
provided that in the case of an increase in capital meeting Sale of all or substantially all corporate indebtedness to the corporation, arising
stock, the 25-25 rule is complied with, as ● With notice of the proposal and meeting assets: out of unpaid subscription, in a
approved by the SEC given to stockholders delinquency sale, and to purchase
● With prior approval of the SEC Net Asset Value Test- The determination of delinquent shares sold during said sale;
There shall be no increase or decrease of capital Bonds issued by a corporation shall be registered whether or not the sale involves all or ● To pay dissenting or withdrawing
stock unless : with the SEC, which shall have the authority to substantially all of the corporation’s properties stockholders entitled to payment for their
● Approved by majority of the board determine the sufficiency of the terms thereof. and assets must be computed based on its net shares under the provisions of the
● Approved by at least 2/3 of OCS in a asset value, as shown in its latest financial Corporation Code.
meeting E. Power to Deny Pre-Emptive Rights (Sec. statements.
● With notice of the proposal and meeting 38) Shares of stock which have been issued and fully
given to stockholders- given personally Incapacity Test- A sale or other disposition shall paid for, but subsequently reacquired by the
or through electronic means if allowed General rule: Stockholders have the pre-emptive be deemed to cover substantially all the corporate issuing corporation through purchase,
● With prior approval of the SEC right to subscribe to all issues or disposition of property and assets if thereby the corporation redemption, donation, or some other lawful
o The application with the SEC shall be shares by the corporation of any class in would be rendered incapable of continuing means are Treasury Shares. Such shares may
made within six (6) months from the proportion to their shareholdings the business or accomplishing the purpose again be disposed of for a reasonable price fixed
date of approval of the board of Unless: for which it was incorporated. (Sec. 39) by the board of directors (Sec. 9) subject to
directors and stockholders, which ● Denied by the Articles of Incorporation or stockholders’ preemptive rights.
period may be extended for amendment thereto; Notice:
justifiable reasons. ● Shares are issued in compliance with Written notice of stockholder/member meeting H. Power to Invest Corporate Funds in
● Accompanied by a sworn statement of laws requiring minimum stock ownership proposing said action served personally at their another Corporation or For Non-Primary
the treasurer showing that the 25-25 rule by the public places of residence and deposited to the Purpose (Sec. 41)
has been complied with ● Shares issued in good faith in exchange addressee in the post office with postage prepaid,
for property for corporate purposes or when allowed by the by-laws or done with the Needs vote of:
25-25 Rule approved by 2/3 of the OCS consent of the stockholder, sent electronically ● Board majority in meeting
● Shares in payment of previously ● 2/3 of OCS or members -
The SEC shall not accept for filing any certificate contracted debts approved by 2/3 of Dissenting stockholders have appraisal rights. Stockholders/members’ approval not
of increase of capital stock unless accompanied OCS needed if investment in stock of other
by a sworn statement of the treasurer of the After authorization or approval by the corporations is reasonably necessary to
corporation lawfully holding office at the time of F. Power to Sell or Dispose Corporate stockholders/members, the Board may accomplish primary purpose
the filing of the certificate, showing that at least Assets (Sec. 39) however, abandon proposed action without ● Written notice of proposed investment
twenty-five percent (25%) of the increase in prior authorization/approval of and time and place of meeting sent to
capital stock has been subscribed and that at This Power is subject to the provisions of the stockholders/members, subject to rights of 3rd stockholders
least twenty-five percent (25%) of the amount “Philippine Competition Act”, and other related parties ● Dissenting stockholders have appraisal
subscribed has been paid in actual cash to the laws. rights
corporation or that property, the valuation of However, stockholders’/members’ authorization
which is equal to twenty-five percent (25%) of the Votes Required: not needed if Investment by a sugar central in the equity of a
subscription, has been transferred to the Power to Sell or Dispose Corporate Assets ● Disposition of property and assets is jute-bag manufacturing company used in packing
corporation: (Not all or Substantially All) necessary in the usual and regular sugar, falls within the implied powers of the sugar
course of business, or central as part of its primary purpose (De La
Majority Vote by Board of Directors or Trustees Rama v. Ma-ao Sugar Central, G.R. No. L-17504,
ONLY 1969)
Page 122 of 393 Page 123 of 393

I. Power to Declare Dividends (Sec. 42) resources, where pertinent laws or regulations ● Partly executed and partly executory – M. Doctrine of Equality of Shares
will govern Principle against unjust enrichment shall
Only Board action is needed (except stock apply. Under the doctrine of equality of shares – all
dividends where stockholder action is needed) A management contract is not an agency stocks issued by the corporation are presumed
● Cash dividends due on delinquent stock contract, and therefore is not revocable at will Ultra vires test: It is a question, therefore, in equal with the same privileges and liabilities,
should first be applied to unpaid balance (Nielson v. Lepanto, G.R. No. L-21601, 1968) each case, of the logical relation of the act to the provided that the Articles of Incorporation is silent
plus cost and expenses corporate purpose expressed in the charter. If on such differences (CIR vs. CA, G.R. No.
● Stock dividends shall be withheld from This needs approval of: that act is one which is lawful in itself, and not 108576, 1999)
delinquent stockholders until the unpaid 1. Board of Directors of both managing and otherwise prohibited, is done for the purpose of
subscription is fully paid managed corporation serving corporate ends, and is reasonably This is now indicated under Sec. 6 of the RCC
● Stock dividends need 2/3 vote of the 2. Majority of outstanding shares or tributary to the promotion of those ends, in a
members of both managed and substantial, and not in a remote and fanciful, Each share shall be equal in all respects to every
OCS
managing corporation sense, it may fairly be considered within charter other share, except as otherwise provided in the
● Dividends are payable out of unrestricted articles of incorporation and in the certificate of
3. But 2/3 vote of outstanding powers. The test to be applied is whether the act
retained earnings stock. (Sec. 6)
stock/members of managed corporation in question is in direct and immediate furtherance
● Stock corporations cannot retain surplus of the corporation’s business, fairly incident to the
profits more than 100% of paid-in capital necessary in the ff: N. Trust Fund Doctrine
o Where stockholders of both express powers and reasonably necessary to
stock unless: their exercise. If so, the corporation has the power
- Needed for corporate expansion managing and managed The subscriptions to the capital stock of a
to do it; otherwise, not. (University of Mindanao,
projects approved by the board corporation (the common corporation constitute a fund to which the
Inc. v. Bangko Sentral ng Pilipinas, G.R. 194964-
- Or prohibited by loan agreement stockholders) own or control 65, 2016) creditors have a right to look for satisfaction of
which prohibits declaration of more than 1/3 or the outstanding their claims and that the assignee in insolvency
stock of managing corporation L. Doctrine of Individuality of Subscription can maintain an action upon any unpaid stock
dividends without financial
o Where majority of directors in subscription in order to realize assets for the
institution’s consent
both corporations are the same No certificate of stock shall be issued to a payment of its debts. (Phil. Trust Co. v. Rivera,
- Or needed under special G.R. No. L-19761, 1923)
subscriber until the full amount of the subscription
circumstances
K. Limitations together with interest and expenses (in case of
● Unless otherwise provided in the articles [Hence,] there can be no distribution of assets
delinquent shares), if any is due, has been paid.
of incorporation, distribution of dividends i. Ultra Vires Acts (Sec. 63) among the stockholders without first paying
is done on a pro rata basis. corporate creditors; any disposition of corporate
1. Applicability of Ultra Vires Doctrine The foregoing provision sets forth the Doctrine of funds to the prejudice of creditors is null and void.
The power to declare dividends under [Sec. 42 of An act not within the express or implied, and Indivisibility/Individuality of Subscription. This (Boman Environmental Dev. Corp. v. Court of
RCC] is with the Board of Directors, and can be incidental powers of the corporation. doctrine espouses that the subscription contract Appeals, G.R. No. 77860, 1988). This is without
declared only out of its unrestricted retained is one, entire, indivisible and whole contract prejudice to the ability of a corporation to effect
earnings. Assuming that a corporate director was Types of Ultra Vires Cases which cannot be divided into portions. It cannot distributions to its stockholders by way of
authorized by the Board to fix the monthly a. First type: Acts done beyond the powers of be divided into portions so that no stockholder dividends charged against unrestricted retained
dividends, dividends can be declared only out of the corporation as provided for in the law or shall be entitled to a certificate of stock until said earnings.
unrestricted retained earnings of a corporation, its articles of incorporation (Sec. 44) stockholder has paid the entire value of the
which earnings cannot obviously be fixed and shares subscribed, including the interest and Coverage of the Trust Fund Doctrine
b. Second type: Acts or contracts entered into
predetermined 5 years in advance. (Ongkingco v. expenses. The Doctrine of Indivisibility of
on behalf of the corporation by persons 1. In case of Solvency: The coverage of the
Sugiyama, G.R. No. 217787, 2019). Subscription is absolute since the above-quoted
without corporate authority, even though the
Section 64 speaks of no exception. trust fund doctrine is only up to the extent of
J. Power to Enter Into Management contract is within the powers of the
the “subscribed capital stock” of the
Contract (Sec. 43) corporation (Manila Metal Container Corp. v.
The purpose of the prohibition is to prevent the corporation. In this sense, the unrestricted
PNB, G.R. No. 166862, 2006) and partial disposition of a subscription which is not retained earnings do not constitute part of the
Where one corporation undertakes to manage all c. Third type: Acts or contracts, which are per fully paid, because if it is permitted, and the capital stock. Hence, the corporation is at
or substantially all of the business of another se illegal as being contrary to law. subscriber subsequently becomes delinquent in liberty to pay out assets to the stockholders
corporation, whether the contract is called the payment of his subscription, the corporation by way of dividends up to the extent of the
“service contracts” or “operating agreement” 2. Consequences of Ultra Vires Acts may not be able to sell as many of his subscribed unrestricted retained earnings.
● Executed contract – Courts will generally shares as would be necessary to cover the total
General Rule: Contract may not exceed 5 yrs per not set aside or interfere with such contracts; amount due from him, which is authorized under
term 2. In case of Insolvency: The trust fund
● Executory contracts – No enforcement section [67]. (SEC OGC Opinion No. 16-05)
doctrine is not limited to reaching the
even at the suit of either party (void and
Exception: Contracts relating to exploration, stockholders’ unpaid subscriptions. The
unenforceable);
development, exploitation or utilization of natural scope of the doctrine when the
corporation is insolvent encompasses not
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only the capital stock, but also other the members of the Board of Directors Exception: Requisites for Valid Proxy
property and assets generally regarded in of the managed corporation 1. Acts where stockholders’ approval is also 1. The proxy shall be in writing;
equity as a trust fund for the payment of (7) Declaration of stock dividend needed 2. Signed by the stockholder or member; and
corporate debts. Thus, the Trust Fund 2. Filling vacancies within the Board of 3. Filed before the scheduled meeting with the
Doctrine extends to all assets (not just However, among the “powers of Directors corporate secretary (Sec. 57)
subscribed capital stock) when a corporation corporations” only majority vote is needed in: 3. Amending, repealing or adopting by-laws
becomes insolvent. (Halley v. Printwell, G.R. 4. Amending or repealing resolutions of the Duration of Proxy
No. 157549, 2011) (1) Power to enter into management contracts, Board where the resolution by express General Rule: It shall be valid only for the
except in instances mentioned in number (6) terms is not so amendable or repealable meeting for which it is intended.
3. Releasing Subscribers: where the of the preceding section by the Executive Committee
corporation released the subscribers to the 5. Distribution of cash dividends Exception: Unless otherwise provided in the
2. By the Board of Directors proxy
capital stock from their subscriptions without
valuable consideration. (Ong yong v. Tiu, The Board of Directors is the main agency by
which all corporate powers and authority are 8. STOCKHOLDERS AND MEMBERS Note: No proxy shall be valid and effective for a
G.R. No.144476, 2003) period longer than five (5) years at any one time.
exercised
A. Fundamental Rights of Stockholders
O. How Corporate Powers are Exercised and Members The by-laws of the corporation may prescribe a
General rule: Majority vote of the Board is
needed in the following instances: particular form for proxy and fix the deadline for
1. By the Shareholders The following are important rights of its submission.
a. Extension or shortening of the corporate term stockholders, which continue to exist even when
(Note: Generally, the vote requirement of the the shares have been sequestered: Generally, proxies, even those with irrevocable
shareholders or members are joined with a vote b. Increase or decrease of capital stock or the
creation of bonded indebtedness a. Right to attend meetings and to vote terms, have always been considered as
of, or a ratification by, a majority of the Board of b. Right to receive dividends revocable, unless coupled with an interest, and
Directors) c. Sale or other disposition corporate assets
c. Right to receive distributions upon liquidation their revocation may be by formal notice, orally,
d. Sale or other dispositions of all or
of the corporation or by conduct as by the appearance of the
Vote of stockholders representing 2/3 of the substantially all corporate assets (with 2/3
d. Right to inspect the books of the corporation stockholder or member giving the proxy, or the
outstanding capital stock or 2/3 of members stockholders or members authorization, Sec issuance of a subsequent proxy, or the sale of
(as applicable) are needed in the following 39) e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas,
G.R. No. 91925, 1991) shares.
instances: e. Acquisition of its own shares
f. Investment of corporate funds in any Note: Proxies, who are not stockholders or
(1) Extension or shortening of corporate term B. Participation In Management
corporation or business or for any purpose members, cannot be elected as a director or
(2) Increase or decrease of capital stock or the other than its primary purpose (with 2/3 trustee. (Lim v. Moldex Land, Inc., G.R. No.
creation of bonded indebtedness i. Proxy – Section 57 of the Corporation Code
stockholders ratification, Sec. 41) 206038, 2017)
(3) Power to deny pre-emptive right, in these provides that stockholders and members may
g. Declaration of cash, property, and stock vote in person or by proxy in all meetings of
cases: dividends (if stock dividends, it must be joined Proxy Disputes—Jurisdiction
(a) Shares issued in good faith in exchange stockholders or members. The regular courts now have the power to hear
with 2/3 vote of shareholders, sec. 42)
for property for corporate purposes h. Entering into management contracts and decide cases involving all matters and
ii. Voting Trust Agreements – A stockholder conduct of the elections of directors, including
(b) Shares in payment of previously (accompanied by the approval of the confers upon a trustee the right to vote and validation of proxies. The power of SEC to
contracted debts shareholders or members, Sec. 43) other rights pertaining to the shares for a regulate proxies remains only in instances when
(4) Sale of all or substantially all corporate assets
period not exceeding 5 years at any one time. stockholders vote on matters other than the
(5) Investing corporate funds in another 3. By the Officers (Sec. 58). election of directors (SEC v. CA, G.R. No.
corporation or business or for any other
187702/189014, 2014).
purpose other than its primary purpose The officers shall manage the corporation and
However, if the voting trust was a requirement for
(6) Power to enter into management contracts in perform such duties as may be provided in the Requisites for Valid Voting Trust
a loan agreement, period may exceed 5 years but
the following instances: bylaws and/or as resolved by the board of shall automatically expire upon full payment of a. In writing and notarized
(a) where stockholders representing the directors. (Sec. 24) b. Specifying the terms and conditions
the loan.
same interest of both the managing and c. A certified copy must be filed with the
Executive Committee (Sec. 34)
the managed corporations own more Pooling or voting agreements – two or more corporation and with the SEC. (Sec. 58)
than one-third (1/3) of the total stockholders agree that their shares shall be
General rule: The Executive Committee may act,
outstanding capital stock entitled to vote voted as a unit. Usually concerned with the Duration
by majority vote, on specific matters within the election of directors to gain control of the
of the managing corporation; or General Rule: Not exceeding 5 years
competence of the board as delegated to it. Such management.
(b) where a majority of the members of the an Executive Committee may be established if
Board of Directors of the managing the bylaws so provide. Exception: If the voting trust was a requirement
corporation also constitute a majority of for a loan agreement, period may exceed 5 years
Page 126 of 393 Page 127 of 393

but shall automatically expire upon full payment non-voting shares are not entitled to vote managing corporation; or (2) a majority of factors consistent with the basic right of corporate
of the loan. except as other provided in the said section. the members of the board of directors of suffrage.
b. Preferred or redeemable shares may be the managing corporation also constitute
No voting trust must be used for the purposes of deprived of the right to vote unless otherwise a majority of the members of the board of C. Proprietary Rights
fraud. Stockholders who are defrauded by their provided. the managed corporation;
trustees have a right to revoke the trust and i. Right To Dividends
c. Fractional shares of stock cannot be voted i. Amend the Articles of Incorporation
recover damages from such trustee. The right to dividends vests at the time of its
unless they constitute at least one full share. declaration by the Board of Directors.
d. Treasury shares have no voting rights as long 3. By Cumulative Voting
Voting Trust v. Proxy a. See discussion on election of
as they remain in treasury. Although stock certificates grant the stockholder
VOTING TRUST PROXY directors
e. Holders of stock declared delinquent by the the right to receive quarterly dividends of 1%,
Trustee votes as Proxy holder votes as
board for unpaid subscription have no voting cumulative and participating, the stockholders do
owner agent 4. Without board resolution
rights. not become entitled to the payment thereof
Agreement must be Proxy need not be f. A transferee of stock if his stock transfer is a. 2/3 of outstanding capital stock – without necessity of a prior declaration of
notarized notarized not registered in the stock and transfer book delegate to the board the power dividends. (Republic Planters Bank v. Hon.
Trustee acquires legal Proxy has no legal of the corporation and does not have a proxy to amend the by-laws; Agana, Sr., G.R. No. 51765, 1997)
title to the shares of title to the shares of from or voting trust agreement with the b. Majority of the outstanding
the transferring the principal transferor may not vote the capital stock – revoke the power Stock Corporations are prohibited from retaining
stockholder; only of the board to amend the by- surplus profits in excess of 100% of their paid-in
purchased/acquired shares.
beneficial title laws which was previously capital stock, except:
g. A stockholder who mortgages or pledges his
remains with the delegated. 1. When justified by definite corporate
shares retains the right to vote unless he
stockholder c. Removal of directors by a vote of expansion projects or programs approved by
gives authority for the creditor to vote.
Trustee may vote in Proxy must vote in the stockholders representing at the board of directors
person or by proxy person least 2/3 of the outstanding 2. Corporation is prohibited under a loan
iii. Cases When Stockholder’s Action is
unless the agreement capital stock agreement from declaring dividends without
Required
provides otherwise the creditor’s consent.
Trustee is not limited Proxy can only act at 1. Concurrence of majority of the The term “outstanding capital stock (OCS),” 3. Under special circumstances such as when
to act at any particular a specified outstanding capital stock (by majority vote) means the total shares of stock issued under there is a need for special reserve for
meeting stockholder’s meeting a. To enter into management binding subscription contracts to subscribers or probable contingencies
(if not continuing) contract if any of the two stockholders, whether fully or partially paid,
instances stated above are except treasury shares. (Sec. 173) Form of Dividends
Trustee can vote and Proxy can only vote in
1. Cash Dividends (revocable before
exercise all the rights the absence of the absent;
iv. Manner of Voting (sec. 57) announcement).
of the stockholder owners of the stock b. To adopt, amend or repeal the
2. Property Dividends (revocable before
even when the latter by-laws. Stockholders and members may vote in person announcement).
is present 2. Concurrence of 2/3 of outstanding capital or by proxy in all meetings of stockholders or 3. Stock Dividends, which requires, aside from
Agreement must not Proxy cannot exceed stock (by 2/3 vote) (see similar enumeration members. the declaration by the Board, the approval of
exceed 5 years at any 5 years at any one in the specific express powers of the
2/3 of the outstanding capital stock
one time, except time corporation) Voting through remote communication or in
absentia; Requisites: (revocable before issuance).
when the same is a. Extend or shorten corporate term;
made a condition of a b. Increase/Decrease Corporate Stock; 1. Authorized in the by-laws or by a majority
of the board of directors Note: No dividends can be declared out of capital,
loan c. Incur, Create Bonded Indebtedness;
except liquidating dividends distributed at
Voting right is Right to vote is d. Deny pre-emptive right; 2. Votes are received before the
dissolution.
divorced from the inherent or e. Sell, dispose, lease, encumber all or corporation finishes the tally of votes.
ownership of stocks inseparable from the substantially all of corporate assets; ii. Right Of Appraisal
right to ownership of f. Investing another corporation, business Effect: A stockholder or member who The right to withdraw from the corporation and
other than the primary purpose; participates through remote communication or in demand payment of the fair value of his shares
the stock
g. Declare stock dividends absentia, shall be deemed present for purposes after dissenting from certain corporate acts
Agreement is Revocable anytime,
h. Enter into management contract if (1) a of quorum. involving fundamental changes in corporate
irrevocable except if coupled with
interest stockholder or stockholders representing structure.
The corporation shall establish the appropriate
the same interest of both the managing requirements and procedures for voting through
and the managed corporations own or 1. When available
Limitations on Right to Vote remote communication and in absentia, taking a. Extension or shortening of corporate term;
a. Where the Articles of Incorporation provides control more than 1/3 of the total into account the company’s scale, number of
outstanding capital entitled to vote of the (Sec. 36)
for classification of shares pursuant to Sec. 6, shareholders or members, structure and other
Page 128 of 393 Page 129 of 393

b. In case any amendment to the articles of automatically be restored to all his rights as subsequent purchasers in good faith and to all
incorporation has the effect of changing or stockholder. (Sec. 82) persons interested, except the parties to such The purposes held to justify a demand for
restricting the rights of any stockholders or transfers: “All transfers not so entered on the inspection are the following:
class of shares, or of authorizing preferences iii. Right To Inspect books of the corporation are absolutely void; not (1) To ascertain the financial condition of the
in any respect superior to those of because they are without notice or fraudulent in company or the propriety of dividends;
outstanding shares of any class; (Sec. 80) What Records Can Be Inspected? law or fact, but because they are made so void by (2) the value of the shares of stock for sale or
statute (Uson vs. Diosomito, G.R. No. 42135, investment;
c. Investing of corporate funds for any purpose
Corporate records, regardless of the form in 1935). (3) whether there has been mismanagement;
other than the primary purpose; (Sec. 80)
which they are stored, shall be open to inspection (4) in anticipation of shareholders' meetings to
d. Sell or dispose all or substantially all assets The entries are considered prima facie evidence obtain a mailing list of shareholders to solicit
by any director, trustee, stockholder or member
of corporation;(Sec. 80) only and may be subject to proof to the contrary proxies or influence voting;
of the corporation in person or by a representative
e. Merger or consolidation.(Sec. 80) at reasonable hours on business days, and a (Bitong v. CA, G.R. No. 123553, 1998). (5) to obtain information in aid of litigation with the
demand in writing may be made by such director, corporation or its officers as to corporate
2. Manner of exercise of right (Sec 81, RCC) trustee or stockholder at their expense, for copies The stock and transfer book of the corporation transactions.
● A written demand on the corporation within of such records or excerpts from said records. cannot be used as the sole basis for determining
30 days after the vote was taken (failure to do (Sec. 73). the quorum as it does not reflect the totality of The improper purposes which may warrant
so means waiver);(Sec. 81) shares which have been subscribed, and more so the denial of the right of inspection:
● From the time of demand, all rights accruing Also, a corporation shall furnish a stockholder or when the articles of incorporation show a (1) Obtaining of information as to business
to such shares including voting and dividend member, within 10 days from receipt of their significantly larger amount of shares issued and secrets or to aid a competitor;
rights shall be suspended except the right of written request, its most recent financial outstanding as compared to that listed in the (2) to secure business "prospects" or investment
such stockholder to receive payment of the statement (Sec. 74). stock and transfer book (Lanuza v. Court of or advertising lists;
fair value of stockholder’s shares. (Sec. 82) Appeals, G.R. No. 131394, 2005). (3) to find technical defects in corporate
The first three are the formulation of the old code. transactions in order to bring "strike suits" for
● Ten (10) days from demand, the dissenting
Under the Revised Corporation Code, inspection Grounds for Not Allowing Inspection by a purposes of blackmail or extortion. (Terelay
stockholder must submit his certificates of Stockholder Investment and Development Corp. v. Yulo, G.R.
rights covers a’’ “corporate records, regardless of
stocks for notation that such certificates a. If the person demanding to examine the No. 160924, 2015)
the form in which they are stored” (see Sec. 73)
represent dissenting shares. (Sec. 85) records has improperly used any information
● The price to be paid is the fair value of the Stock and transfer book secured for prior examination, The Right to Inspect Corporate Records is
shares on the date the vote was taken; (Sec. Record of: b. He is not acting in good faith, Subject to Confidentiality rules
81) 1. All stocks in the names of the stockholders c. A requesting party who is not a stockholder
● The fair value shall be agreed upon by the alphabetically arranged; or member of record, or is a competitor shall The inspecting or reproducing party shall remain
corporation and the dissenting stockholders 2. The installment paid and unpaid on all stock bound by confidentiality rules under prevailing
have no right to inspect or demand
within 60 days from the date the vote was laws, such as:
for which subscription has been made, and reproduction of corporate records. (Sec. 73)
taken. In case there is no agreement, the fair 1. Trade secrets or processes under
the date of payment of any installment;
value shall be determined by a majority of the Republic Act No. 8293, or the
3. A statement of every alienation, sale or Competitor- competitor, director, officer,
3 distinguished persons one of whom shall be “Intellectual Property Code of the
transfer of stock made; and controlling stockholder or otherwise represents
named by the stockholder another by the the interests of a competitor shall have no right to Philippines”, as amended,
4. Such other entries as the by-laws may
corporation and the third by the two who were inspect or demand reproduction of corporate 2. Republic Act No. 10173, or the “Data
prescribe.
chosen; (Sec. 81) records. (Sec. 73) Privacy Act of 2012”,
● The right of appraisal is extinguished when: 3. Republic Act No. 8799, or “The Securities
Notes: Stock and Transfer Book
(Sec. 83) Section [73], while specific in the kinds of records In one case, the Supreme Court clarified that the Regulation Code”, and
a. He withdraws the demand with that must be maintained, is not limiting, thus, the right of inspection may only be exercised by a 4. the Rules of Court. (Sec. 73)
the corporation’s consent; inspection right is applicable to the stock and stockholder of record. As such, the corporation
transfer book (Yujuico v. Quiambao, G.R. No. may validly set up the defense in its refusal to Doctrinal Rulings on Right to Inspect
b. The proposed action is
180416, 2014) grant a claim of the right of inspection on the The demand for inspection should cover only
abandoned;
ground that the person is not a stockholder of reasonable hours on business days;
c. The SEC disapproves of such record. (Puno v. Puno Enterprises Inc., GR No.
action where approval is The corporate secretary is the officer who is duly
authorized to make entries on the stock and 177066, September 11, 2009) The stockholder, member, director or trustees
necessary
transfer book (Gokongwei v. SEC, GR No. 45911, demanding the right is one who has not
d. The SEC determines that such In Terelay Investment and Development Corp. v. improperly used any information secured through
1979).
dissenting stockholder is not Yulo, the court ruled that although the corporation any previous examination of the records;
entitled to the appraisal right. All transfers of shares not entered in the stock may deny a stockholder's request to inspect
● If the dissenting stockholder is not paid within and transfer book of the corporation are invalid as corporate records, the corporation must show The demand must be accompanied with
30 days from the award, he shall to attaching or execution creditors of the that the purpose of the shareholder is improper statement of the purpose of the inspection, which
assignors, as well as to the corporation and to by way of defense. must show good faith or legitimate purpose.
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Illegitimate purposes include to obtain corporate demanding to examine and copy excerpts Right of first refusal v. Right to Vote
secrets (formula), nuisance suit, or to embarrass from the corporation’s records and minutes The right of first refusal provides that a The right to vote is given to the shareholders but
the company. (Africa v. PCGG, G.R. No. 83831, has improperly used any information secured stockholder who may wish to sell or assign his can be limited if stipulated in the Articles of
1992) through any prior examination of the records shares must first offer the shares to the Incorporation and the Certificate of Stock.
or minutes of such corporation or of any other corporation or to the existing stockholders of the
If the corporation or its officers contest such corporation, or was not acting in good faith or corporation, under terms and conditions which However, holders of nonvoting shares shall
purpose or contend that there is evil motive are reasonable; and that only when the nevertheless be entitled to vote on the following
for a legitimate purpose in making his
behind the inspection, the burden of proof is with corporation or the other stockholders do not or fail matters:
demand, the contrary must be shown or
the corporation or such officer to show the same. to exercise their option, is the offering stockholder a) Amendment of the articles of
proved. at liberty to dispose of his shares to third parties. incorporation; (b)Adoption and
The RTC, and not the Sandiganbayan, has ● The person demanding to examine has amendment of bylaws;
jurisdiction over a stockholder’s suit to enforce its improperly used any information secured Pre-Emptive Right v. Right of First Refusal b) Sale, lease, exchange, mortgage,
right to inspect under the Corporation Code through any prior examination of the records PRE-EMPTIVE RIGHT OF FIRST pledge, or other disposition of all or
where the case does not involve a sequestration- or minutes of such corporation or for any RIGHT REFUSAL substantially all of the corporate property;
related incident, but an intra-corporate other corporation; and Generally may be c) Incurring, creating, or increasing bonded
controversy (Abad v. PHILCOMSAT, G.R. No. ● The one requesting to inspect was not acting exercised, subject to
Arises only by virtue indebtedness;
200620, 2015) in good faith or for a legitimate purpose in of contractual d) Increase or decrease of authorized
limitations in
making his demand stipulations or by law capital stock;
A stockholder’s right to inspect corporate records Corporation Code e) Merger or consolidation of the
subsists during the period of liquidation (three Covers unissued corporation with another corporation or
Criminal sanctions under Sec. 170 Covers shares
year period for dissolution per Sec. 145). (Chua shares offered for other corporations;
refer to discussion at the respective topic below already issued
v. SEC, G.R. No. 216146, 2016) subscriptions f) Investment of corporate funds in another
iv. Pre-Emptive Right Can only be exercised corporation or business in accordance
Remedies If Right to Inspect is Denied The shareholders’ right to subscribe to all issues May be exercised by by the owner and not with this Code; and
or dispositions of shares of any class in proportion mere trustees or mere trustee or g) Dissolution of the corporation
Mandamus to his present stockholdings, the purpose being to conservators conservator, since it is
Refusal to allow stockholders (or members of a enable the shareholder to retain his proportionate (Republic v. an act of ownership vi. Other Rights
non-stock corporation) to examine books of the control in the corporation and to retain his equity Sandiganbayan, G.R. (Republic v. ● Right to issuance of stock certificate for
company is not a ground for appointing a receiver in the surplus. fully paid shares - Under Section 64 of the
No. 107789, 2003) Sandiganbayan, G.R.
(or creating a mgt. committee) since there are Corporation Code, no certificate of stock shall
other adequate remedies, such as mandamus. No. 107789, 2003)
Instances When Preemptive Right Is Not Right claimed against be issued to a subscriber until the full amount
(Ao-as v. CA, G.R. No. 128464, 2006) Available Right exercisable of his subscription together with interest and
the Corporation,
a. Shares to be issued to comply with laws against the seller- expenses (in case of delinquent shares), if
Damages where the stockholder
requiring stock offering or minimum stock stockholder any is due, has been paid. A subscriber must
must pay
ownership by the public; first totally pay his subscription before a
Administrative Sanction (Sec. 158)
Requisites for Section [158] to Apply (Ang-Abaya b. Shares issued in good faith with approval of certificate of stock covering shares
Note:
v. Ang, G.R. no. 178511, 2008) the stockholders representing 2/3 of the subscribed and paid for could be issued to
A corporation has no power to prevent or restrain
outstanding capital stock in exchange for him. But an unpaid subscription (not declared
transfers of its shares, unless such power is
● A director, trustee, stockholder or member property needed for corporate purposes; expressly conferred in the Articles of delinquent) can be voted upon in corporate
has made a prior demand in writing for a copy c. Shares issued in good faith with approval of Incorporation or the law. (Fleischer v. Botica meetings. Such delinquent shares are also
of excerpts from the corporations records or the stockholders representing 2/3 of the Nolasco Co., G.R. No. L-23241, 1925) entitled to dividends, subject to the rules set
minutes; outstanding capital stock issued in payment forth in Section 43 of the Corporation Code
● Any officer or agent of the concerned of previously contracted debts; A provision in the by-laws granting the right of first on delinquent shares.
corporation shall refuse to allow the said d. In case the right is denied in the Articles of refusal (and therefore, restrains trade) is void and
director, trustee, stockholder or member of Incorporation; does not bind third parties (Fleischer v. Botica Nevertheless, Section 64 does not prohibit the
the corporation to examine and copy said e. Waiver of the right by the stockholder; Nolasco Co., G.R. No. L-23241, 1925) corporation from “dividing” the subscription of a
excerpts; f. If the shares of a corporation are offered and subscriber by considering portion thereof as fully
not subscribed and purchased by the By-laws are intended merely for the protection of paid and issuing a corresponding certificate over
● If refusal is made per a resolution or order of
stockholders, and the shares are being the corporation and prescribe relation, not the paid- up shares. Thus, in the absence of
the board of directors or trustees, the liability restriction; they are always subject to the charter
offered again, there is no pre-emptive right provisions in the by- laws to the contrary, a
under this section for such action shall be of the corporation. (Rural Bank of Salinas v. CA,
with respect to the latter offer of shares corporation may apply payments made by
imposed upon the directors or trustees who G.R. No. 96674, 1992) subscribers on account of their subscriptions
voted for refusal; (Benito v. SEC, G.R. No. L-56655, 1983)
either as:
● Where the officer or agent of the corporation
sets up the defense that the person
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1. Full payment for the corresponding 3. To be valid against third parties, the transfer a clear legal right to the registration of the Corporate Controversies, A.M. No. 01-2-04-
number of shares, the par value of which must be recorded in the books of the transfer. SC, 2001).
is covered by such payment; or corporation
2. Payment pro rata to each and all the D. Remedial Rights As a general rule, corporate litigation must be
entire number of shares subscribed for Note: The delivery of the stock certificate duly commenced by the corporation itself, with the
endorsed by the owner is the operative act of Suits by Stockholders/Members imprimatur of the board of directors, which,
transfer of shares from the lawful owner to the i. Individual Suit – those brought by the pursuant to the law, wields the power to sue.
Once an alternative is chosen, it must be applied
new transferee. (Bitong v. Court of Appeals, G.R. shareholder in his own name against the Therefore, since the derivative suit is a remedy of
uniformly to all stockholders similarly situated,
and therefore, it cannot be changed without the No. 123553, 1998) corporation when a wrong is directly inflicted last resort, it must be shown that the board, to the
consent of all stockholders who might be against him. detriment of the corporation and without a valid
affected. The delivery contemplated in Section [73], ii. Representative/Class Suit – those brought business consideration, refuses to remedy a
however, pertains to the delivery of the by the stockholder on behalf of himself and all corporate wrong. A derivative suit may only be
● Proportionate participation in the certificate of shares by the transferor to the other stockholders similarly situated when a instituted after such an omission. Simply put,
distribution of assets in liquidation transferee, that is, from the original stockholder wrong is committed against a group of derivative suits take a back seat to board-
- Stockholders and stock corporation – named in the certificate to the person or entity the stockholders. sanctioned litigation whenever the corporation is
stockholder was transferring the shares to, willing and able to sue in its own name. (Ago
Except by decrease of capital stock, and iii. Derivative Suit – those brought by one or
whether by sale or some other valid form of Realty & Dev. Corp. v. Ago, G.R. No.s 210906 &
as otherwise allowed by the Corporation more stockholders/members in the name and
absolute conveyance of ownership. It does not 211203, 2019)
Code, no corporation shall distribute any on behalf of the corporation to redress
pertain to the surrender of the stock certificate to
of its assets or property to its the corporation. (Teng v. SEC, G.R. No. 184332, wrongs committed against it, or E. Obligations of a Stockholder
stockholders except upon lawful 2016) protect/vindicate corporate rights whenever
dissolution and after payment of all its the officials of the corporation refuse to sue, a. Liability to the corporation for unpaid
liabilities (Sec. 122) However: The surrender of the original certificate or the ones to be sued, or has control of the subscription;
of stock is necessary before the issuance of a corporation. (Ching v. Subic Bay, G.R. No. b. Liability to the creditors of the corporation for
- Members and foundations – Upon new one so that the old certificate may be 174353, 2014) unpaid subscription;
dissolution of a non-stock corporation, all cancelled. A corporation is not bound and cannot - A lawyer engaged as counsel for a c. Liability to the corporation for interest on
liabilities and obligations must first be be required to issue a new certificate unless the corporation cannot represent members unpaid subscription if so required by the by-
paid, and assets received and held original certificate is produced and surrendered. of the Board in a derivative suit against laws;
subject to limitations permitting their use (Teng v. SEC, G.R. No. 184332, 2016) them. To do so would be tantamount to d. Liability for watered stock;
for specified eleemosynary purposes conflicting interest between the Board e. Liability for dividends unlawfully paid;
shall be properly transferred or returned, A transfer of shares not recorded in the stock and
and the corporation (Hornilla v. Salunat,
transfer book is non- existent as far as the F. Meetings
then the net assets remaining, if any, A.C. 5804, 2003).
corporation is concerned, and consequently, a
shall be distributed to the members, or petition for mandamus filed by a transferee,
any class or classes of members, to the Requisites of Derivative Suit i. Regular or Special:
compelling it to issue the corresponding Regular - held annually on a date fixed in the by-
extent that the articles of incorporation or certificates in the name of the transferee would be a. He (Plaintiff) was a stockholder or member at
by- laws provide for a plan of distribution. the time the acts or transactions subject of laws, or if not so fixed, on date after April 15 of
without basis. It is only when the transfer has every year as determined by the board of
Otherwise, a plan of distribution may be been recorded in the stock and transfer book that the action was filed;
directors or trustees.(Sec. 49)
adopted in the process of dissolution by: a corporation may rightfully regard the transferee b. He exerted all reasonable efforts, and alleges
a. Majority vote of the Board of as one of its stockholders. From this time, the the same with particularity in the complaint, to
Special - held at any time deemed necessary or
Trustees consequent obligations on the part of the exhaust all remedies available under the as provided in the by- laws. Provided that at least
b. Adopted by at least 2/3 of the corporation to recognize such right as it is articles of incorporation, by-laws, laws or 1 week written notice shall be sent to all
members having voting rights mandated by law to recognize arises (Ponce v. rules governing the corporation or stockholders or members, unless otherwise
(Secs. 94–95) Alsons Cement, G.R. No. 139802, 2002). partnership to obtain the relief he desires; provided in the by- laws. Note that notice of any
meeting may be waived, expressly or impliedly by
Note: In Andaya v. Rural Bank of Cabadbaran, The exhaustion of intra-corporate remedies
● Right to transfer of stocks in corporate any stockholder or member.
Inc., G.R. No. 188769, 2016, the Court ruled that cannot be dispensed even if the company is
books; the registration of a transfer of shares of stock is a family corporation (Yu v. Yukayguan, G.R. ii. Notice of Meeting
a ministerial duty on the part of the corporation. No. 177549, 2009; Ang v. Sps. Ang, G.R. No. When - written notice of regular meetings shall be
Requirements for valid transfer of stocks Aggrieved parties may then resort to the remedy
1. There must be delivery of the stock 201675, 2013) sent to stockholders or members of record at
of mandamus to compel corporations that least twenty-one (21) days prior to the meeting.
certificate; wrongfully or unjustifiably refuse to record the c. No appraisal rights are available for the act or (Sec. 49)
2. The certificate must be endorsed by the transfer or to issue new certificates of stock. This
acts complained of; and
owner, or his attorney-in-fact, or other remedy is available even upon the instance of
d. The suit is not a nuisance or harassment suit
persons legally authorized to make the a bona fide transferee who is able to establish
(Interim Rules of Procedure for Intra-
transfer; and
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How - written notice to regular meetings may be meeting of the corporation by giving proper notice stocks. For non- stock corporations, only those Resolution vs. Minutes Of The Meeting
sent to the stockholders or members of record required by this Code or the bylaws, with the who are actual, living members with voting rights (People v. Dumlao, G.R. No. 168918, 2009)
through: petitioner presiding thereat until at least a majority shall be counted in determining the existence of RESOLUTION MINUTES OF THE
a. means of communication provided in the of stockholders/ members present have chosen a a quorum during member’s meetings. Dead MEETING
bylaws (Sec. 50) presiding officer. (Sec. 49). members shall not be counted (Tan v. Sycip, G.R. A formal action by a A brief statement not
b. electronic mail (Sec.49) No. 153468, 2006). corporate board of only of what transpired
c. such other manner as the SEC shall Who presides over the meetings?
directors or other at a meeting, usually of
allow under its guidelines. General Rule: The chairman v. Minutes and agenda of meetings
Exceptions: Minutes of the meeting corporate body stockholders/members
1. In the absence of the chairman, the ● Records of all business transactions and authorizing a or directors/trustees,
Notice of Meetings shall state the time place and particular act, but also at a meeting of
purpose of the meeting and shall be president shall preside at all meetings of minutes of all meetings shall be kept and
the directors or trustees as well as of the carefully preserved at a corporation’s transaction, or an executive
accompanied by: appointment committee
1. agenda for the meeting stockholders or members, unless the principal office
2. proxy form bylaws provide otherwise. ● It shall set forth in detail:
2. In the following cases: - the time and place of the meeting Agenda of meetings (Sec. 49)
3. requirements and procedures to be At each regular meeting of stockholders or
(1) there is no person designated by the held
followed in case a stockholder elects members, the board of directors or trustees shall
by-laws to call a meeting, or - how it was authorized
and is allowed to participate, attend endeavor to present to stockholders or members
(2) the person authorized unjustly - the notice given
and vote by remote communication. the following:
refuses to call a meeting, - the agenda therefor
4. requirements and procedures for a. The minutes of the most recent regular
The petitioning stockholders / member - whether the meeting was regular or
nomination and in case the meeting is meeting
shall preside until at least a majority of special, its object if special
for election of directors. (Sec. 50) stockholders/ members present have b. A members’ list for non-stock
- those present and absent, and corporations and, for stock corporations,
chosen a presiding officer. (Sec 49). - every act done or ordered done at
Section 50 of the Corporation Code expressly material information on the current
the meeting. stockholders, and their voting rights;
allows a shorter period of notice of stockholders’ iv. Quorum
- upon the demand of any director, c. A detailed, descriptive, balanced and
meetings that those provided under its default two General rule: Majority of the outstanding capital
stock, or of the members, shall constitute a trustee, stockholder or member, the comprehensible assessment of the
(2) week period, provided the same is provided
quorum (Sec. 51) time when any director, trustee, corporation’s performance,
for in the By-Laws, (Ricafort v. Dicdican, 787
SCRA 163, 2016); such period set in the by-laws stockholder or member entered or d. A financial report for the preceding year,
is valid even when the period is reckoned from Outstanding Capital Stock – the total shares of left the meeting must be noted in the e. An explanation of the dividend policy and
the mailing of the notice rather than when it is stock issued under binding subscription minutes; the fact of payment of dividends
actually received by the stockholder of record, agreements to subscribers or stockholders, - on a similar demand, the yeas and f. Director or trustee profiles
(Guy v. Guy, 790 SCRA 288, 2016) whether or not fully or partially paid, except nays must be taken on any motion or g. A director or trustee attendance report,
treasury shares proposition, and a record thereof indicating the attendance of each director
iii. Place and time of meetings carefully made.
Exceptions: or trustee at each of the meetings of the
Where?- The meetings of stockholders or - the protest of any director, trustee,
a. The bylaws provides for a greater board and its committees and in regular
members whether regular or special shall be held stockholder or member on any action
in the principal office of the corporation as set majority (Sec. 51) or special stockholder meetings;
or proposed action must be recorded h. Appraisals and performance reports for
forth in the articles or if not practicable, in the city b. If the rescheduled election of in full upon their. (Sec. 75)
or municipality where the principal office of the directors/trustees is held, the voting the board and the criteria and procedure
corporation is located. (Sec. 49) shares of stock or membership for assessment;
The signing of the minutes by all the members of
represented at the meeting ordered by i. A director or trustee compensation report
the board is not required—there is no provision in
When? - Regular - held annually ; Special - held the SEC shall constitute a quorum for j. Director disclosures on self-dealings and
the Corporation Code that requires that the
at any time deemed necessary purposes of conducting an election under related party transactions; and/or
minutes of the meeting should be signed by all
this Section 25. the members of the board. The signature of the k. The profiles of directors nominated or
Who calls for the meetings? seeking election or reelection.
c. In cases where greater vote for an act or corporate secretary gives the minutes of the
In case the ff. shall occur:
business is required by law as when the meeting probative value and credibility (People v.
(1) there is no person designated by the by-laws
required vote is 2/3 of the outstanding Dumlao, G.R. No. 168918, 2009).
to call a meeting, or
(2) the person authorized unjustly refuses to call capital stock, or membership as the case
may be. The entries contained in the minutes are prima
a meeting,
facie evidence of what actually took place during
the meeting, pursuant to Section 44, Rule 130 of
The SEC upon petition of a stockholder/ member, Note: For stock corporations, the “quorum”
the Revised Rule on Evidence (People v.
and on the showing of good cause therefore, may referred to in Section 52 of the Corporation Code
Dumlao, G.R. No. 168918, 2009).
issue an order directing the petitioner to call a is based on the number of outstanding voting
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9. BOARD OF DIRECTORS AND doctrine is confirmation after conduct, amounting knowledge of the facts, or fails to disaffirm, Disqualifications of Directors, Trustees, or
TRUSTEES to a substitute for a prior authority. Ratification ratification will be implied or else it will be Officers (Sec. 26)
can be made either expressly or impliedly like estopped to deny ratification (Premiere
A. Repository of Corporate Powers silence or acquiescence and acceptance of Development Bank vs. CA, G.R. No. 159352, A person shall be disqualified from being a
benefits (Yasuma v. Heirs of Cecilio De Villa, G.R. 2004). director, trustee, or officer of any corporation if,
Doctrine of Centralized Management No. 150350, 2006). But illegal acts cannot be within five (5) years prior to the election or
ratified. Efren was Bonanza’s General Property Manager appointment as such, the person was:
Unless otherwise provided in this Code, the board while Miguel was the President. Bonanza leased a) Convicted by final judgment:
of directors or trustees shall exercise the Doctrine of Apparent Authority the lot to Efren but eventually notified the latter i. Of an offense punishable by
corporate powers, conduct all business, and If a corporation knowingly permits one of its about the rescission of lease. Using the Doctrine imprisonment for a period
control all properties of the corporation (Sec. 22). officers, or any other agent, to act within the of Apparent Authority, Bonanza was estopped exceeding six (6) years;
scope of an apparent authority, it holds him out to from denying the existence and enforceability of ii. For violating this Code; and
Powers of the Board of Directors the public possessing the power to so do those Lease Contract after it effectively ratified the iii. For violating “The Securities
acts; and thus, the corporation will, as against lease by accepting proceeds throughout several
Regulation Code”;
General Rule: The Board of Directors ALONE anyone who has in good faith dealt with it through years. Also, while it is true that the doctrine
b) Found administratively liable for any
exercises the powers of the corporation. such agent, be estopped from denying the cannot be invoked by one who is not a third party,
agent’s authority. (Francisco v. GSIS, G.R. No. L- an officer of a corporation can actually be a third offense involving fraud acts; and
18287, 1963) person in contract with the corporation. c) By a foreign court or equivalent foreign
Exceptions: Other persons or groups within the (Quesada, et al. v. Bonanza Restaurants, Inc., regulatory authority for acts, violations or
corporation may do so similarly: Apparent authority may be ascertained G.R. No. 207500, 2016) misconduct similar to those enumerated
a) If (1) there is a management contract and through: in paragraphs (a) and (b) above.
(2) powers are delegated by majority of B. Tenure, Qualifications and
the board to an executive committee; a. The general manner in which the Disqualifications of Directors Grounds not exclusive
b) Corporate officers (e.g. the President) corporation holds out an officer or agent as The foregoing is without prejudice to
having the power to act or, in other words, the Term of Office (Sec. 22) qualifications or other disqualifications, which the
via authority from (1) law, (2) corporate
apparent authority to act in general, with which it SEC or the Philippine Competition Commission
by-laws; and (3) authorization from the clothes him; or ● Directors shall be elected for a term of one may impose in its promotion of good corporate
board, either expressly or impliedly by (1) year from among the holders of stocks governance or as a sanction in its administrative
habit, custom or acquiescence in the b. The acquiescence in his acts of a registered in the corporation’s books proceedings. (Sec. 26)
general course of business; particular nature, with actual or constructive ● Trustees shall be elected for a term not
c) A corporate agent in transactions with knowledge thereof, whether within or beyond the exceeding three (3) years from among the By-law provisions that prohibit directors who have
third persons to the extent of the authority scope of his ordinary powers. interests in competitor corporations are
members of the corporation.
to do so has been conferred upon him; Each director/trustee shall hold office until the reasonable in order to protect the interests of the
If a private corporation intentionally or negligently company (Gokongwei v. SEC, G.R. No. L-45911,
d) Those with apparent authority successor is elected and qualified.
clothes its officers or agents with apparent power 1979)
(doctrine of apparent authority). to perform acts for it, the corporation will be
Qualifications of Directors
estopped to deny that the apparent authority is Hold-Over Principle
a. Must own at least one (1) share of the capital
Theories on Source of Board Power real as to innocent third persons dealing in good Directors/Trustees may continue to hold office
faith with such officers or agents. stock of the corporation in his own name or
despite the lapse of one year until their
a. Directly-Vested / Original Power must be a member in the case of non-stock successors are elected and qualified.
Pursuant to Section 22, the source of power of Note: corporations
the Board of Directors is primarily and directly- It requires presentation of evidence of similar acts i. Any director who ceases to be the Remaining members of the board of directors
vested by law; it is not a delegated power from executed either in its favor or in favor of other owner of at least one (1) share of the cannot elect another director to fill in a vacancy
the stockholders or members of the corporation parties. It is not the quantity of similar acts which capital stock of the corporation of caused by the resignation of a hold-over director.
establishes apparent authority, but the vesting of which he is a director shall thereby The hold-over period is not part of the term of
b. Delegated Powers from Stockholders a corporate officer with the power to bind the cease to be a director. (Sec. 22) office of a member of the board of directors. (Valle
The Board of Directors is a creation of the corporation (People’s Aircargo and Warehousing b. He must not be disqualified under the RCC Verde Country Club v. Africa, G.R. No. 151969,
stockholders and controls and directs the affairs Co., Inc. v. CA., G.R. No. 117847, 1998). (Sec. 26) 2009)
of the corporation by delegation of the c. He must possess other qualifications as may
stockholders. By drawing to themselves the When the officers or agents of a corporation Thus, when during the holdover period, a director
be prescribed in the by-laws of the
powers of the corporation, they occupy positions exceed their powers in entering into contracts or resigns from the board, the vacancy can only be
corporation. (Gokongwei, Jr. v. SEC, G.R.
of trusteeship in relation to the stockholders. doing other acts, the corporation, when it has filled-up by the stockholders, since there is no
knowledge thereof, must promptly disaffirm the No. L-45911, 1979)
term left to fill-up pursuant to the provisions of
Doctrine of Ratification contract or act and allow the other party or third d. He must be of legal age Section 29 which mandates that a vacancy
The corporation may ratify the unauthorized acts persons to act in the belief that it was authorized occurring in the board of directors caused by the
of its corporate officer. The substance of the or has been ratified. If it acquiesces, with expiration of a member’s term shall be filled by
Page 138 of 393 Page 139 of 393

the corporation’s stockholders. (Valle Verde (P50,000,000.00) and having two give one candidate as many votes as the Note: When so authorized in the bylaws or by a
Country Club v. Africa, G.R. No. 151969, 2009) hundred (200) or more holders of number of directors to be elected multiplied majority of the board of directors, the
shares, each holding at least one by the number of his shares shall equal; stockholders or members may also vote through
A director continuing to serve after one year from hundred (100) shares of a class of c. Cumulative voting by distribution – a remote communication or in absentia. The right to
his election (on a holdover capacity), cannot be its equity shares; stockholder may also cumulate his shares by vote through such modes may be exercised in
considered as extending his term. This hold-over b) Banks and quasi-banks, NSSLAs, multiplying the number of his shares by the corporations vested with public interest,
period is not part of his term, which, as declared, notwithstanding the absence of a provision in the
pawnshops, corporations engaged in number of directors to be elected and
had already expired. (Valle Verde Country Club v. by-laws of such corporations. (sec. 23)
money service business, pre-need, trust distribute the same among as many
Africa, G.R. No. 151969, 2009)
and insurance companies, and other candidates as he shall see fit Who Elects Directors or Trustees
C. Requirement of Independent Directors financial intermediaries; and ● By the stockholders/members as
(Sec. 22) c) Other corporations engaged in business Methods of Voting in Relation to Type of provided in the by-laws (traditionally
vested with public interest similar to the Corporation
during annual SH/M meetings
An independent director is a person who, apart above, as may be determined by the ● By the board, if still constituting quorum
from shareholdings and fees received from the SEC, considering such factors: a) Stock Corporations
for vacancies in the interim (i.e. between
corporation, is independent of management and i. such as the extent of minority Stockholders entitled to vote shall have the right
to vote the number of shares of stock standing in annual meetings) due to causes other
free from any business or other relationship which ownership, than removal or expiry of term (Sec. 28)
could, or could reasonably be perceived to their own names in the stock books of the
ii. type of financial products or ● If the vacancies are due to removal or
materially interfere with the exercise of corporation at the time fixed in the bylaws or
securities issued or offered to expiry of term, the directors/trustees
independent judgment in carrying out the where the bylaws are silent, at the time of the
investors, election must be elected by the
responsibilities as a director.
iii. public interest involved in the stockholders/members at a meeting for
nature of business operations, The stockholder may use: this purpose (special meeting)
Requirements:
Independent directors must be: and 1) Straight Voting
1) independent of management and free iv. other analogous factors. 2) Cumulative voting for one candidate How Elected
from any relationship which could 3) Cumulative voting by distribution ● By owners of majority of outstanding
D. Elections capital stock or by members in annual
materially interfere with the exercise of
independent judgment as a director Note: The total number of votes cast shall not stockholders’/members’ meeting
Election of Directors or Trustees (Sec. 23)
2) a shareholder and receive fees from the exceed the number of shares owned by the ● Stockholders/members may be present
corporation stockholders as shown in the books of the in person or by written proxy
Manner of Election corporation multiplied by the whole number of
3) elected by the shareholders present or ● In any form; or ● For stock corporations: Number of votes
directors to be elected; and that no delinquent = (no. of shares) x (no. of directors to be
entitled to vote in absentia during the ● By ballot when requested by any voting stock shall be voted.
election of directors. stockholder or member elected)
4) subject to rules and regulations ● In stock corporations, voting may be in ● By straight voting or cumulative voting,
b) Non-stock Corporations
governing their qualifications, person or by proxy which is all votes may be cast for a
General Rule: Members of nonstock
disqualifications, voting requirements, corporations may use Straight Voting, i.e. cast as candidate or distributed among the
duration of term and term limit, maximum Time to Determine Voting Right many votes as there are trustees to be elected candidates
number of board memberships and other ● At the time fixed in by- laws but may not cast more than one (1) vote for one ● For non-stock corporations: Unless
requirements that the SEC will prescribe. ● If by- laws are silent, at time of election (1) candidate. otherwise provided in the articles of
incorporation or in the by-laws,
Corporations required to have Independent i. Cumulative Voting/Straight Voting Exception: Unless otherwise provided in the members of non-stock corporations may
Directors articles of incorporation or in the bylaws. (Sec. 23) cast as many votes as there are trustees
a. Straight voting – Every stockholder may to be elected but may not cast more than
The board of the following corporations vested vote the number of outstanding capital stock ii. Quorum one vote for one candidate.
with public interest shall have independent in his own name for as many persons as there ● Viva voce (live voice) or must be by
directors constituting at least twenty percent are directors to be elected; or in non-stock At all elections of directors or trustees, there must ballot if requested
(20%) of such board: be present, either in person or through a
corporations, members may cast as many ● Delinquent shares and treasury shares
a) Corporations covered by “The Securities votes as there are trustees to be elected but
representative authorized to act by written proxy:
● Stock Corporation – owners majority of cannot vote
Regulation Code”, namely: may not cast more than one vote for one
outstanding capital stock ● Candidates with highest number of
i. those whose securities are candidate. (In straight voting, the votes are
● Non-stock Corporation – majority of votes will be declared elected
registered with the SEC, spread out evenly among all the elective
ii. corporations listed with an members entitled to vote
positions)
exchange or with assets of at b. Cumulative voting for one candidate – a
least Fifty million pesos stockholder may accumulate his shares and
Page 140 of 393 Page 141 of 393

Election Rules on Stock and Non-Stock Report Of Election of Directors, Trustees and corporation, or in case of death, the officer’s heirs authorizing the removal and this fact
Corporations Officers shall, within seven (7) days from knowledge must be so stated in the agenda and
STOCK NON-STOCK thereof, report in writing such fact to the SEC. notice of said meeting.
CORPORATION CORPORATION Within thirty (30) days after the election of the (Sec. 25) c) In all other cases, the election must be
directors, trustees and officers of the corporation, held no later than forty-five (45) days
Owners of a majority A majority of the
the secretary, or any other officer of the E. Removal (Sec. 27)
of outstanding capital members, either in from the time the vacancy arose.
corporation, shall submit to the SEC, the names,
stock, either in person person or by nationalities, shareholdings, and residence Requisites of Removal from the Board
or by representative representative a. It must take place either at a regular meeting Vacancy NOT by removal or expiration of term
addresses of the directors, trustees, and officers
authorized to act by authorized to act by May be filled by:
elected. (Sec. 25) or special meeting of the stockholders or
written proxy, must be written proxy, must be a) the vote of at least a majority of the
members called for the purpose;
present at the election present at the election remaining directors or trustees, if still
Only the directors and officers of the corporation b. There must be previous notice to the
of the directors of the trustees whose names appear in the report submitted to constituting a quorum;
stockholders or members of the intention to
Cumulative voting or Cumulative voting is the SEC are deemed legally constituted to bind b) if not, said vacancies must be filled by the
remove;
Straight voting can be not available, unless the corporation in bringing a suit on behalf of the stockholders or members in a regular or
c. The removal must be by a vote of the
used; a matter of right allowed by the articles corporation (Premium Marble Resources v. CA, special meeting called for that purpose.
stockholders representing 2/3 of the
granted by law to or by-laws. G.R. No. 96551, 1996).
outstanding capital stock or 2/3 of the Cases when Emergency Action is Required
each stockholder with
Non-holding of Election members, as the case may be; Requirements:
voting rights. The Board may be
d. The director may be removed with or without a) If the vacancy prevents the remaining
elected by region.
Directors are elected The non-holding of elections and the reasons cause unless he was elected by the minority, directors from constituting a quorum
at large. shall be reported to the SEC within thirty (30) in which case, it is required that there is cause b) emergency action is required to prevent
days from the date of the scheduled election. The for removal. grave, substantial, and irreparable loss or
Alien Membership in Board of Directors report shall specify a new date for the election, damage to the corporation
which shall not be later than sixty (60) days from Note:
P.D. No. 715: "election of aliens as members of the scheduled date. The SEC shall, motu proprio or upon verified Effects:
the board of directors of governing body of complaint, and after due notice and hearing, a) The vacancy may be temporarily filled from
corporations or associations engaging in partially If no new date has been designated, or if the order the removal of a director or trustee elected among the officers of the corporation by
nationalized activity shall be allowed in proportion rescheduled election is likewise not held, the SEC despite the disqualification, or whose unanimous vote of the remaining directors or
to their allowable participation or share in the may, upon the application of a stockholder, disqualification arose or is discovered
member, director or trustee, and after verification trustees.
capital of such entities." subsequent to an election. This is without
of the unjustified non-holding of the election, prejudice to other sanctions that the SEC may b) The action by the designated director or
summarily order that an election be held. impose on the board of directors or trustees who, trustee shall be limited to the emergency
Non-Filipino citizens may become members of action necessary,
the board of directors of a bank to the extent of with knowledge of the disqualification, failed to
The SEC shall have the power to issue such remove such director or trustee. c) The term shall cease within a reasonable
the foreign participation in the equity of said bank.
(General Banking Law, Sec. 15) orders as may be appropriate, including: time from the termination of the emergency or
a) orders directing the issuance of a notice F. Filling of Vacancies (Sec. 28) upon election of the replacement director or
Filling Vacancies in Board - Permissive stating the time and place of the election, trustee, whichever comes earlier.
b) designated presiding officer, and Replacement director or trustee - A director or d) The corporation must notify the SEC within
The filling of vacancies in the board by the c) the record date or dates for the trustee elected to fill a vacancy and shall serve three (3) days from the creation of the
remaining directors or trustees constituting a determination of stockholders or only for the unexpired term of the predecessor in emergency board, stating therein the reason
quorum as provided for by Section [28] is merely members entitled to vote. office.
for its creation.
permissive, not mandatory, and the vacancies
How Elections should be held:
may still be filled-up by the stockholders of Notwithstanding any provision of the articles of Vacancy filled by reason of an increase in the
members in a regular or special meeting called In all elections to fill vacancies under this section,
incorporation or bylaws to the contrary, the number of directors or trustees
for the purpose. However, when the by-laws of the procedure set forth in Sections 23 and 25 of
shares of stock or membership represented at
the corporation contain a specific mode of filling- this Code shall apply.
such meeting and entitled to vote shall constitute This vacancy shall be filled only by an election at
up existing vacancies in the board, the same is a quorum for purposes of conducting an election a regular or at a special meeting of stockholders
mandatory (Tan v. Sycip, G.R. No. 153468, When Elections may be held:
under this section. (Sec. 25) or members duly called for the purpose, or in the
a) Due to term expiration- the election
2006). same meeting authorizing the increase of
Cessation from Office shall be held no later than the day of
directors or trustees if so stated in the notice of
such expiration at a meeting called for the meeting.
Should a director, trustee or officer die, resign or that purpose.
in any manner cease to hold office, the secretary, b) Result of removal- the election may be
or the director, trustee or officer of the held on the same day of the meeting
Page 142 of 393 Page 143 of 393

G. Compensation (Sec. 30) b. Duty of Loyalty (Basis: Secs. 30 & 33) Exception: The act of the director has been Liability for Watered Stocks
Directors or trustees shall not acquire any ratified by a vote of the stockholders owning or
General Rule: In the absence of any provision in personal or pecuniary interest in conflict with their representing at least two-thirds (2/3) of the Directors or officers consenting to issuance of
the by-laws fixing their compensation, the duty as such directors or trustees. outstanding capital stock. watered stocks are solidarily liable with the
directors shall not receive any compensation, as stockholder concerned, to the corporation or its
such Disloyalty: Sec. 30(2) v. Sec. 33 Violations of Secs. 30 and 33 are not penal creditors for the difference between the fair value
SEC. 30(2) SEC. 33 offenses in relation Sec. 158: Had the received (by the corporation at the time of the
Exception: They may receive reasonable per Applicable to Legislature intended to attach penal sanctions to issuance) and the par or issued value of the stock
diems [i.e. at meetings] Applicable to directors said sections, it could have expressly stated such issued. (Sec. 64)
directors, trustees,
only intent in the same manner it did for Section 74 of
and officers the same Code that the violation thereof is K. Personal Liabilities
Qualifiers to General Rule and Exception
Any such compensation other than per diems Allows ratification of a likewise considered an offense under Section
may be granted to directors by the vote of the No ratification allowed transaction by the 144. (Ient v. Tullet, Inc., G.R. No. 189158, 2016) Personal liability of a corporate director, trustee
stockholders representing at least a majority of director or officer may so validly attach, as a rule, only
the outstanding capital stock at a regular or Covers stock and I. Business Judgment Rule when:
Covers stock 1. He assents:
special stockholders' meeting. non-stock
corporations only Questions of policy or management are left solely a. To a patently unlawful act of the
corporations
However: In no case shall the total yearly to the honest decision of officers and directors of corporation, or
compensation of directors, as such directors, c. Duty of Diligence (Basis: Sec. 30) a corporation and the courts are without authority b. For bad faith, or gross negligence in
exceed 10% percent of the net income before to substitute their judgment for the judgment of directing its affairs, or
Directors and/or trustees shall not willfully and
income tax of the corporation during the the board of directors; the board is the business c. For conflict of interest, resulting in
knowingly vote for or assent to patently unlawful
preceding year. manager of the corporation and so long as it acts
acts of the corporation or act in bad faith or with damages to the corporation, its
in good faith its orders are not reviewable by the
gross negligence in directing the affairs of the stockholders or other persons
Directors or trustees shall not participate in the courts or the SEC. The directors are also not
corporation. (solidary liability under Sec. 30(1));
determination of their own per diems or liable to the stockholders in performing such acts
compensation. (Philippine Stock Exchange, Inc. v. CA, GR No. 2. He attempts to acquire, or acquires any
Doctrine of Corporate Opportunity interest adverse to the corporation in respect
130644, 1997).
If there is presented to a corporate officer or of any matter which has been reposed in
Note: The implication of the phrase “as such director a business opportunity, which the
directors” is that members of the Board may Coverage of the Rule: Two Branches them in confidence (liable as a trustee for the
corporation has an interest or a reasonable
receive compensation, in addition to reasonable a. Resolutions and transactions entered into by corporation under Sec. 30(2))
expectancy, the self-interest of the officer or
per diems, when they render services to the director will be brought into conflict with that of his the Board of Directors within the powers of 3. He consents to the issuance of watered
corporation in a capacity other than as directors corporation. The law does not permit him to seize the corporation cannot be reversed by the stocks or who, having knowledge thereof,
or trustees [in this case, if serving as corporate the opportunity even if he will use his own funds courts not even on the behest of the does not forthwith file with the corporate
officers] (Western Technology v. Salas, G.R. No. in the venture. If he seizes the opportunity thereby stockholders of the corporation; and secretary his written objection thereto
113032, 1997) obtaining profits to the expense of the b. Directors and officers acting within such (solidary liability under Sec. 64);
corporation, he must account all the profits by business judgment cannot be held personally 4. He agrees to hold himself personally and
For Corporations vested with public interest refunding the same to the corporation. liable for the consequences of such acts. solidarily liable with the corporation; or
5. He is made, by a specific provision of law, to
These corporations shall submit to their Requisites of Doctrine of Corporate J. Solidary liabilities for damages personally answer for his corporate action
shareholders and the SEC, an annual report of Opportunity
the total compensation of each of their directors (Tramat Mercantile, Inc. v. CA, G.R. No.
a. The Corporation is financially able to Liability under Sec. 30(1) 111008, 1994).
or trustees.
undertake the business opportunity.
H. Disloyalty b. From the nature of the business opportunity, Directors or trustees who willfully and knowingly: Case law states that to hold a director or officer
it is in line with the corporation’s business and a) vote for or assent to patently unlawful acts personally liable for corporate obligations, two
Rules on Fiduciaries’ Duties and Liabilities is of practical advantage to the corporation. of the corporation requisites must concur:
c. The corporation has an interest or a b) are guilty of gross negligence or bad faith in 1. it must be alleged in the complaint that
Three-Fold Duties of Directors (Strategic reasonable expectancy, by embracing the directing the affairs of the corporation the director or officer assented to patently
Alliance Development Corporation v. Radstock, opportunity. c) acquire any personal or pecuniary interest in unlawful acts of the corporation or that
G.R. No. 178158, 2009) conflict with their duty as such directors or the officer was guilty of gross negligence
Consequence of violation trustees or bad faith; and
a. Duty of Obedience (Basis: Sec. 24) a. Directors must account for all the profits by shall be liable jointly and severally for all damages 2. there must be proof that the officer acted
To direct the affairs of the corporation only in refunding the same to the corporation resulting therefrom suffered by the corporation, in bad faith. (Freyssinet Filipinas Corp. v.
accordance with the purposes for which it was b. Directors may be removed from the board. its stockholders or members and other persons. Lapuz, G.R. No. 226722, 2019)
organized
Page 144 of 393 Page 145 of 393

L. Responsibility For Crimes Presumption of a Purchase or Sale of a

Security of an Issuer of Insider Where any of the first three (3) conditions set forth Special Committees (Sec. 34)
General rule: The Board being generally a Applies when an insider or an insider’s spouse, or in the is absent such contract may be ratified by:
policy-making body, directors as such cannot be relatives by affinity or consanguinity within the a) the vote of the stockholders representing at The board of directors may create special
held liable under a criminal statute making those second degree, legitimate or common-law, while least two-thirds (2/3) of the outstanding committees of temporary or permanent nature
in charge of the management of the corporation in possession of material nonpublic information if capital stock or of at least two-thirds (2/3) of and to determine the members’ term,
liable for the criminal acts done in pursuit of transacted after such information came into the members in a meeting called for the composition, compensation, powers, and
corporate operations. existence but prior to dissemination of such purpose; and responsibilities.
information to the public and the lapse of a b) Full disclosure of the adverse interest of the
The members of the Board generally do not reasonable time for market to absorb such Other delegations of authority
directors or trustees involved is made at such
concern themselves with the day-to-day affairs of information. a) The Board may delegate such powers to
meeting and the contract is fair and
the corporation, except those corporate officers either an executive committee or officials or
who are charged with the running of the business This presumption is rebutted upon a showing by reasonable under the circumstances.
contracted managers.
of the corporation and are concomitantly the purchaser or seller that he was aware of the b) The delegation, except for the executive
members of the Board, like the President. material nonpublic information at the time of the ii. Contracts Between Corporations with
Interlocking Directors (Sec. 32) committee, must be for specific purposes.
(Federated Dealers Assn. v. Del Rosario, G.R. purchase or sale. ● Accordingly, the general rules of agency
No. 202639, 2016).
A contract between two (2) or more corporations as to the binding effects of their acts
Material Nonpublic Information
having interlocking directors shall not be would apply.
Exception: To be held criminally liable for the a. It has not been generally disclosed to the
acts of a corporation, there must be a showing invalidated on that ground alone. These are valid ● For such officers to be deemed fully
public and would likely affect the market price
that its officers, directors, and shareholders so long as there is no fraud and the contract is fair clothed by the corporation to exercise a
of the security after being disseminated to the
actively participated in or had the power to and reasonable. However, if the director’s interest power of the Board, the latter must
public and the lapse of a reasonable time for
prevent the wrongful act. (SEC v. Price is nominal in one of the contracting corporations specially authorize them to do so (ABS-
the market to absorb the information; or (not exceeding 20% of the outstanding capital
Richardson Corp., G.R. No. 197032, 2017) CBN Broadcasting Corporation v. CA,
b. Would be considered by a reasonable person stock), then the contract must comply with the GR No. 128690, 1999).
important under the circumstances in requisites provided supra, Sec. 31, otherwise
M. Special Fact Doctrine
determining his course of action whether to voidable. Q. Meetings
Under the Special Facts Doctrine, although a buy, sell or hold a security.
director does not stand in fiduciary relation to the P. Executive and Other Special The corporation’s by-laws can provide otherwise
stockholder, he is under legal obligation to make O. Contracts Committees to all the rules hereunder, so long as minimum
fair and full disclosure of pertinent official requirements are satisfied.
information where special circumstances exist, i. By Self-Dealing Directors with the Executive Committees (Sec. 34)
giving rise to the obligation to disclose. (Soledad Corporation (Sec. 31) i. Regular or Special
M. Cagampang, The Fiduciary Duties of i. Creation
Corporate Directors Under Philippine Law, 46 A contract of the corporation with its director/s or 1. Regular- held monthly, unless the by- laws
Phil. L. J., 513, 562 [1971]) trustee/s or officer/s, or their spouses and If the bylaws so provide, the board may create an provide otherwise
relatives within the fourth civil degree of executive committee composed of at least three 2. Special- held anytime upon the call of the
N. Inside Information consanguinity or affinity is voidable at the option (3) directors. Said committee may act, by majority
of such corporation, unless the following are President or as provided in the by- laws
vote of all its members, on such specific matters
Unlawful Acts of Insider (RA 8799, Sec. 27) present: within the competence of the board, as may be
a. The presence of such director/trustee in the (1) When and Where -
It shall be unlawful for an insider to sell or to buy delegated to it in the bylaws or by majority vote
a security of an issuer, while in the possession of Board meeting in which the contract was of the board. ○ Monthly, unless otherwise provided in the
material information with respect to the issuer or approved was not necessary to constitute a by-laws, or anytime upon the call of the
the security that is not generally available to the quorum. ii. Limitations President or as provided in the by- laws ;
public unless: b. The vote of such director or trustee was not ○ Anywhere in or outside the Philippines,
1. The insider proves that the info was not necessary for the contract’s approval. Powers That Cannot Be Delegated to the unless the bylaws provide otherwise.
gained from such relationship c. The contract is fair and reasonable Executive Committee
2. That the other party selling to or buying from d. In case of corporations vested with public a. Approval of action requiring concurrence of (2) Notice of the meeting - at least two (2) days
the insider is identified the insider proves interest, material contracts are approved by stockholders; prior to the scheduled meeting, unless a
a. That he disclosed the information at least two-thirds (2/3) of the entire b. Filling of vacancies in the board; longer time is provided in the bylaws. A
b. That he had reason to believe that membership of the board, with at least a c. Adoption, amendment or repeal of by-laws; director may waive the requirement,
the other party otherwise is also in majority of the independent directors voting to d. Amendment or repeal of board resolution expressly or impliedly.
possession of the information approve the material contract; and which by its terms cannot be amended or
repealed; (3) Attendance in Meetings - Directors or
e. In case of an officer, the contract with him has
e. Distribution of cash dividends. (Sec. 34) trustees cannot attend or vote by proxy at
been previously authorized by the Board.
board meetings.
Page 146 of 393 Page 147 of 393

○ Those who cannot physically attend or Valid Corporate Acts Comparison Between Stockholders’ and Directors’ Meeting
vote at board meetings can participate STOCKHOLDERS’ MEETING DIRECTORS’ / TRUSTEES’
and vote through remote General Rule: Every decision reached by at least MEETING
communication such as a majority of the directors or trustees constituting Types of Regular and Special Regular and Special
videoconferencing, teleconferencing, a quorum are considered valid. Meetings
or other alternative modes of Place of Held in the principal office of the corporation as Anywhere in or outside of the
Exception: The election of officers shall require
communication that allow them Meetings set forth in the articles of incorporation, or if not Philippines, unless the by- laws
the vote of a majority of all the members of the
reasonable opportunities to practicable, in the city or municipality where the provide otherwise
board.(Sec. 52)
participate. principal office of the corporation is located.
Note: A director or trustee who has a potential When held REGULAR – held annually on a date fixed by the REGULAR – held monthly
ii. Who Presides - The chairman or, in his interest in any related party transaction must by- laws, or if not so fixed, on any date after April
absence, the president shall preside at all recuse from voting on the approval of the related 15 every year as determined by the board of
meetings of the directors or trustees as well as of party transaction without prejudice to compliance directors or trustees
the stockholders or members, unless the bylaws with the requirements of Section 31 of this Code. SPECIAL – held at any time deemed necessary SPECIAL – held at any time upon
provide otherwise. (Sec. 53)
or as provided in the by- laws the call of the President
iv. Rule on Abstention
iii. Quorum of Board Notice of REGULAR – notice must be sent at least 21 days Notice must be sent at least two
Meeting before the meeting (2) days prior to the scheduled
In case of abstention during a board meeting on
General Rule: A majority of the directors or SPECIAL – notice must be sent at least 1 week. meeting, unless a longer time is
a vote taken on any issue, the general rule is that
trustees as stated in the articles of incorporation Notice may be waived, expressly or impliedly, by provided in the bylaws. Notice
an abstention is counted in favor of the issue that
shall constitute a quorum to transact corporate won the majority vote; since by their act of any stockholder or member may be waived expressly or
business abstention, the abstaining directors are deem to impliedly, by any Director or
abide by the rule of the majority. (Lopez v. Ericta, Trustee
Exception: Unless the articles of incorporation or G.R. No. L-32991, 1972) Who presides General Rule: Person designated in the bylaws The chairman or, in his absence,
the by-laws provides for a greater majority (Sec. In default: Chairman, and in his absence, the the president shall preside
52) president
Quorum Majority of the outstanding capital stock, or of the Majority of the number of
members. directors and trustees as fixed in
EXCEPT:(a) greater majority is provided in the the articles of incorporation,
bylaws (b) in cases where greater vote for an act unless the articles of
or business is required by law. incorporation or the by-laws
provides for a greater majority.
Note: For stock corporations, quorum is based
on outstanding voting stocks. For non-stock
corporations, only those who are actual, living
members with voting rights shall be counted.(Tan
v. Sycip, G.R. No. 153468, 2006
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10. CAPITAL AFFAIRS certificate. The subscription price of the stocks Requirements for Valid Transfer of Stock:
subscribed by him should first be paid. 1. If represented by a certificate, the
A. Certificate of stock following must be strictly complied with: Principle of Indivisibility of Subscription
b. Consideration for Shares of Stock a. Endorsement by owner or his A subscription is one entire and indivisible
A stock certificate or a certificate of stock is (See earlier discussion) representative contract. It cannot be divided into portions, so that
defined as a written instrument signed by the b. Delivery coupled with an intention of the stockholder shall not be entitled to a certificate
proper officer of a corporation stating or ii. Uncertificated Shares/Securities constituting the person to whom the of stock until he has remitted the full payment.
acknowledging that the person named in the Defined as security evidenced by electronic or
stock is delivered the transferred (sic)
document is the owner of a designated number of similar records. (Securities and Regulation Code, 2. Payment pro rata
thereof.(Neugene Marketing, Inc. v.
shares of its stock. It is prima facie evidence that Sec. 3.14) All partial payments on one subscription shall be
Court of Appeals, G.R. No. 112941, deemed applied proportionately among the
the holder is a shareholder of a corporation.
(Teng v. Securities and Exchange Commission, Note: Under Sec. 43.1 of the Securities and [February 18, 1999], 362 PHIL 633- number of shares. To permit the issuance of a
G.R. No. 184332, [February 17, 2016], 781 PHIL Regulation Code, a corporation whose shares of 646) stock certificate without full payment will be in
133-148) stock are registered pursuant to the Corporation c. Must be recorded in the corporation’s violation of Sec. 63 (Timoteo Aquino, 2018)
Code or listed in a stock exchange may: Stock and Transfer Book (STB) to bind
i. Nature of the certificate a. If so resolved by its Board of Directors and the corporation and third parties (Teng In the absence of special agreement to the
It is the paper representation or tangible evidence agreed by a shareholder, issue shares to, or v. SEC, Gr 184332, February 17, 2016) contrary, the subscriber’s right consists only in an
of the stock itself and of the various record the transfer of some or all of its shares equity entitling him to a certificate for the total
representations therein. It expresses the contract into the name of said shareholders, investors Note: Recording in STB is only required number of shares subscribed for by him upon
between the corporation and the stockholder. It is or, securities intermediary in the form of for absolute transfers, which do not payment of the remaining portion of the
not essential to the ownership and/or existence of uncertificated securities; include pledges, mortgages, etc. subscription price (Fua Cun vs. Summers, G.R.
the share of stock. It is prima facie evidence that (Monserrat v. Ceron, G.R. No. 37078, No. 19441, 1923).
b. The use of uncertificated securities shall be
the holder is a shareholder in a corporation September 27, 1933)
without prejudice to the rights of the securities
(Makati Sports Club v. Cheng, G.R. No. 178523, Requisites for Issuance of Certificate of Stock
2010) intermediary subsequently to require the 1. The certificate must be signed by the
2. If NOT represented by the certificate (such
corporation to issue a certificate in respect of president or vice-president, countersigned
as when the certificate has not yet been
It is a written acknowledgment by the corporation any shares recorded in its name; and by the secretary or assistant secretary;
issued or where for some reason is not in
of the stockholder’s interest in the corporation. It c. If so provided in its articles of incorporation 2. The certificate must be sealed with the seal
the possession of the stockholder):
is a personal property that may be mortgaged or and by-laws, issue all of the shares of a of the corporation;
a. By means of deed of assignment or
pledged. Transfer binds the corporation only particular class in the form of uncertificated 3. The certificate must be delivered;
public document; and
when it is recorded in the corporate books. securities and subject to a condition that 4. The par value, as to par value shares or full
b. Such deed of assignment or public
investors may not require the corporation to subscription as to no par value shares must
Note: It is the shares that can be the subject of a document must be duly recorded in the
issue a certificate in respect of any shares first be fully paid; and
security interest, not the certificate of stock books of the corporation (Ponce v.
recorded in their name. 5. The original certificate must be
Alsons Cement Corporation, G.R. No.
Shares of Stock v. Certificate of Stock 139802, December 10, 2002) surrendered where the person requesting
iii. Negotiability; Requirements for Valid
SHARES OF STOCK CERTIFICATE OF the issuance of a certificate is a transferee
Transfer of Stocks
STOCK If, however, the reason for the absence of from the stockholder (Bitong v. CA, G.R.
Negotiability a certificate is that the subscription has No. 123553, July 13, 1998)
Unit of interest in a Evidence of the
not been fully paid, the corporation may
corporation holder’s ownership of Stock certificates are not negotiable instruments
under the purview of Negotiable Instruments Law refuse to record a sale given that under v. Stock And Transfer Book
the stock and of his Sec. 62, “[n]o shares of stock against
right as a shareholder because there is no promise or order to pay
money. which the corporation holds any unpaid 1. Contents
and up to the extend claim shall be transferable in the books of Stock corporations must keep a stock and
specified therein the corporation.” transfer book, which shall contain a record of:
A stock certificate is a quasi-negotiable
Incorporeal or It is concrete and 1. All stocks in the names of the
instrument because it may be transferred by
intangible property tangible endorsement coupled with delivery but the holder iv. Issuance stockholders alphabetically arranged;
May be issued by the May be issued only if thereof takes it without prejudice to such rights or 2. The installments paid and unpaid on
corporation even if the the subscription is defenses as the registered owner or creditor may 1. Full Payment (Sec. 63) all stock for which subscription has
subscription is not fully paid have under the law, except insofar as such rights No stock certificate shall be issued unless there been made, and the date of payment
fully paid or defenses are subject to the limitations imposed is full payment of:
of any installment;
by the principles governing estoppel. (De los 1. Subscription;
3. A statement of every alienation, sale
Santos v. McGrath, G.R. No. L-4818, 1955) 2. Interest; and
Note: A stockholder who does not pay his or transfer of stock made; and
subscription is not entitled to the issue of a stock 3. Expenses (in case of delinquent
4. Such other entries as the by-laws
shares).
may prescribe. (Sec. 73)
Page 150 of 393 Page 151 of 393

b. The corporation shall publish a notice concerned for the difference between the value ii. Notice Requirement
Only absolute transfers of shares of stock are of loss once a week for at least three received at the time of issuance of the stock and
required to be recorded in the corporation’s stock (3) consecutive weeks in a the par or issued value of the same : (Sec. 64) The unpaid subscriptions are not due and
and transfer book in order to have force and effect newspaper of general circulation in 1. consents to the issuance of stocks for a payable without a call. A corporation cannot file
as against third persons. Attachments of shares the place where the corporation has consideration less than the par or issued an action to recover the unpaid price if the action
are not “transfers” and need not be recorded in its principal office. The notice shall value; is not preceded by a call, until a call is made, no
the corporation’s stock and transfer book. (Ferro 2. consents to the issuance of stocks for a cause of action accrues (Lingayen Gulf Electric
state the ff:
Chemicals v. Garcia, et al., G.R. 168134, 2016) consideration other than cash, valued in Power Company v. Baltazar, G.R. No. L-4824,
i. name of the corporation
excess of its fair value; June 30, 1954).
2. Who May Make Valid Entries ii. name of the registered
owner 3. having knowledge of the insufficient
Only the corporate secretary is duly authorized to Payment of balance of subscription
iii. the serial number of the consideration does not file a written
make entries on the stock and transfer book. Payment of unpaid subscription or any
Hence, entries made by the Chairman or the certificate objection with the corporate secretary percentage thereof, together with any interest
President are invalid. (Torres Jr. v. CA, G.R. No. iv. the number of shares accrued, shall be made on the date specified in
120138, 1997). represented by such iii. Trust Fund Doctrine On Watered Stocks the subscription contract or on the date stated in
certificate the call made by the board.(Sec 66)
Registration of a transfer of shares of stock is a The Trust Fund Doctrine is the basis for the
v. after one (1) year from the
ministerial duty on the part of the corporation. prohibition on issuing watered stock. Effect of Failure to Pay Balance (Sec. 66)
date of the last publication
Aggrieved parties may then resort to the remedy without contest, the right to 1. The entire balance shall be due and
of mandamus to compel corporations that A Corporation has no power to release an original payable
make such contest shall be subscriber of its capital stock from the obligation
wrongfully or unjustifiably refuse to record the 2. The stockholder shall liable for interest
barred and the corporation of paying for his shares, without a valuable
transfer or to issue new certificates of stock. This 3. If no payment is made within thirty (30)
remedy is available even upon the instance of a shall cancel the lost consideration for such release; and as against
certificate creditors, a reduction of the capital stock can take days from the said date, all stocks
bona fide transferee who is able to establish a covered by the subscription shall
clear legal right to the registration of the transfer. vi. in lieu thereof, a new place only in the manner and under the conditions
certificate of stock is issued prescribed by the statute or the charter or the thereupon become delinquent and shall
(Andaya v. Rural Bank of Cabadbaran, Inc., G.R.
c. If a contest is presented to the articles of incorporation (Philippine Trust Corp. v. be subject to sale as hereinafter
No. 188769, 2016)
corporation or if an action is pending Rivera, G.R. No. L-19761, 1923). provided, unless the board of directors
3. Stock transfer agents in court, issuance of new certificates orders otherwise.
A stock transfer agent or one engaged principally is suspended until the court renders See subsection F.4. for discussion on Trust Fund
in the business of registering transfers of stocks Doctrine. The prescriptive period in case of subscription of
a decision regarding the ownership
on behalf of a stock corporation. (Sec. 75) shares begins to run only from the time the board
of the certificate of stock C. Payment of Balance of Subscription of directors declares that the balance is due and
d. No action is allowed against the payable (Garcia v. Suarez, G.R. No. 45493,
A stock transfer agent shall be allowed to operate corporation for issuing new shares i. Call by Board of Directors 1939)
in the Philippines upon compliance with the
except for fraud, bad faith, or
following:
negligence. The board of directors may, at any time, declare Unpaid Subscriptions (Sec. 66)
1. securing a license from the SEC
due and payable to the corporation unpaid a. There will be interest imposed on unpaid
(renewable annually)
vii. Situs of the Shares of Stocks subscriptions and may collect the same or such subscriptions
2. payment of a fee fixed by the SEC percentage thereof, in either case, with accrued b. Payable to the corporation from date of
The situs of shares of stock is the domicile of the interest, if any, as it may deem necessary. subscription
vi. Lost or Destroyed Certificate corporation (Tayag v. Benguet Consolidated Inc., c. If required by and interest fixed in the By-laws
G.R. No. L-23145, 1968). Requisites for a valid call
Procedure for the issuance of new certificates to a) Must be made in the manner prescribed by d. If interest is required but not fixed – legal rate
replace those lost, stolen, or destroyed: (Sec. 72) B. Watered Stock (Diluted Stock) law; e. Therefore, no interest on unpaid subscription
a. The registered owner of a certificate is required:
b) Must be made by the Board of Directors; and
of stock in a corporation or his legal i. Definition b. If not required by by-laws
c) Must operate uniformly upon all shareholders
representative shall file with the c. If not required by subscription contract
corporation an affidavit in triplicate Stocks issued for a consideration less than the Note: A call is not necessary in two cases
setting forth the ff: par or issued price thereof. (Sec. 61) 1. when the date of payment is specified in Methods of Collection of Unpaid Subscription
i. Circumstances of the Loss; the subscription a. Call for payment
ii. Certificates and Serial ii. Liability Of Directors For Watered Stock b. Declaration of delinquency and sale at public
2. when the corporation becomes insolvent
Numbers of lost certificates; (Velasco v. Poizat) auction of delinquent shares;
and Directors or officers who shall commit the c. Ordinary civil action;
iii. Other Information and following will be liable to the corporation or its
creditors, solidarily with the stockholder
Evidence.
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d. Collection from cash dividends and other iv. Auction Sale E. Alienation of shares
amounts due to stockholders if allowed by by- Auction Sale is conducted not less than thirty (30) v. Sale of fully paid shares
laws/agreed to by him. days nor more than sixty (60) days from the date i. Allowable restrictions on the sale of shares Section 63 provides that shares of stock issued
the stocks become delinquent. The authority granted to a corporation to regulate with a corresponding certificate of stock are
D. Sale of Delinquent Shares the transfer of its stock does not empower the personal property and may be transferred by
1. The delinquent stock shall be sold at a corporation to restrict the right of a stockholder to delivery of the certificate or certificates indorsed
Delinquent stocks - Stocks not paid within 30 public auction to such bidder who shall transfer his shares, but merely authorizes the by the owner or his attorney-in-fact or other
days from the date fixed in the contract of offer to pay ff: adoption of regulations as to the formalities and person legally authorized to make the transfer.
subscription or from the date stated in the call a. the full amount of the balance on procedure to be followed in effecting transfer
made by the Board of Directors. the subscription together (Thomson v. CA, G.R. No. 116631, 1998). vi. Requisites of a valid transfer
b. accrued interest If represented by a certificate, the following must
i. Effect of Delinquency ii. Sale of partially paid shares be strictly complied with:
c. costs of advertisement
1. They shall be subject to delinquency Section 62 provides that no share of stock against a. Delivery of the certificate;
d. expenses of sale for the smallest
sale. which the corporation holds any unpaid claims b. Indorsement by the owner or his agent;
number of shares or fraction of a shall be transferable in the books of the
2. The stock shall not be voted or be entitled c. To be valid against third parties, the transfer
share. corporation.
to vote or to representation at any must be recorded in the books of the
2. The stock so purchased shall be
stockholder’s meeting. transferred to such purchaser in the
corporation (Rural Bank of Lipa v. CA, G.R.
iii. Sale of a portion of shares not fully paid No. 124535, 2001).
3. The holder shall not be entitled to any of books of the corporation and a certificate A stockholder who has not paid the full amount of
the rights of a stockholder except the for such stock shall be issued in the his subscription cannot transfer part of his
right to dividends If NOT represented by a certificate, the following
purchaser’s favor. subscription in view of the indivisible nature of a
must be complied with:
4. The corporation has the right to apply 3. The remaining shares, if any, shall be subscription contract.
cash dividends due to the unpaid balance a. By means of a deed of a Deed of Assignment;
credited in favor of the delinquent b. The same must be recorded in the books of
plus cost and expenses and to withhold stockholder who shall likewise be entitled iv. Sale of all shares not fully paid
stock dividends until the unpaid The entire subscription, although not yet fully the corporation.
to the issuance of a certificate of stock
subscription is fully paid. paid, may be transferred to a single transferee,
covering such shares. (Sec. 67) If, however, the reason for the absence of a
Note: the only right that may not be exercised is who as a result of the transfer must assume the
unpaid balance. (SEC Opinion) Consent of the certificate is that the subscription has not
the right to dividends Note: There shall be no sale at public auction if:
corporation must first be secured since the been fully paid, the corporation may refuse to
a. The delinquent stockholder pays on or
transfer of subscription rights and obligations record a sale given that under Sec. 62, “[n]o
Procedure of Delinquency Sale
before the sale: (a) balance due, (b) contemplates a novation of contract. (Civil Code, shares of stock against which the corporation
accrued interest, or (c) advertising costs Art. 1923) holds any unpaid claim shall be transferable
ii. Call by resolution of the board of directors
and expenses of sale. in the books of the corporation.”
The board of directors shall issue a resolution
ordering the sale of delinquent stocks. (Sec. 67) b. The Board orders otherwise, on any of The SEC correctly categorized the assignment of
the following grounds: (a) Defect in the the subscription agreements as a form of The failure by a seller to deliver, within a
Notice of Sale; or (b) Defect in sale itself. novation by substitution of a new debtor and reasonable time, the stock certificates
There is no need for a call if the subscription
(Sec. 67) which required the consent of or notice to the representing shares of stock subject of a sale
contract specifies dates when subscription
creditor. In this case, the change of debtor took transaction may be a basis to rescind such sale
balance is due. If no payment is made within thirty
place when R.C. Lee assigned the Oceanic (Fil-Estate Gold and Development v. Vertex, G.R.
(30) days from the date specified, the board shall When Sale May Be Questioned
shares under the subscription agreements to SSI No. 202079, 2013)
order the sale of delinquent shares. a. The action is filed on the ground of irregularity
or defect in the notice of sale, or in the sale of so that the latter became obliged to settle the 75%
unpaid balance on the subscription. The SEC Note: Recording in STB is only required for
iii. Notice of Sale the delinquent stock;
was correct in saying that Interport was duly absolute transfers, which do not include pledges,
1. Notice of the sale, with a copy of the b. The party seeking to maintain such action
notified of the assignment when SSI tendered its mortgages, etc. (Monserrat v. Ceron, G.R. No.
resolution, shall be sent to every first pays or tenders to the party holding the
payment for the 75% unpaid balance, and that it 37078, September 27, 1933)
shareholder with unpaid subscriptions stock the sum for which the same was sold
either personally, by registered mail, or could not anymore refuse to recognize the
with interest from the date of the sale at the transfer of the transfer of the subscription In case of chattel mortgage [Note: the Personal
through other means provided in the legal rate; and Property Security Act has done away with chattel
agreements to SSI was to extinguish the
bylaws. c. The complaint was filed within 6 months from mortgages], a double registration is necessary
obligation of R.C. Lee to Oceanic, now Interport.
2. Notice of the sale shall be published once the date of the sale (Sec. 68) Interport was no longer obliged to accept any with the Register of Deeds where:
a week for two (2) consecutive weeks in payment from R.C. Lee because the latter had a. The debtor resides
a newspaper of general circulation in the ceased to be privy to the subscription b. The corporation has its principal place of
province or city where the principal office agreements, but was now legally bound to accept business.
of the corporation is located. SSi’s tender of payment as the new debtor.
(Interport Resources Corporation v. Security Registration on the stock and transfer book would
Specialist, Inc., G.R. No. 154069, 2016) be of no effect
Page 154 of 393 Page 155 of 393

ii. Right to inspect corporate records Requisites for the exercise of the right to 11. DISSOLUTION AND LIQUIDATION
In case of attachments and levies, shares may be What does the right to inspect corporate inspect
attached by leaving with the corporate officer a records include? (Sec. 73) 1. It must be exercised at reasonable hours Dissolution
copy of the writ and notice. No recording in the 1. Right to inspect corporate records on business days Extinguishment of the franchise of a corporation
stock and transfer book is needed. The moment 2. Right to demand for their reproduction, 2. The stockholder has not improperly used and the termination of its corporate existence.
the notice has been duly delivered, it becomes provided that [D-E-Co]: any information he secured through any
binding. a. demand in writing is made by the previous examination However, the corporation shall nevertheless be
requesting party 3. The demand is made in good faith and for continued as a body corporate for three (3) years
vii. Involuntary dealings b. copies are reproduced at the after the time when it would have been so
a legitimate purpose
As an incident of ownership, a stockholder may dissolved, for the purpose of prosecuting and
requesting party’s expense
pledge, mortgage or encumber his shares of defending suits by or against it and enabling it to
c. The inspecting or reproducing When may corporate records be inspected?
stocks. Restrictions by the corporation are only settle and close its affairs, to dispose of and
party shall remain bound by Authorized persons may inspect corporate books
valid when: convey its property and to distribute its assets, but
confidentiality rules under at reasonable hours on business days (Sec. 73)
a. They appear in the Articles of Incorporation, not for the purpose of continuing the business for
by-laws, and the certificates. prevailing laws, such as the rules which it was established. (Sec. 122)
on trade secrets or processes iii. Effect of refusal to inspect corporate
b. They are not more onerous than granting records
existing stockholders an option to purchase under Republic Act No. 8293, A. Modes of Dissolution:
Any officer or agent of the corporation who shall
within a reasonable period and within otherwise known as the
refuse to allow the inspection and/or reproduction i. Voluntary
reasonable terms. “Intellectual Property Code of the
of records shall be liable for:
Philippines”, as amended, 1. damages
Republic Act No. 10173, 1. Where No Creditors Are Affected
F. Corporate Books and Records 2. shall be guilty of an offense which shall
otherwise known as the “Data be punishable under Section 161, RCC Procedure where no creditors are affected by
i. Corporate records to be kept at principal Privacy Act of 2012”, Republic
the dissolution of the corporation:
office: (Sec. 73) [AB-O-NA-BResRepMi] Act No. 8799, otherwise known If such refusal is made pursuant to a resolution or 1. A meeting must be held on the call of
1. The articles of incorporation and bylaws as “The Securities Regulation order of the board of directors or trustees, the directors or trustees;
of the corporation and all their Code”, and the Rules of Court. liability under this section for such action shall be 2. Notice of the meeting should be given to
amendments; imposed upon the directors or trustees who voted the stockholders by personal delivery or
2. The current ownership structure and Who may inspect corporate records? for such refusal. (Sec. 73)
registered mail at least twenty (20) days
voting rights of the corporation, including A director, trustee, stockholder or member of the
prior to the meeting;
lists of stockholders or members, group corporation in person or by a representative has Defenses that may be used by officer / agent /
the right to inspect corporate records (Sec. 73). director / trustee: 3. The notice of meeting should also be
structures, intra-group relations,
1. the requesting party improperly used any published for once in a newspaper
ownership data, and beneficial
The ff. may NOT inspect or demand reproduction information secured through any prior published in the principal place of
ownership;
of corporate records: (Sec. 73) examination of the records or minutes of business, otherwise, in a newspaper of
3. The names and addresses of all the
1. One who is not a stockholder or member such corporation or of any other general circulation
members of the board of directors or
of record, corporation, 4. The resolution to dissolve must be
trustees and the executive officers;
2. A competitor, director, officer, controlling 2. the requesting party was not acting in approved by the majority of the
4. A record of all business transactions;
stockholder or otherwise represents the good faith or for a legitimate purpose in directors/trustees and approved by the
5. A record of the resolutions of the board of
interests of a competitor shall have no making the demand to examine or stockholders representing at least
directors or trustees and of the
right to inspect or demand reproduction reproduce corporate records, majority of the outstanding capital stock
stockholders or members;
of corporate records. 3. the requesting party is a competitor, or majority of members;
6. Copies of the latest reportorial
director, officer, controlling stockholder or 5. A verified request for dissolution is then
requirements submitted to the SEC; and
Any stockholder who shall abuse the rights otherwise represents the interests of a filed with the SEC stating:
7. The minutes of all meetings of
granted under Sec. 73 shall be penalized under competitor (Sec. 73) a. the reason for dissolution
stockholders or members, or of the board Section 158 the RCC without prejudice to the b. the form, manner and time when
of directors or trustees. provisions of Republic Act No. 8293, otherwise the notices were given
known as the “Intellectual Property Code of the c. names of the stockholders and
Note: This is not an exclusive list. Section 73 Philippines”, as amended, and Republic Act No.
states that Every corporation shall keep and directors or members and
10173, otherwise known as the “Data Privacy Act
carefully preserve at its principal office all trustees who approved the
of 2012”.
information relating to the corporation including, dissolution
but not limited to the abovementioned. d. the date, place, and time of the
meeting in which the vote was
made; and
e. details of publication
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6. In addition, the following shall be 4. The corporation shall submit to the SEC the outstanding capital stock or of its c. Issue such other orders as it may
submitted to the SEC: the following: members. deem appropriate. (Sec. 137)
a. Copy of the resolution a. a copy of the resolution 2. Written notice of the proposed action and
authorizing the dissolution, authorizing the dissolution, the time and place of the meeting shall be Procedure on Withdrawal of Petition for
certified by a majority of the certified by a majority of the sent to stockholders or members Dissolution
board and countersigned by the board of directors or trustees and 3. In case of extension of corporate term, a A withdrawal of the petition for dissolution shall be
secretary; countersigned by the secretary dissenting stockholder may exercise the in the form of a motion and similar in substance
b. Proof of publication of the corporation; and right of appraisal under the conditions to a withdrawal of request for dissolution but shall
be verified and filed prior to publication of the
c. Favorable recommendation from b. list of all its creditors. provided in this Code. (Sec. 137)
order setting the deadline for filing objections to
the appropriate regulatory 5. By an order reciting the purpose of the
the petition. (Sec. 137)
agency, when necessary. petition, the SEC shall fix a deadline for Note: Under Sec. 11, the RCC now allows the
7. The SEC shall, within 15 days from the filing objections to the petition (shall not revival of a the corporate existence of an Expired
ii. Involuntary
receipt of the verified request for be less than thirty (30) days nor more Corporation.
dissolution, and in the absence of any than sixty (60) days after the entry of the A corporation may be dissolved by the SEC motu
withdrawal within said period, approve order). If a corporation’s term has expired, it may apply
proprio or upon filing of a verified complaint by
for a revival of its corporate existence,
the request and issue the certificate of 6. Publication: Before such the deadline, a any interested party. (Sec. 138)
together with all the rights and privileges under its
dissolution, upon which the dissolution copy of the order shall be published at
certificate of incorporation and subject to all of its
will take effect. (Sec. 134) least once a week for three (3) Grounds for dissolution of the corporation:
duties, debts and liabilities existing prior to its
consecutive weeks in a newspaper of a. Non-use of corporate charter as provided
revival. Upon approval by the SEC, the
2. Where Creditors Are Affected general circulation published in the corporation shall be deemed revived and a under Section 21 of this Code;
municipality or city where the principal certificate of revival of corporate existence shall b. Continuous inoperation of a corporation
Procedure where the dissolution of the office of the corporation is situated, be issued, giving it perpetual existence, unless as provided under Section 21 of this
corporation may prejudice the rights of any otherwise, in a newspaper of general its application for revival provides otherwise. Code;
creditor: circulation in the Philippines (Sec. 11) c. Upon receipt of a lawful court order
1. A verified petition for dissolution shall be dissolving the corporation;
7. Posting: A similar copy shall be posted
filed with the SEC. 4. Withdrawal of dissolution d. Upon finding by final judgment that the
for three (3) consecutive weeks in three
2. The petition shall be: corporation procured its incorporation
(3) public places in such municipality or
a. signed by a majority of the Procedure on Withdrawal of Request for through fraud;
city.
corporation’s board of directors Dissolution: e. Upon finding by final judgment that the
8. After the expiration of the time to file
or trustees 1. Withdrawal of Request of Dissolution: corporation:
objections, a hearing shall be conducted
b. verified by its president or Not later than 15 days from the receipt by 1. Was created for the purpose of
upon prior five (5) day notice to hear the
secretary or one of its directors SEC of the request for dissolution, the committing, concealing or aiding
objections;
or trustees withdrawal thereof shall be made in the SEC of securities violations,
9. Judgment shall be rendered dissolving
c. shall set forth all claims and writing, duly verified by any incorporator, smuggling, tax evasion, money
the corporation and directing the
demands against it director, trustee, shareholder, or member laundering, or graft and corrupt
disposition of assets; the judgment may
d. that its dissolution was resolved and signed by the same number of practices;
include appointment of a receiver.
upon by the affirmative vote of incorporators, directors, trustees, 2. Committed or aided in the SEC
10. The dissolution shall take effect only
the stockholders representing at shareholders, or members necessary to of securities violations,
upon issuance by the SEC of a certificate
least two-thirds (2/3) of the request for dissolution. smuggling, tax evasion, money
of dissolution* (Sec. 135)
outstanding capital stock or at 2. Upon receipt of a withdrawal of request laundering, or graft and corrupt
least two-thirds (2/3) of the for dissolution, the SEC shall withhold practices, and its stockholders
3. By Shortening Corporate Term-
members at a meeting of its action on the request for dissolution and knew of the same; and
stockholders or members called Procedure on voluntary dissolution by shall, after investigation: 3. Repeatedly and knowingly
for that purpose. shortening of the corporate term (Sec. 36): a. Make a pronouncement that the tolerated the SEC of graft and
3. The petition shall likewise state: 1. A private corporation may extend or request for dissolution is deemed corrupt practices or other
a. the reason for the dissolution; shorten its term by amending the the withdrawn; fraudulent or illegal acts by its
b. the form, manner, and time when articles of incorporation when approved b. Direct a joint meeting of the directors, trustees, officers, or
the notices were given; by a majority vote of the board of board of directors or trustees and employees. (Sec. 138)
c. the date, place, and time of the directors or trustees, and ratified at a the stockholders or members for
meeting in which the vote was meeting by the stockholders or members the purpose of ascertaining If the corporation is ordered dissolved by final
made. representing at least two-thirds (2/3) of whether to proceed with judgment pursuant to the grounds set forth in
dissolution; or subparagraph (e) hereof, its assets, after
Page 158 of 393 Page 159 of 393

payment of its liabilities, shall, upon petition of the ● Entering into contracts or negotiations for purpose of continuing the business for which it designation of the trustee is made within said
SEC with the appropriate court, be forfeited in lease or sale of properties to be used as was organized (PNB v. Court of First Instance of period.
favor of the national government. Such forfeiture business or factory site; Rizal, Pasig, Br. XXI, G.R. No. 63201, 1992).
shall be without prejudice to the rights of innocent ● Making plans for and the construction of the c. Through Receiver – created by means of
stockholders and employees for services factory; and A party’s stockholding in a corporation, whether judicial or quasi-judicial appointment of the
rendered, and to the application of other penalty ● Taking steps to expedite the construction of existing or dissolved, is a property right which he receiver. The receiver is actually an officer of
or sanction under this Code or other laws. (Sec. may vindicate against another party who has
the company’s working equipment the court and must therefore be accountable
138) deprived him thereof.
to the court.
In the event of failure to file for an extension if a
The SEC shall give reasonable notice to, and Stockholders may convey their respective
corporation’s term has expired, it may apply for a Note: If there is no Board of Directors or
coordinate with, the appropriate regulatory shareholdings toward the creation of a new
revival of its corporate existence, together with all Trustees, those having pecuniary interest in the
agency prior to the involuntary dissolution of corporation to continue the business of the old or
the rights and privileges under its certificate of assets, including not only the shareholders but
companies under their special regulatory they may reincorporate by filing new articles of
incorporation and subject to all of its duties, debts likewise the creditors of the corporation, acting for
jurisdiction.(Sec. 138) incorporation and by-laws.
and liabilities existing prior to its revival. Upon and in its behalf, may liquidate (Alabang Dev’t v.
approval by the SEC, the corporation shall be B. Methods of Liquidation Alabang Hills Village Ass’n, G.R. No. 196950,
Non-use of corporate charter (Sec. 21)
deemed revived and a certificate of revival of 2014)
If a corporation does not formally organize and
corporate existence shall be issued, giving it Liquidation
commence its business within 5 years
perpetual existence, unless its application for d. Liquidation after Three Years
● Effect: certificate of incorporation shall be Process by which all the assets of the corporation
revival provides otherwise. are converted into liquid assets in order to
deemed revoked following the end of
facilitate the payment of obligations to creditors, If full liquidation can only be effected after the 3-
the 5-year period Demands of Minority for Dissolution and the remaining balance if any is to be year period and there is no trustee, the directors
Corporate dissolution due to mismanagement of distributed to the stockholders. may be permitted to complete the liquidation by
Continuous Inoperation (Sec. 21) majority stockholder is too drastic a remedy, continuing as trustees by legal implication
If a corporation has commenced its business but especially when the situation can be remedied (Reburiano v. CA, G.R. No. 102965, 1999).
subsequently becomes inoperative for a period of There is no time limit within which the
such as giving minority stockholders a veto power trustees must complete a liquidation placed in
at least 5 consecutive years to any decision (Chase v. Buencamino, G.R. No. The trustee may continue to prosecute a case
● Effect: after due notice and hearing, the their hands (Vigilla et.al. v. Philippine College of
20395, 1985). Criminology, G.R. No. 200094, 2013). commenced by the corporation within three years
corporation will be put on delinquent from its dissolution until rendition of the final
status Effects of Dissolution judgment, even if such judgment is rendered
Modes of Liquidation
● Remedy: it shall have a period of 2 years (a) Vesting of legal title to the corporate property beyond the three-year period allowed by Section
to resume operations. Otherwise, in the stockholders, who become co-owners a. Through Board of Directors or Trustees – [139]. However, an already defunct corporation
certificate of incorporation will likewise be thereof normal method of procedure cannot initiate a suit after the lapse of the three-
revoked. (b) The corporation ceases to be a body year period. (Alabang Dev’t v. Alabang Hills
corporate to continue the business for which Even if no trustee is appointed or designated Village Ass’n, G.R. No. 196950, 2014)
“Organization” under SEC Rules it was established. during the three-year period of the liquidation of
● Adoption of the by-laws and the filing and Note: When a corporation threatened by
the corporation, the Court has held that the Board
approval of the same with and by the SEC if The termination of the life of a juridical entity does of Directors may be permitted to complete the bankruptcy is taken over by a receiver, all the
the same were not adopted and filed not by itself cause the extinction or diminution of corporate liquidation by continuing as trustees by creditors shall stand on equal footing. Not one of
simultaneously with the articles of the rights and liability of such entity, since it is legal implication (Vigilla et al. v Philippine College them should be given preference by paying one
allowed to continue as a juridical entity for three of Criminology, G.R. No. 200094, 2013) or some of them ahead of the others.
incorporation;
● Election of the Board of Directors or Trustees (3) years for the purpose of prosecuting and
defending suits by or against it and enabling it to Note: This only concerns the matters/actions that The Civil Code provisions on concurrence and
and of the officers; preference of credits are applicable to the
● Establishment of the principal office; and settle and close its affairs, to dispose of and are initiated during the 3 year grace period. The
convey its property, and to distribute its assets Board cannot be considered as trustees for liquidation proceedings.
● Providing for the subscription and payment of
(Republic v. Tancinco, G.R. No. 139256, 2002). matters initiated after the 3-year period.
the capital stock and the taking of such steps A corporation in the process of liquidation has no
as are necessary to endow the legal entity legal authority to engage in any new business,
A board resolution to dissolve the corporation b. Through Trustee – at any time during the
with capacity to transact the legitimate does not operate to so dissolve the juridical entity. even if the same is in accordance with the primary
three years of liquidation, a corporation is
business for which it was created For dissolution to be effective “the requirements purpose stated in its articles of incorporation.
authorized and empowered to convey all of
mandated by the Corporation Code should have its property to trustees for the benefit of
“Commenced Business” under SEC Rules been strictly complied with” (Vesagas v. Court of When a Corporation Must Wind Up (Sec. 139)
stockholders, members, creditors, and other If it is dissolved by:
When the corporation has performed preparatory Appeals, G.R. No. 142924, 2001)
acts geared towards the fulfillment of the persons in interest. The three (3)-year a. By expiry of term or
purposes for which it was established such as but limitation will not apply provided the b. Is annulled by forfeiture, or
When the period of corporate life expires, the
not limited to the following: corporation ceases to be a body corporate for the otherwise, or
Page 160 of 393 Page 161 of 393

c. Is terminated In any other Said restrictions shall not be more onerous than permitted under its articles of
manner Notwithstanding the foregoing, a corporation shall granting the existing stockholders or the incorporation; or
not be deemed a close corporation when at least corporation the option to purchase the shares of 3. that the transfer violates a restriction on
Effects of Winding Up of Affairs: (Sec. 139) two-thirds (2/3) of its voting stock or voting rights the transferring stockholder with such reasonable transfer of stock, and the corporation
a. Continues as a corporate body for 3 is owned or controlled by another corporation terms, conditions or period stated therein. may, at its option, refuse to register the
years to prosecute and defend suits which is not a close corporation within the transfer in the name of the transferee.
against it, close its affairs, dispose and meaning of the Corporation Code. (Sec. 95) If upon the expiration of said period, the existing
convey its property and distribute assets stockholders or the corporation fails to exercise
(e) The provisions of subsection (d) shall not
Suppletory Effect the option to purchase, the transferring
b. Cannot continue business for which it be applicable if the transfer of stock, though
The provisions of other Titles of the Corporation stockholder may sell his shares to any third
was established contrary to subsections (a), (b) or (c), has been
Code shall apply suppletorily except insofar as person.
c. Can convey property to trustees for the consented to by all the stockholders of the close
Title of Close Corporation otherwise provides.
benefit of the stockholders/members, corporation, or if the close corporation has
(Sec. 95) iii. Effects of Issuance or Transfer of Stock in
creditors and other persons in interest amended its articles of incorporation in
Breach of Qualifying Conditions. –
i. Legal interest vests in accordance with this Title.
Management of a close corporation
business 1. The articles of incorporation of a close (a) If shares of stock of a close corporation
(f) The term “transfer”, as used in this
ii. Beneficial interest remains corporation may provide that the business of are issued or transferred to any person who is not
section, is not limited to a transfer for
with stockholders/ the corporation shall be managed by the eligible to be a holder thereof under any provision
value.
members, creditors stockholders of the corporation rather than by of the articles of incorporation, and if the
d. Assets distributable to unknown a board of directors. certificate for such stock conspicuously shows
(g) The provisions of this section shall not
creditors, stockholders/ members, a. When they manage, stockholders are the qualifications of the persons entitled to be
impair any right which the transferee may have to
persons in interest or those who cannot holders of record thereof, such person is
liable as directors; either rescind the transfer or recover the stock
conclusively presumed to have notice of the
be found shall be escheated to the city or b. There is no need to call a meeting to elect under any express or implied warranty. (Sec. 98)
fact of the ineligibility to be a stockholder.
municipality where the assets are directors;
located. c. To the extent that the stockholders are Note: Even if the transfer of shares is made in
(b) If the articles of incorporation of a close
e. Distribution of assets only upon lawful actively engaged in the management, violation of the restrictions enumerated under
corporation states the number of persons, not
dissolution and payment of all debts and said stockholders shall be liable for [Sec. 98 of RCC], such transfer is still valid if it
exceeding twenty (20), who are entitled to be
liabilities. has been consented to by all the shareholders of
corporate torts unless the corporation stockholders of record, and if the certificate for
the close corporation and the corporation cannot
Exceptions: has obtained reasonably adequate such stock conspicuously states such number,
refuse to register the transfer of shares in the
a. Decrease of capital stock liability insurance. and the issuance or transfer of stock to any
name of the transferee. (Florete, Sr. v. Florete,
b. As otherwise allowed in the person would cause the stock to be held by more
Jr., G.R. No. 223321, 2018)
Corporation Code Companies That Cannot Be Close than such number of persons, the person to
Corporations (MIPES-BOO) whom such stock is issued or transferred is
Need for factual determination of close
a. Mining companies; conclusively presumed to have notice of this
12. OTHER CORPORATIONS corporation to apply
b. Insurance companies; fact.
Before courts can allow the operation of Section
A. Close Corporations c. Public utilities; 98 to a case, there must first be a factual
d. Educational institutions; (c) If a stock certificate of a close corporation
determination that the corporation is indeed a
conspicuously shows a restriction on transfer of
i. Characteristics of a close corporation e. Stock exchanges; close corporation. There needs to be a
the corporation’s stock and the transferee
f. Banks; presentation of evidence on the relevant
acquires the stock in violation of such restriction,
A close corporation, within the meaning of the g. Oil companies; restrictions in the articles of incorporation and by-
the transferee is conclusively presumed to have
Corporation Code, is one whose articles of h. Other corporations declared to be vested with laws of the corporation. (Rural Bank of Andaya v.
notice of the fact that the stock was acquired
incorporation provides that: public interest. Cabadbaran, G.R. No. 188769, 2016)
in violation of the restriction.
1. All the corporation's issued stock of all
classes, exclusive of treasury shares, shall ii. Validity Of Restrictions On Transfers Of iv. When board meeting is unnecessary or
(d) Whenever a person to whom stock of a
be held of record by not more than a specified Shares (Sec 97) improperly held (Sec. 100)
close corporation has been issued or transferred
number of persons, not exceeding twenty Restrictions on the right to transfer shares must has or is conclusively presumed under this
(20) General Rule: Any action taken by the directors
appear in: section to have notice of:
without a board meeting shall be deemed
2. All the issued stock of all classes shall be 1. The articles of incorporation; 1. the person’s ineligibility to be a
INVALID.
subject to one or more specified restrictions 2. The by-laws; and stockholder of the corporation; or
on transfer permitted by this Title 3. In the certificate of stock 2. that the transfer of stock would cause the Exception: The following shall nonetheless be
3. The corporation shall not list in any stock stock of the corporation to be held by valid despite the lack of a valid board meeting,
exchange or make any public offering of any Otherwise, the same shall not be binding on any more than the number of persons unless the by-laws provide otherwise
of its stock of any class. purchaser thereof in good faith.
Page 162 of 393 Page 163 of 393

1. Before or after such action is taken, a vii. Deadlocks (Sec. 103) B. Non-Stock Corporations
written consent thereto is signed by all The incurring of profit or losses does not
the directors; or Power To Buy-Back Shares Of Close i. Definition determine whether an activity is for profit or non-
2. All the stockholders have actual or Corporations v. Appraisal Right In Stock A non-stock corporation is one where no part of profit, and the courts will consider whether
implied knowledge of the action and Corporations its income is distributable as dividends to its dividends have been declared or its members or
make no prompt objection in writing; or CLOSE CLOSE STOCK members, trustees, or officers, subject to the that is property, effects or profit was ever used for
CORP CORP CORP provisions of the Corporation Code on dissolution personal or individual gain, and not for the
3. The directors are accustomed to take
purpose of carrying out the objectives of the
informal action with the express or Sec. 103 Sec. 104
Any profit which a non-stock corporation may enterprise (Manila Sanitarium and Hospital v.
implied acquiescence of all the (Deadlocks) (Withdrawal) Gabuco, G.R. No. 13873, 1963).
obtain as an incident to its operations shall,
stockholders; or Exercised by Exercised by Exercised by whenever necessary or proper, be used for the
4. All the directors have express or implied the the the furtherance of the purpose or purposes for which In a mutual life insurance corporation, organized
knowledge of the action in question and corporation stockholder stockholder the corporation was organized, subject to the as a non-stock nonprofit corporation, the so-
none of them makes a prompt objection There are provisions of this Title. (Sec. 86) called “dividend” that is received by members-
in writing. certain policyholders is not a portion of profits set aside
Exercisable Requisites: for distribution to the stockholders in proportion to
Exercisable instances
An action within the corporate powers taken at only in a 1. Does not have a capital stock divided into their subscription to the capital stock of a
for any where
a meeting held without proper call or notice, is deadlock share corporation. One, a mutual company has no
reason appraisal
deemed ratified by a director who failed to situation 2. No part of its income is distributable as capital stock to which subscription is necessary;
rights can be
attend, unless after having knowledge thereof, dividends to its member there are no stockholders to speak of, but only
exercised
the director promptly files his written objection 3. They must be formed or organized for members. And, two, the amount they receive
Can be does not partake of the nature of a profit or
with the secretary of the corporation. purposes specified in Sec. 87
directed income. The quasi-appearance of profit will not
Available Available
v. Pre-Emptive Rights Of Stockholders In either against change its character; it remains an overpayment,
only against only against Conversion between Stock and Non-Stock
Close Corporations (Sec 101) the a benefit to which the member-policyholder is
the the Corporation
corporation equitably entitled (Republic v. Sunlife Assurance
corporation corporation A non-stock corporation cannot be converted into
General Rule: It shall extend to all stock to be or any other Company of Canada, GR No. 158085, 2005).
a stock corporation through mere amendment of
issued, including reissuance of treasury shares, stockholder
its Articles of Incorporation as this would be in
whether for money, property or personal services, Available Limited only Unrestricted Delinquency in Membership Dues of Non-
violation of Section 87 which prohibits distribution
or in payment of corporate debts even without in a situation retained Stock Corporations
of income as dividends to members. (SEC
unrestricted when the earnings are A non-stock corporation may seize and dispose
Opinion, 20 March 1995) However, a non-stock
Exception: Unless the articles of incorporation retained corporation required for of the membership share of a fully-paid member
corporation can be converted into a stock
provide otherwise. on account of his unpaid monthly dues, when
earnings and has sufficient buyback to corporation only if the members dissolve it first
such corporation is authorized to do so under the
not subject to assets in its happen, and then organize a stock corporation. The result
vi. Amendment of the articles of incorporation by-laws, even when no provision on the matter
any formula books generally is a new corporation. (SEC Opinion, 13 May
(Sec. 102) appears in the articles of incorporation, and in
1992)
spite of the fact that Sec. 67 of Corporation Code
Any amendment to the articles of incorporation Compelling Dissolution In Close on delinquency sale pertains to payment of
On the other hand, a stock corporation may be
which seeks to delete or remove any provision Corporations v. Stock Corporations shares subscription. (Valley Golf v. De Caram,
converted into a non-stock corporation by mere
required by this Title or to reduce a quorum or CLOSE CLOSE STOCK G.R. No. 155805, 2000)
amendment provided all the requirements are
voting requirement stated in said articles of CORP CORP CORP complied with. Its rights and liabilities will remain.
incorporation shall require the affirmative vote Sec. 104 Sec. 105
of at least two- thirds (2/3) of the outstanding SEC is given Theory on Non-Stock Corporations
capital stock, whether with or without voting express Majority of A non-stock corporation may only be formed or
rights, or of such greater proportion of shares as power to A stockholder the Board organized for charitable, religious, educational,
may be specifically provided in the articles of professional, cultural, fraternal, literary, scientific,
dissolve a must make a plus 2/3
incorporation for amending, deleting or removing social, civic or other similar purposes. It may not
any of the aforesaid provisions, at a meeting duly close written stockholder
corporation petition to the vote is engage in undertakings such as the investment
called for the purpose. business where profit is the main or underlying
when there is dissolution required for
a deadlock dissolution purpose. Although the non-stock corporation may
obtain profits as an incident to its operation such
situation
profits are not to be distributed among its
members but must be used for the furtherance of
its purposes (People v. Menil, G.R. No. 115054-
66, 1999).
Page 164 of 393 Page 165 of 393

Comparative Table: Stock v. Non-Stock explanation if its articles or by-laws provide for iii. Treatment Of Profits 2. Assets held by the corporation upon a
Corporations more than 15 members of the Board. (Sec. 91) Non-stock non-profit corporations may actually condition requiring return, transfer or
STOCK CORP NON-STOCK CORP earn profits incidentally from its operations, conveyance, and which condition occurs
Can they earn profit? Term provided that the profits are devoted to their by reason of the dissolution, shall be
Trustees shall hold office for a period of three (3) purpose. returned, transferred or conveyed in
Yes Yes
years until their successors are elected and accordance with such requirements;
Distribution of Dividends qualified (Sec. 91) The mere fact that a non-stock corporation may
Yes No 3. Assets received and held by the
earn profit does not make it a profit-making
Name of “Constituents” corporation subject to limitations
Qualifications of Trustees corporation, where such profit is used to carry out
Stockholders Members Only ONE qualification under Sec. 92: the purposes set forth in the Articles of permitting their use only for charitable,
Limitation to Purpose Membership in the corporation. Nonetheless, the Incorporation and is not distributed to its religious, benevolent, educational or
member who may be elected as trustee may just incorporators, members, trustees, or officers. similar purposes, but not held upon a
May not include a
There can be purpose which would be a nominee. A trustee who ceases to be a (SEC Opinion, 13 November 1990, XXIV SEC condition requiring return, transfer or
secondary purposes change or contradict member of the corporation can no longer act as a Quarterly Bulletin 63) conveyance by reason of the dissolution,
trustee. shall be transferred or conveyed to one
its nature in AOI
Note: or more corporations, societies or
Kind of Board Note: An independent trustee of a non-stock Despite its nomenclature, the essence of a non- organizations engaged in activities in the
Board of Directors Board of Trustees corporation vested with public interest need not stock non-profit corporation is not the non- Philippines substantially similar to those
Number of Board Members be a member of such non-stock corporation (Sec. existence of shares of stock to cover its capital (it of the dissolving corporation according to
may be more than 15 91) is legally possible for a corporation having capital
must not be more a plan of distribution adopted pursuant to
EXC: special stock to still be considered a non-stock
than 15 this Chapter;
corporations For stock corporations, the "quorum" referred to corporation), but that:
in Section 52 of the Corporation Code is based on a. Its primary purpose should be any of those 4. Assets other than those mentioned in the
Term of Board Members
the number of outstanding voting stocks. For under Sec. 88 of the Corporation Code, and preceding paragraphs, if any, shall be
3 years, but AOI or
nonstock corporations, only those who are actual, b. There is a prohibition in the articles of distributed in accordance with the
by-laws may provide
living members with voting rights shall be counted incorporation and by-laws that no part of the provisions of the articles of incorporation
otherwise
1 year in determining the existence of a quorum during or the by-laws, to the extent that the
income or any form of dividend is
5 years - educational members' meetings. Dead members shall not be distributable to the members, trustees, and articles of incorporation or the by-laws,
Constant terms counted. (Tan v. Sycip, G.R. No. 153468 August determine the distributive rights of
institutions officers of the corporation (CIR v. Club
17, 2006) members, or any class or classes of
Filipino Inc. de Cebu, G.R. No. L-12719,
Staggered terms 1962) members, or provide for distribution; and
How Board Members are Elected ii. Purposes 5. In any other case, assets may be
A non-stock corporation may be formed or ● Even though the corporation
Directly elected by may incidentally earn profits distributed to such persons, societies,
Elected by the organized for the following purposes:
the members, unless from its operations. (CIR v. organizations or corporations, whether or
stockholders (per a. Charitable,
AOI provides University of Visayas, G.R. No. not organized for profit, as may be
Corp. Code) b. Religious,
otherwise L-13554, 1961) specified in a plan of distribution adopted
c. Educational,
Manner of Voting pursuant to this Chapter.(Sec. 93)
d. Professional,
Straight voting, e. Cultural, iv. Plan and Distribution of Assets upon
Straight or cumulative unless AOI or by- Dissolution Plan of Distribution of Assets
f. Recreation, A non-stock corporation in the process of
voting laws provide g. Fraternal,
Rules of Distribution of Assets upon dissolution may adopt a plan providing for the
otherwise h. Literary,
Dissolution distribution of assets, not inconsistent with the
Can a stockholder/member disengage i. Scientific, RCC, in the following manner:
from the corporation? The assets of a nonstock corporation undergoing
j. Social, the process of dissolution for reasons other than
Can sell to other Articles or by-laws k. Civic Service, 1. The board of trustees shall, by majority
those set forth in Section 139 of the RCC (every
stockholders OR specifically provide l. Similar purposes, like trade, industry, vote, adopt a resolution recommending a
corporation whose charter expires pursuant to its
exercise of appraisal for the method of agriculture and like chambers, or articles of incorporation, is annulled by forfeiture, plan of distribution and directing the
rights termination m. Any combination of thereof (Sec. 87) or whose corporate existence is terminated in any submission thereof to a vote at a regular
other manner) shall be applied and distributed as or special meeting of members having
Number of Trustees In the Articles of Incorporation, a non-stock follows: voting rights;
A non-stock corporation may OR may not have corporation may not include a purpose which 1. All liabilities and obligations of the 2. Each member entitled to vote shall be
more than 15 trustees. would change or contradict its nature as such. corporation shall be paid, satisfied and given a written notice setting forth the
discharged, or adequate provision shall proposed plan of distribution or a
NOTE: However, SEC has adopted a policy of be made therefore; summary thereof and the date, time and
requiring registrant corporations to submit an
Page 166 of 393 Page 167 of 393

place of such meeting within the time and c. Other foreign temporary 4. The manner by which any vacancy
in the manner provided in this Code for Term of Office residents (unless otherwise occurring in the office of chief
the giving of notice of meetings; and Unless otherwise provided in the articles of provided by law) archbishop, bishop, priest, minister,
3. Such plan of distribution shall be adopted incorporation or bylaws, the board of trustees of 4. No group of aliens shall comprise more rabbi, or presiding elder is required to be
upon approval of at least two-thirds (2/3) incorporated schools, colleges, or other than ⅓ of the enrollment in any school. filled, according to the rules, regulations
of the members having voting rights institutions of learning shall, as soon as or discipline of the religious
organized, so classify themselves that the term of D. Religious Corporations
present or represented by proxy at such denomination, sect or church; and
office of one- fifth (1/5) of their number shall
meeting. 5. The place where the principal office of the
expire every year. Trustees thereafter elected to i. Corporation Sole; Nationality
fill vacancies, occurring before the expiration of a corporation sole is to be established and
Note: Special form of corporation, usually associated located, which place must be within the
particular term, shall hold office only for the with the clergy and consists of one person only
Although a non-stock corporation cannot unexpired period. Trustees elected thereafter to territory of the Philippines.
distribute incidental profits or dividends to its and his successors, who are incorporated by law
fill vacancies caused by expiration of term shall to give some legal capacities and advantages. 6. The articles of incorporation may include
members, trustees and officers during its hold office for five (5) years. (Sec. 106) any other provision not contrary to law for
corporate term, in the event of dissolution, after the regulation of the affairs of the
the payment of all liabilities and return of assets A corporation sole does not have any nationality
Note: For institutions organized as stock but for purposes of applying our nationalization corporation. (Sec. 109)
received subject to limitations permitting their corporations, the number and term of directors
use, the remaining assets may be distributed to laws, nationality is determined by the nationality
shall be governed by the provisions on stock of the members (Roman Catholic Apostolic Note: The articles must be verified by affidavit or
the members, as provided for in the articles of corporations.(Sec. 106) Church v. LRC, G.R. No. 8451, 1957). affirmation of presiding elder. Document that
incorporation of by-laws.
such presiding elder was duly elected or
Quorum Composition appointed as such and this document must be
In the absence of distribution rules, the remaining A majority of the trustees shall constitute a A corporation sole may be formed by the chief certified by notary public. (Sec. 110)
assets may be distributed to such persons, quorum for the transaction of business. The
societies, organizations, or corporations, archbishop, bishop, priest, minister, rabbi, or
powers and authority of trustees shall be defined other presiding elder of such religious Acquisition and Alienation of Property
whether or not organized for profit, as may be in the bylaws.(Sec. 106) denomination, sect or church, for the purpose of A corporation sole may purchase and hold real
specified in a plan of distribution as adopted by
administering and managing, as trustee, the estate and personal property for its church,
the Board of Trustees and ratified by the 1987 Constitution Provisions affairs, property and temporalities of any religious charitable, benevolent, or educational purposes,
members. Article II, Sec. 17 of the Constitution: “The State denomination, sect or church. and may receive bequests or gifts for such
shall give priority to education [...] to foster purposes. (Sec. 111)
In a regular non-stock corporation it is possible for patriotism and nationalism, accelerate social
its net assets and accumulated “earnings” from its Articles of Incorporation: Contents
progress, and promote total human liberation and In order to become a corporation sole, the chief Such corporation may sell or mortgage real
operations, to inure to the benefit of private development.” archbishop, bishop, priest, minister, rabbi, or property held by it by obtaining an order for that
individuals (e.g., its own members) or entities,
presiding elder of any religious denomination, purpose from the Regional Trial Court of the
but only as a consequence of dissolution. Article XIV, Sec. 4 of the Constitution requires: sect or church must file with the SEC articles of province where the property is situated upon
1. That educational institutions shall be: incorporation setting forth the following: proof that the notice of the application for leave to
Suppletory Effect a. Solely owned by Filipino 1. That the applicant chief archbishop, sell or mortgage has been made through
The provisions governing stock corporation,
citizens; OR bishop, priest, minister, rabbi, or publication or as directed by the Court, and that it
when pertinent, shall be applicable to non-stock
b. If owned by a corporation, at presiding elder represents the religious is in the interest of the corporation that leave to
corporations, except as may be covered by
least 60% of the capital must be denomination, sect or church which sell or mortgage be granted. (Sec. 111)
specific provisions of this Title.
owned by Filipino citizens. desires to become a corporation sole;
C. Educational Corporations 2. The control and administration shall be Note: In cases where the rules, regulations, and
2. That the rules, regulations and discipline
vested in citizens of the Philippines. discipline of the religious denomination, sect or
of the religious denomination, sect or church, religious society, or order concerned
Educational corporations shall be governed by: 3. No educational institution shall be church are consistent with becoming a
1. Special laws (e.g. “Education Act of represented by such corporation sole regulate the
established exclusively for aliens. The corporation sole and do not forbid it; method of acquiring, holding, selling, and
1982”) 60% ownership requirement does not 3. That such chief archbishop, bishop, mortgaging real estate and personal property,
2. General provisions of the Revised apply to the following: priest, minister, rabbi, or presiding elder such rules, regulations and discipline shall
Corporation Code (Sec. 105) a. Educational institutions is charged with the administration of the govern, and the intervention of the courts shall not
established by religious groups temporalities and the management of the be necessary. (Sec. 111)
Board of Trustees of Educational and mission boards; affairs, estate and properties of the
Corporations b. Schools established for foreign The doctrine in Republic v. Villanueva (G.R. No.
religious denomination, sect, or church
Trustees of educational institutions organized as diplomatic personnel and their 55418-19, 1982) and Republic v. Iglesia ni Cristo
within the territorial jurisdiction, so
nonstock corporations shall not be less than five dependents; (G.R. No. 180067, 1984), that a corporation
(5) nor more than fifteen (15): Provided, That the described succinctly in the articles of
sole is disqualified to acquire/hold alienable
number of trustees shall be in multiples of five incorporation
lands of the public domain, because of the
(5).(Sec 106) constitutional prohibition qualifying only
Page 168 of 393 Page 169 of 393

individuals to acquire land and the provision Exception: As otherwise provided by special custodian, or other person BOND REQUIREMENT as per SEC
under the Public Land Act which applied only to law. exercising fiduciary duties Memorandum 7-2019:
Filipino citizens or natural persons, has been i. proof of authority to act on ACS Surety Bond
expressly overturned in Director of Lands v. Note: Unless required by applicable laws or behalf of the trust or estate Coverage
IAC (G.R. No. 66575 1986). regulations, no portion of the authorized capital is must be submitted at the 1 to 1,000,000 1,000,000
required to be paid up at the time of incorporation. time of incorporation (SEC 1,000,001 to 2,000,000 2,000,000
A registered corporation sole can acquire land if (SEC Circular No. 7, Series of 2019) Memorandum 7-2019) 2,000,001 to 3,000,000 3,000,000
its members constitute at least 60% Filipinos. c. Estate
(SEC Opinion, 8 August 1994) iii. Articles of incorporation and by-laws 3,000,001 to 4,000,000 4,000,000
4,000,001 to 5,000,000 5,000,000
Who may NOT form?
Dissolution of a Corporation Sole Requirements for filing the Articles of 5,000,001 and above Equal to the
1. Banks and quasi-banks, non-bank
A corporation sole may be dissolved and its Incorporation: OPC’s ACS
financial institutions (SEC Memorandum
affairs settled voluntarily by submitting to the SEC i. In accordance with Sec. 14 of the RCC. 7-2019)
a verified declaration of dissolution, setting forth: ii. If the single stockholder is a trust or an 2. Pre-need, trust, insurance, public and ● Bond shall be renewed every two (2)
1. The name of the corporation; estate - the name, nationality, and publicly-listed companies years or as often as may be required,
2. The reason for dissolution and winding residence of the trustee, administrator, 3. Non-chartered government-owned and - upon review of the Audited Financial
up; executor, guardian, conservator, controlled Statements/ Financial Statements
3. The authorization for the dissolution of custodian, or other person exercising 4. Natural person who is licensed to certified under oath by the
the corporation by the particular religious fiduciary duties together with the proof exercise a profession to form an OPC for company’s President/Treasurer
denomination, sect or church; and of such authority to act on behalf of the the purpose of exercising such ● Bond is a continuing requirement as
4. The names and addresses of the profession long as the single stockholder is the
trust or estate
persons who are to supervise the winding self-appointed Treasurer of the OPC
iii. Name, nationality, residence of the ● Bond may be cancelled upon proof of
up of the affairs of the corporation. nominee and alternate nominee, and Exception: as provided under special laws
appointment of another person as
the extent, coverage and limitation of the Treasurer and Filing of Amended
Upon approval of such declaration of dissolution The single stockholder shall be the sole director
the authority. (Sec. 118) Form for Appointment of Officers
and president of the One Person Corporation.
by the SEC, the corporation shall cease to carry 2. Undertake in writing to faithfully
(Sec. 121)
on its operations except for the purpose of Note: OPCs are NOT required to file their administer the One Person Corporation’s
winding up its affairs. (Sec. 113) corporate bylaws. (Sec. 119) When to appoint officers? (Sec. 122) funds to be received as treasurer
Within fifteen (15) days from the issuance of its 3. To disburse and invest the same
E. One Person Corporations iv. Corporate name certificate of incorporation according to the articles of incorporation
as approved by the SEC
i. Excepted Corporations It should Indicate the letters “OPC” either below Who to appoint?
or at the end of their corporate name. (Sec. 120) a. Treasurer Special Functions of the Corporate
The following are not allowed to incorporate as b. Corporate secretary Secretary(Sec. 123)
OPC: v. Corporate structure and officers c. Other officers as may be deemed necessary In addition to the functions designated by the One
a. Banks, Person Corporation, the corporate secretary
b. Non-bank financial institutions, One Person Corporation (OPC) (Sec. 116) Who and when to notify? shall:
c. Quasi-banks, - a corporation with a single stockholder Securities and Exchange Commission (SEC) 1. Be responsible for maintaining the
d. Pre-need, - within five (5) days from appointment minutes book and/or records of the
e. Trust, Who may form? - using the Appointment Form as may be corporation
f. Insurance public and publicly listed 1. Natural person – must be of legal age prescribed by the SEC (SEC Memorandum 2. Notify the nominee or alternate
companies, a. A foreign natural person may 7-2019) nominee of the death or incapacity of the
g. Non-chartered GOCCs; and put up an OPC subject to single stockholder
h. Natural person who is licensed to applicable capital requirement Single stockholder allowed? i. notice shall be given no
exercise a profession may not organize and constitutional and statutory - Corporate secretary – NO later than five (5) days from
an OPC for the purpose of exercising restrictions on foreign - Treasurer – YES such occurrence
such a profession. EXC: unless participation in certain - Conditions: 3. Notify the SEC of the death of the
otherwise provided by special laws. (Sec. investment areas or activities 1. Give bond to the SEC in such a sum single stockholder
116) (SEC Memorandum 7-2019) as may be required i. within five (5) days from
b. Trust – does not refer to a trust
such occurrence
ii. Capital stock requirement (Sec. 117) entity, but the subject being
managed by a trustee. If the ii. state the names, residence
General Rule: A One Person Corporation is not single stockholder is a trustee, addresses, and contact
required to have a minimum authorized capital administrator, executor, details of all known legal
stock. guardian, conservator, heirs
Page 170 of 393 Page 171 of 393

4. Call the nominee or alternate 2. Death or Permanent - until the legal heirs 2. the property of the One Person for all the latter’s outstanding liabilities as of the
nominee and the known legal heirs to a of the single stockholder have been lawfully Corporation is independent of the date of conversion.
meeting and advise the legal heirs with determined, and the heirs have designated one of stockholder’s personal property.
regard to: them or have agreed that the estate shall be the F. Foreign Corporations
i. the election of a new single stockholder of the One Person Corporation The principles of piercing the corporate veil
director applies with equal force to One Person A corporation formed, organized or existing under
ii. amendment of the articles Alternate Nominee Corporations as with other corporations any law other than those of the Philippines, and
of incorporation - shall sit as director and manage the One whose laws allow Filipino citizens and
iii. other ancillary and/or Person Corporation in case of the nominee’s ix. Conversion of corporation to OPC and corporations to do business in its own country or
inability, incapacity, death, or refusal to vice-versa state. (Sec. 140)
consequential matters
discharge the functions as director and
manager of the corporation Conversion from an Ordinary Corporation to A foreign corporation is one which owes its
vi. Nominee
- for the same term and under the same a OPC (Sec. 131) existence to the laws of another state, and
1. designated by a single stockholder generally, has no legal existence within the state
conditions applicable to the nominee
2. in the event of the single stockholder’s in which it is foreign (Avon Insurance PLC v.
When a single stockholder acquires all the stocks
death or incapacity, nominee takes the Court of Appeals, G.R. No. 97642, 1997).
Minimum Capital Stock Required for One of an ordinary stock corporation, the latter may
place of the single stockholder as director
Person Corporation (Sec. 117) apply for conversion into a OPC, subject to the
and shall manage the corporation’s A fundamental rule of international jurisdiction is
submission of such documents as the SEC may
affairs that no state can by its laws, and no court which
General rule: No minimum authorized capital require. If the application for conversion is
3. written consent of both nominee and is only a creature of the state, can by its
stock approved, the SEC shall issue certificate of filing
alternate nominee (SEC Memorandum 7- judgments and decrees, directly bind or affect
of amended articles of incorporation reflecting the
2019) – to be attached in the application property or persons beyond the limits of that state
Exception: as otherwise provided by special law conversion.
of incorporation (Time, Inc. v. Reyes, GR No. 28882, 1971).
a. may be withdrawn in writing any
Required Paid Up Capital (SEC Memorandum Conversion from an OPC to an Ordinary Stock
time before the death or i. Bases of Authority over Foreign
7-2019) Corporation (Sec. 132)
incapacity of the single Corporations
stockholder
General rule: No portion of authorized capital A One Person Corporation may be converted into
4. may be changed at any time 1. Consent - It is the voluntary surrender of
stock is required to be paid up at the time of an ordinary stock corporation after due notice to
a. by submitting to the SEC the jurisdiction over its person in a pending suit
incorporation the SEC of such fact and of the circumstances
names of the new nominees and before the host state (Salonga, Private
leading to the conversion, and after compliance
their corresponding written International Law, 1979 ed., p.344).
Exception: as otherwise required by applicable with all other requirements for stock corporations
consent
laws or regulations under this Code and applicable rules. Such notice
b. Articles of Incorporation need 2. “Doing Business” with regard to Foreign
shall be filed with the SEC within sixty (60) days
NOT be amended (SEC Corporations - Continuity of commercial
vii. Minutes and records from the occurrence of the circumstances leading
Memorandum 7-2019) dealings incident to prosecution of purpose and
to the conversion into an ordinary stock
A One Person Corporation shall maintain a corporation. If all requirements have been object of the organization. Isolated, occasional or
minutes book which shall contain all actions, complied with, the SEC shall issue an amended casual transactions do not amount to engaging in
What shall be contained in articles of business. But where the isolated act is not
decisions, and resolutions taken by the One certificate of incorporation reflecting the
incorporation with regard to the nominee and incidental/casual but indicates the foreign
Person Corporation. (Sec. 127) conversion.
alternate nominee? corporation’s intention to do other business, said
a. names single act constitutes engaging in business in the
When action is needed on any matter, it shall be In case of death of the single stockholder, the
b. residence addresses Philippines.
sufficient to prepare a written resolution, signed nominee or alternate nominee shall transfer the
c. contact details
and dated by the single stockholder, and shares to the duly designated legal heir or estate
d. extent and limitations of their authority in Test to Determine “Doing Business”
recorded in the minutes book of the One Person within seven (7) days from receipt of either an
managing the affairs of the One Person
Corporation. The date of recording in the minutes affidavit of heirship or self- adjudication executed
Corporation. a. Isolated Transactions Test: where a foreign
book shall be deemed to be the date of the by a sole heir, or any other legal document
meeting for all purposes under this Code. (Sec. declaring the legal heirs of the single stockholder corporation needs to obtain a license and
Term of Nominee and Alternate Nominee (Sec.
128) and notify the SEC of the transfer. Within sixty fails to do so, whether it should be denied
125)
(60) days from the transfer of the shares, the legal legal standing to obtain remedies from local
viii. Liability (Sec. 130) heirs shall notify the SEC of their decision to courts and administrative agencies or not,
Incapacity of the single stockholder:
either wind up and dissolve the One Person depends therefore on the issue whether it will
1. Temporary - until the stockholder, by self
A sole shareholder claiming limited liability has Corporation or convert it into an ordinary stock engage in business in the Philippines. Not
determination, regains the capacity to assume
the burden of affirmatively showing that: corporation.
such duties. every activity undertaken in the Philippines
1. the corporation was adequately financed.
amounts to doing business as to require a
Note: The Converted Corporations shall succeed
the former corporation and be legally responsible foreign corporation to obtain such license.
Page 172 of 393 Page 173 of 393

business subjecting the parties to local b. Having a nominee director or officer to 2. The application shall be under oath and shall
Single or isolated acts, contracts, or transactions registration and licensing requirements represent its interests in such corporation; specifically set forth the following:
of foreign corporations are not regarded as a (Pacific Vegetable Oil Corp. v Singzon, G.R. c. Appointing a representative or distributor a. The date and term of incorporation;
doing or carrying on of business. Typical No. 7917, 1955) domiciled in the Philippines which transacts b. The address, including the street
examples of these are the making of a single business in its own name and for its own number, of the principal office of the
contract, sale, sale with the taking of a note and “Doing Business” Under The Foreign account; corporation in the country or State of
mortgage in the state to secure payment thereof, Investment Act and IRR d. The publication of a general advertisement incorporation;
purchase, or note, or the mere commission of a
through any print or broadcast media; c. The name and address of its resident
tort. In these instances, there is no purpose to do “Doing Business” in the Philippines - Includes:
any other business within the country (MR. e. Maintaining a stock of goods in the agent authorized to accept summons
a. Soliciting orders, service contracts, opening Philippines solely for the purpose of having and process in all legal proceedings
Holdings, Ltd. V. Bajar, G.R. No. 138104, 2002). offices, whether called “liaison” offices or the same processed by another entity in the and all notices affecting the
branches; Philippines; corporation, pending the
BUT: Where a single act or transaction is not
b. Appointing representatives or distributors f. Consignment by a foreign entity of equipment establishment of a local office;
merely incidental or casual but indicates the
foreign corporation's intention to do other domiciled in the Philippines; with a local company to be used in the d. The place in the Philippines where
business in the Philippines, said single act or processing of products for export; the corporation intends to operate;
transaction constitutes doing business (Far East Note: Includes “appointing representatives or
g. Collecting information in the Philippines; and e. The specific purpose or purposes
Int'l. v. Nankai Kogyo, G.R. No. 13525, 1962). distributors in the Philippines” but not when the
h. Performing services auxiliary to an existing which the corporation intends to
representative or distributor “transacts business
in its name and for its own account.” (Alfred Hahn isolated contract of sale which are not on a pursue in the transaction of its
Need to Allege: The fact that a foreign continuing basis, such as Installing in the business in the Philippines:
corporation is not doing business in the v. CA, G.R. No.113074, 1997)
Philippine machinery it has manufactured or Provided, That said purpose or
Philippines must be alleged, if a foreign
corporation desires to sue in Philippines courts c. Participating in the management, exported to the Philippines, servicing the purposes are those specifically
under the “isolated transactions rule” (Atlantic supervision, or control of any domestic same, training domestic workers to operate it, stated in the certificate of authority
Mutual Inc. Co. v. Cebu Stevedoring Co., G.R. business, firm, entity, or corporation in the and similar incidental services. issued by the appropriate
No. 18961, 1966); if not alleged, it can be Philippines; and government agency;
dismissed for lack of capacity to sue by the d. Any other act or acts that imply a continuity of No foreign corporation transacting business in the f. The names and addresses of the
plaintiff (Commissioner of Customs v. K.M.K. commercial dealings or arrangements, and Philippines without a license, or its successors or present directors and officers of the
Gani, G.R. No. 73722, 1990). contemplate to that extent the performance of assigns, shall be permitted to maintain or corporation;
acts or works, or the exercise of some of the intervene in any action, suit or proceeding in any g. A statement of its authorized capital
b. Twin Characterization Test (Mentholatum court or administrative agency of the Philippines; stock and the aggregate number of
functions normally incident to, and in
Co. Inc v. Mangaliman G.R. No. 47701, 1941) but such corporation may be sued or proceeded
progressive prosecution of, commercial gain shares which the corporation has
against before Philippine courts or administrative
or of the purpose and object of the business authority to issue, itemized by class,
Substance Test: Consider the body or tribunals on any valid cause of action recognized
organization under Philippine laws (Lorenzo Shipping Corp. v. par value of shares, shares without
substance of the business or the enterprise for par value, and series, if any;
which it was ORGANIZED or whether it has Chubb & Sons, Inc., et al., G.R. No. 147724,
Note: “Doing business” was upheld against 2004). h. A statement of its outstanding capital
substantially retired from it and turned it over to
Pioneer International for soliciting orders and stock and the aggregate number of
another.
service contracts in the performance of acts that ii. Necessity of a License to Do Business: shares which the corporation has
Continuity Test: That doing business implies a
imply continuity of commercial dealings. Pioneer ● To place them under the jurisdiction of issued, itemized by class, par value
International’s alleged acts in actively negotiating the courts of shares, shares without par value,
continuity of commercial dealings and
to employ Todaro to run its pre-mixed concrete ● To place them in the same footing as and series, if any;
arrangements and contemplates, to that extent,
operations in the Philippines, which acts are domestic corporations i. A statement of the amount actually
the performance of acts or works or the exercise
hypothetically admitted in Pioneer International’s
of some of the functions normally incidental to, ● Protection for the public in dealing with paid in; and
motion to dismiss, are not mere acts of a passive
and in progressive prosecution of, the purpose said corporations. j. Such additional information as may
investor in a domestic corporation. Such are
and object of its organization. be necessary or appropriate in order
managerial and operational acts in directing and
establishing commercial operations in the 1. Requisites for Issuance of License to enable the Commission to
Taken together, DOING BUSINESS in the determine whether such corporation
Philippines. (Pioneer International, LTD v.
Philippines must cover transactions and series of A foreign corporation applying for a license to is entitled to a license to transact
Guadiz, G.R. No. 156848, 2007)
transactions in pursuit of the main business goals transact business in the Philippines shall submit business in the Philippines, and to
of the corporation and done with the intent to to the SEC the following:
Does Not Include: determine and assess the fees
continue the same in the Philippines. 1. A copy of its articles of incorporation and
a. Mere investment as a shareholder by a payable.
foreign entity in domestic corporations duly bylaws, certified in accordance with law and
c. Contract Test: if the salient points of a 3. The application shall be accompanied by the
registered to do business, and/or the exercise their translation to an official language of the
contract do not find themselves in the following:
of rights as such investor; Philippines, if necessary.
Philippines, Philippine authorities have no
Page 174 of 393 Page 175 of 393

a. A certificate under oath duly Service of Process upon a Foreign authorized official or officials of the country or rights, may sue in trademark or service mark
executed by the authorized official or Corporation Through A Resident Agent State of incorporation. enforcement action (Sehwani Inc v. In-n-Out
officials of the jurisdiction of its Before a foreign corporation can be issued a Burger, G.R. No. 171053, 2007).
incorporation, attesting to the fact license to transact business in the Philippines, Such filing shall not in itself enlarge or alter the
that the laws of the country or State such corporation must first file with the SEC purpose or purposes for which such corporation Rules Regarding A Foreign Corporation’s
of the applicant allow Filipino citizens 1. A written power of attorney designating some is authorized to transact business in the Right to Bring Suit in the Philippines
person who must be a resident of the Philippines. (Sec. 147) FOREIGN CORP CAN FC SUE IN PH?
and corporations to do business
therein, and that the applicant is an Philippines, on whom any summons and STATUS
other legal processes may be served in all iii. Personality to Sue Doing business in
existing corporation in good Section 35 enumerates the express powers of a Cannot sue before
standing. If the certificate is in a actions or other legal proceedings against Philippines without a
corporation, which includes the corporation’s Philippine courts
such corporation; license
foreign language, a translation ability to sue and be sued.
2. Consent that service upon such resident Can sue before
thereof in English under oath of the
agent shall be admitted and held as valid as Philippine courts on
translator shall be attached to the The power of the corporation to sue and be sued an isolated
application. if served upon the duly authorized officers of in any court is lodged with the board of directors
the foreign corporation at its home office. Not doing business in transaction or on a
b. A statement under oath of the that exercises its corporate powers. (Bitong v. the Philippines cause of action
president or any other person a. Whenever such service of summons CA, G.R. No. 123553, 1998) entirely independent
authorized by the corporation, or other process is made upon the
of any business
showing to the satisfaction of the SEC, it must, within 10 days iv. Suability of Foreign Corporations transaction
Commission and when appropriate, thereafter, transmit by mail a copy of Doing business in the
such summons or other legal Every foreign corporation Philippines without a
other governmental agencies that
process to the corporation at its ● Doing business in the Philippines with a license, but Philippine
the applicant is solvent and in sound Can sue before
home or principal office. When SEC license may sue and can be sued in the citizen or entity has
financial condition, setting forth the Philippine courts due
sends such copy, it shall constitute a Philippines contracted with said
assets and liabilities of the to estoppel
necessary part of and shall complete ● Doing business in the Philippines without a corporation or derived
corporation as of the date not
such service license cannot sue, but may be sued in the benefits from the
exceeding one (1) year immediately
b. In case of a change of address of the Philippines Foreign Corporation
prior to the filing of the application.
resident agent, it shall be his or its ● Not doing business in the Philippines, or on Doing business in the Can sue before
4. Foreign banking, financial, and insurance Philippines and has Philippine courts on
duty to immediately notify the SEC in isolated transactions may sue and can be
corporations shall, in addition to the above the required license any transaction
writing. (Sec. 145) sued (if jurisdiction can be acquired)
requirements, comply with the provisions of (Agilent Technologies v. Integrated Silicon, G.R.
existing laws applicable to them. v. Instances When Unlicensed Foreign No. 154618, 2004)
5. In the case of all other foreign corporations, 3. Amendment of license (Sec. 148)
Corporations May Be Allowed To Sue:
no application for license to transact business a. Isolated transactions; Capability to Sue and Suability of Foreign
A foreign corporation authorized to transact
in the Philippines shall be accepted by the b. Action to protect good name, goodwill, Corporations W/N Doing Business
business in the Philippines shall obtain an
Commission without previous authority from and reputation of a foreign corporation; NOT DOING
amended license in the event it changes its DOING BUSINESS IN
the appropriate government agency, corporate name, or desires to pursue other or c. The subject contracts provide that BUSINESS IN
PHILIPPINES
whenever required by law. (Sec. 142) additional purposes in the Philippines, by Philippine Courts will be venue to PHILIPPINES
submitting an application with the Commission, controversies; Isolated
Licensed Unlicensed
2. Resident Agent favorably endorsed by the appropriate d. A license subsequently granted enables Transactions
government agency in the proper cases. the foreign corporation to sue on Yes, can sue;
Who may be a Resident Agent
contracts executed before the grant of
a. Individual residing in the Philippines of Amendment of the Articles of Incorporation or NO, cannot EXC: if
the license (Eriks Ltd. v. Court of
good moral character and of sound By-laws of Foreign Corporations sue; transactions
Appeals, G.R. No. 118843, 1997); YES, can
financial standing exhibits intent to
e. Recovery of misdelivered property; sue
b. Domestic corporation lawfully transacting Sixty (60) days after the effectivity of the EXC: do business,
amendment of the articles of incorporation or f. Where the defendant is estopped. estoppel Foreign
business in the Philippines, with a sound
financial standing and must show proof bylaws of a foreign corporation authorized to Corporation needs
transact business in the Philippines, such foreign The Intellectual Property Code provides that any license to sue
that it is in good standing as certified by foreign corporation not engaged in business in
corporation shall, file with the Commission, and in YES, can be sued
the SEC (Sec. 144) the Philippines and a national of a country which
the proper cases, with the appropriate YES, can
government agency, a duly authenticated copy of is a party to any convention, treaty or agreement Qualifier: as long as summons
relating to intellectual property rights or the be sued
the amended articles of incorporation or bylaws, were properly served (to acquire
indicating clearly in capital letters or underscoring repression of unfair competition, to which the jurisdiction)
the change or changes made, duly certified by the Philippines is also a party or extends reciprocal
Page 176 of 393 Page 177 of 393

vi. Grounds for Revocation of License 13. MERGER AND CONSOLIDATION 2. where the selling corporation fraudulently Philippines, Inc. et al. v James Yu, G.R. No.
enters into the transactions to escape 207161, 2015)
Section 151 provides that the SEC may cancel A. Definition and Concept liability for those debts
the certificate or license of a foreign corporation 3. where the purchasing corporation is 3) Equity Level. Purchaser takes control of the
on any of the following grounds: Merger merely a continuation of the selling business by purchasing the shareholdings.
a. Failure to file its annual report or pay any A union whereby one or more existing corporation Purchasing corporation is still protected by
fees as required by Code; corporations are absorbed by another corporation 4. where the transaction amounts to a the limited liability feature but the same can
b. Failure to appoint and maintain a resident that survives and continues the combined be pierced.
consolidation or merger of the
agent; business (Villanueva, 2018).
corporations
c. Failure to inform SEC of the change of (Edward J. Nell Co. v Pacific Farms Inc., G.R. In order to transfer ownership of shares of stock
resident agent or the latter’s change of Consolidation not traded in the Stock Exchange, it is necessary
The union of two or more existing corporations. A No. L-20850, 1965)
address; to secure a Certificate of Authorizing Registration
new corporation is created, and consolidating (CAR) pursuant to the process laid down in RMO
d. Failure to submit a copy of amended 2) Business Enterprise Level. Purchase of
corporations are extinguished. (PNB v. Andrada No. 15-03. The receipts of the payment of the tax
articles of incorporation or by- laws; or Electric & Engineering Co., G.R. No. 142936, substantially all the assets of the corporation
should also be filed with and recorded by the
articles of merger or consolidation; [April 17, 2002], 430 PHIL 882-903) extending to its “going concern” (ability to do
e. A misrepresentation of any material secretary of the corporation pursuant to Section
business and make money, goodwill,
11 of RR. No. 06-08.
matters in reports; MERGER CONSOLIDATION clientele, stock-in-trade, etc). There is case
f. Failure to pay any and all taxes, imposts, A corporation A NEW corporation is law, based on equity, that holds the B. Constituent and consolidated
assessments or penalties; ABSORBS another created, and transferee liable for the debts and corporations
g. Engaged in a business not authorized by corporation and constituent liabilities of the transferor. A “free and
SEC; REMAINS IN corporations are harmless clause” holding the transferee free Constituent Consolidated
h. Acting as a dummy of a foreign EXISTENCE while EXTINGUISHED. from the liabilities of the transferor is binding Corporations Corporation
corporation not licensed to do business in the other is only between them and cannot prejudice The corporations that The corporation
the Philippines; or DISSOLVED creditors who are not parties thereto. (Y-I shall cease to exist after formed after the
i. Any other ground as would render it unfit Leisure Philippines, Inc. et al. v James Yu, joining together through consolidation of
to transact business in the Philippines. The power to merge or consolidate is not within consolidation (Bank of two constituent
G.R. No. 207161, 2015)
the inherent powers of the corporation. Commerce v. Radio corporations
Therefore, it must be expressly granted by law. Philippines Network, Inc.,
Law applicable to Foreign Corporations (Sec. Note: The sale under [Sec. 39] does not
146) contemplate an ordinary sale of all corporate G.R. No. 195615, [April
Merger or consolidation does not become 21, 2014], 733 PHIL 491-
effective by mere agreement of the constituent assets; the transfer must be of such degree that
A foreign corporation lawfully doing business in the transferor corporation is rendered incapable 581)
corporations. The approval of the SEC is required
the Philippines shall be bound by all laws, rules of continuing its business or its corporate
(PNB v. Andrada Electric & Engr. Co., Inc., G.R. The names of the
and regulations applicable to domestic purpose. (Y-I Leisure Philippines, Inc. et al. v
No. 142936, 2002) corporations proposing to
corporations of the same class, except: James Yu, G.R. No. 207161, 2015)8
1. those which provide for the creation, merge or consolidate,
Mere Acquisition/Transfer (3 Levels) hereinafter referred to as
formation, organization or dissolution of However, not every transfer of the entire
Merger/ Consolidation Transfer of the constituent
corporations or corporate assets would qualify under Section
Property corporations;
2. those which fix the relations, liabilities, [39]. It does not apply:
Loss of separate No loss of
responsibilities, or duties of stockholders, (1) if the sale of the entire property and
existence by the separate The constituent corporations shall become a
members, or officers of corporations to assets is necessary in the usual and
absorbed corporation (in existence single corporation which, in case of merger, shall
each other or to the corporation. regular course of business of
mergers) or the be the surviving corporation designated in the
corporation, or
constituent corporations plan of merger; and, in case of consolidation,
(2) if the proceeds of the sale or other
(in consolidation) shall be the consolidated corporation designated
disposition of such property and assets
will be appropriated for the conduct of its in the plan of consolidation
1) Assets-Only Level. remaining business.
General Rule: A corporation that purchases
the assets of another will not be liable for the Thus, the litmus test to determine the applicability
debts and liabilities of the selling corporation of Section [39] would be the capacity of the
provided the former acted in good faith. corporation to continue its business after the sale
Except, when the following circumstances of all or substantially all its assets.(Y-I Leisure
are present:
1. where the purchasers expressly or
8 Please refer to the Net Asset Value Test and the
impliedly agrees to assume the debts
Incapacity Test in p. 123
Page 178 of 393 Page 179 of 393

C. Plan of Merger or Consolidation (Sec. E. Procedure of Consolidation or Merger STEP 4: Articles of Merger or Consolidation constituent corporation at least two (2)
75) (Sec. 77) weeks before said hearing.
STEP 1: Drawing up of the Plan of Merger or
The plan of merger or consolidation shall set forth Consolidation (Sec. 75) Once the required number of stockholders or F. Effectivity of Merger or Consolidation
the ff: members approved of the plan, Articles of Merger
1) The names of the constituent The board of constituent corporations shall draw or Articles of Consolidation shall be executed by A merger does not become effective upon the
corporations; up a plan of merger or consolidation. It shall each of the constituent corporations, to be signed mere agreement of the constituent corporations,
2) The terms of the merger or consolidation contain the following: by the president or vice-president and certified by but open approval of the articles of merger by the
and the mode of carrying the same into a. The names of the constituent the secretary or assistant secretary of each SEC issuing the certificate of merger as required
corporations; corporation, setting forth: by Section 79 of the Corporation Code (Bank of
effect;
b. The terms of the merger or a. The plan of the merger or the plan of Commerce v. Heirs of Rodolfo dela Cruz).
3) A statement of the changes, if any, in the
consolidation and the mode of consolidation;
articles of incorporation of the G. Limitations of Merger and Consolidation
carrying the same into effect; b. As to stock corporations, the number
surviving corporation in case of merger;
c. A statement of the changes, if any, in of shares outstanding, or in the case
and, in case of consolidation, all the Under the Philippine Competition Act (R.A. no.
the articles of incorporation of the of non-stock corporations, the number
statements required to be set forth in the 10667), the Philippine Competition Commission
surviving corporation in case of of members;
articles of incorporation for corporations can review the mergers and acquisitions of a
merger; and, in case of c. As to each corporation, the number of
organized under this Code; and corporation/s based on the factors it deems to be
consolidation, all the statements shares or members voting for or relevant. (Sec. 16 of R.A. no. 10667)
4) Such other provisions with respect to
required to be set forth in the articles against such plan, respectively;
the proposed merger or consolidation as
of incorporation for corporations d. The carrying amounts and fair values Parties to a merger or acquisition agreement
are deemed necessary or desirable.
organized under this Code; and of the assets and liabilities of the without complying with the thresholds are
d. Such other provisions with respect respective companies as of the prohibited from consummating their agreement
Note: The plan of merger has to be approved by
majority of the board of each constituent to the proposed merger or agreed cut-off date; until thirty (30) days after providing notification to
corporation; it has to be approved by affirmative consolidation as are deemed e. The method to be used in the merger the Commission in the form and containing the
vote of stockholders representing ⅔ of the necessary or desirable. or consolidation of accounts of the information specified in the regulations issued by
outstanding capital stock or ⅔ of the members in companies; the Commission. A transaction that meets the
case of a non-stock corporation. STEP 2: Board Approval (Sec. 75) f. The provisional or pro-forma values, thresholds and does not comply with the
as merged or consolidated, using the notification requirements and waiting periods set
D. Articles of Merger or Consolidation The plan of merger or consolidation shall be out in Section 5 shall be considered void and will
accounting method; and
approved by majority vote of each of the boards subject the parties to an administrative fine of one
(Sec. 78) g. Such other information as may be
of the corporations involved at separate percent (1%) to five percent (5%) of the value of
prescribed by the SEC. the transaction. (Sec. 17 of R.A. no. 10667; PCA
The articles must be signed by the president or meetings;
Rule 4, as amended by PCC Resolution No. 02-
vice president and certified by the secretary or STEP 5: Approval by the SEC
STEP 3: Stockholders’ or Members’ Approval 2020)
assistant secretary setting forth:
1) The plan of the merger or the plan of (Sec. 76) The Articles of Merger or Articles of Consolidation
1. Notice of such meeting should be given Thresholds for compulsory notification
consolidation; shall be submitted to the SEC for approval. M&A transactions whose definitive agreements
2) As to stock corporations, the number of to all stockholders or members at least 1 However, in the case of special corporations, like are executed on or after 1 March 2020 will be
shares outstanding, or in the case of non- week before the meeting. banks, insurance companies, building and loan subject to mandatory notification to the PCC if
stock corporations, the number of members; 2. The plan has to be approved by a vote of associations, etc., the favorable recommendation they meet the ff. thresholds:
3) As to each corporation, the number of shares stockholders representing ⅔ of the of the appropriate government agency shall first Size of (i) the aggregate annual gross
or members voting for or against such plan, outstanding capital stock, if a stock be obtained. Party revenues in, into or from the
respectively; corporation, or ⅔ of the members of the 1. If the SEC is satisfied that the merger or Philippines, or
4) The carrying amounts and fair values of the non- stock corporation. consolidation of the corporations (ii) the value of the assets in the
assets and liabilities of the respective 3. Dissenting stockholders may exercise concerned is legal, it shall issue a Philippines of the ultimate
companies as of the agreed cut-off date; their right of appraisal. However, if the certificate of merger or of consolidation, parent entity (UPE) of either the
5) The method to be used in the merger or board abandons the plan, such right is at which time the merger or consolidation acquiring or acquired entities
consolidation of accounts of the companies; extinguished. shall be effective. exceeds PhP 6 billion
6) The provisional or pro-forma values, as 4. Any amendment to the plan must be 2. If the SEC is not satisfied, it shall set a Size of The size of transaction will be
approved by the same votes of the board hearing to give the corporations Transaction met if the transaction value, as
merged or consolidated, using the
concerned the opportunity to be heard. determined below, exceeds
accounting method; and members or trustees and stockholders or
Written notice of the date, time and place PhP 2.4 billion.
7) Such other information as may be prescribed members required for the original plan.
by the SEC. of hearing shall be given to each
Page 180 of 393 Page 181 of 393

Merger or acquisition agreements that power to file an action for recovery) perform other acts necessary to the proceedings P1,000.00 for each day of continuing violation
substantially prevent, restrict or lessen including: or to the investigation. but in no case to exceed P2,000,000.00;
competition in the relevant market or in the i. subscriptions to shares and 2. Issuance of a permanent cease-and-desist
market for goods or services as may be other choses in action iii. Cease and desist power order;
determined by the Commission shall be ii. and every other interest of, 3. Suspension or revocation of the certificate of
prohibited. (Sec. 20 of R.A. no. 10667) belonging to, or due to each Whenever the SEC has reasonable basis to incorporation; and
believe that a person has violated, or is about to 4. Dissolution of the corporation and forfeiture of
constituent corporation
Exemptions: Notwithstanding such prohibition, violate, the RCC, rule, regulation, or order of the its assets under the conditions in Title XIV of
5. Regarding liabilities and pending claims:
the PCC would allow such merger or acquisition SEC, it may direct such person to desist from the RCC
provided the parties prove the following: a. Liabilities and obligations of each committing the act constituting the violation.
constituent corporation: ii. Prohibited Acts and Penalties
(a) The concentration has brought about or is i. Surviving or consolidated The SEC may issue a cease and desist order ex
likely to bring about gains in efficiencies that are corporation shall be parte to enjoin an act or practice which is Table of Violations and Fines
greater than the effects of any limitation on responsible fraudulent or can be reasonably expected to Violation Fine
competition that result or likely to result from the b. Pending claim, action or proceeding cause significant, imminent, and irreparable SEC. 165. Fraudulent 200k - 2M
merger or acquisition agreement; or brought by or against any constituent danger or injury to public safety or welfare. The Conduct of Business
corporation ex parte order shall be valid for a maximum period
(b) A party to the merger or acquisition agreement i. may be prosecuted by or of twenty (20) days, without prejudice to the order A corporation that conducts 400k - 5M
is faced with actual or imminent financial failure, against the surviving or being made permanent after due notice and its business through fraud. (When the
and the agreement represents the least anti- consolidated corporation hearing. violation of this
competitive arrangement among the known provision is
c. The rights of creditors or liens upon
alternative uses for the failing entity’s Thereafter, the SEC may proceed injurious or
assets.(Sec. 21 of R.A. no. 10667) the property of such constituent administratively against such person in
corporations are not impaired detrimental to
accordance with Section 158, and/or transmit the public)
H. Effects of Merger or Consolidation evidence to the Department of Justice for SEC. 166. Acting as 100k - 5M
14. INVESTIGATIONS, OFFENSES, AND preliminary investigation or criminal prosecution Intermediaries for Graft
1. Constituent corporations become a single PENALTIES and/or initiate criminal prosecution for any and Corrupt Practices
corporation violation of this Code, rule, or regulation.
a. Merger: surviving corporation A. Authority of Commissioner A corporation used for
b. Consolidation: consolidated iv. Contempt fraud, or for committing or
corporation under the plan of i. Investigation and prosecution of concealing graft and corrupt
consolidation offenses Any person who, without justifiable cause, fails or practices as defined under
2. Separate existence of constituent refuses to comply with any lawful order, decision, pertinent statutes.
The SEC may investigate an alleged violation of or subpoena issued by the SEC shall, after due
corporations cease EXCEPT that of the
this Code, rule, regulation, or order of the SEC. notice and hearing, be held in contempt and fined When there is a finding that
surviving or consolidated corporation
in an amount not exceeding P30,000.00. When any of its directors, officers,
3. Surviving or consolidated corporation the refusal amounts to clear and open defiance of
The SEC may publish its findings, orders, employees, agents, or
possesses the rights privileges immunities; the SEC’s order, decision, or subpoena, the SEC
opinions, advisories, or information concerning representatives are
and powers and is subject to all duties and any such violation, as may be relevant to the may impose a daily fine of P1,000.00 until the engaged in graft and corrupt
liabilities of a corporation organized under order, decision, or subpoena is complied with.
general public or to the parties concerned, practices, the corporation’s
this Code subject to the provisions of the “Data Privacy Act failure to install:
4. ALL of the following are deemed transferred of 2012”, and other pertinent laws. B. Sanctions for violations a. safeguards for the
to and vested in such surviving or transparent and lawful
consolidated corporation: (BY OPERATION The SEC shall give reasonable notice to and i. Administrative sanctions (Sec. 158) delivery of services;
OF LAW) coordinate with the appropriate regulatory agency and
a. Rights prior to any such publication involving companies If, after due notice and hearing, the SEC finds that b. policies, code of ethics,
under their special regulatory jurisdiction. any provision of this Code, rules or regulations, or and procedures against
b. Privileges
any of the SEC’s orders has been violated, the graft and corruption
c. Immunities SEC may impose any or all of the following
ii. Administration of oath and issuance shall be prima facie
d. Franchises of each constituent sanctions, taking into consideration the extent of
of subpoena evidence of corporate
corporation participation, nature, effects, frequency and liability under this
e. Real or personal property The SEC, through its designated officer, may seriousness of the violation: section.
f. Receivables due on whatever administer oaths and affirmations, issue SEC. 167. Engaging 100k – 1M
account (hence surviving / subpoena and subpoena duces tecum, take 1. Imposition of a fine ranging from P5,000.00) Intermediaries for Graft
consolidated corporation has the testimony in any inquiry or investigation, and may to P2,000,000.00, and not more than and Corrupt Practices
Page 182 of 393 Page 183 of 393

preclude the institution GENERAL RULE: All interrogatories propounded and books of accounts of any entity or
A corporation that appoints of appropriate action by the SEC and the answers thereto, as well as person under investigation as may be
an intermediary who against the director, the results of any examination made by the SEC necessary for the proper disposition of
engages in graft and corrupt trustee, or officer of the or any other official authorized by law to make an the cases, subject to the provisions of
practices for the corporation responsible examination of the operations, books, records of existing laws;
corporation’s benefit or for said violation: any corporation, shall be kept strictly 10. Suspend or revoke the certificate of
interest. - Provided, further, That CONFIDENTIAL, incorporation after proper notice and
SEC. 168. Tolerating Graft 500k – 1M nothing in this section hearing;
and Corrupt Practices shall be construed to EXCEPT: 11. Dissolve or impose sanctions on
repeal the other causes (1) When the law requires the same to be corporations, upon final court order, for
A director, trustee, or officer for dissolution of a made public; committing, aiding in the SEC of, or in
who knowingly fails to corporation provided in (2) When necessary for the SEC to take any manner furthering securities
sanction, report, or file the this Code. action to protect the public; violations, smuggling, tax evasion,
appropriate action with (3) To issue orders in the exercise of its money laundering, graft and corrupt
proper agencies, allows or Liability for any of the powers under RCC practices, or other fraudulent or illegal
tolerates the graft and foregoing offenses shall be (4) Where such interrogatories, answers or acts;
corrupt practices or separate from any other results are necessary to be presented as 12. Issue writs of execution and attachment
fraudulent acts committed administrative, civil, or evidence before any Court. (Sec. 178) to enforce payment of fees,
by a corporation’s directors, criminal liability under this administrative fines, and other dues
trustees, officers, or Code and other laws. What are the functions, powers, and collectible under this Code;
employees. jurisdiction of the SEC? (Sec. 179) 13. Prescribe the number of independent
SEC. 169. Retaliation 100k – 1M iii. Who are liable (Sec. 171-172) directors and the minimum criteria in
Against Whistleblowers 1. Corporation- Penalty may be imposed SEC shall have the power and authority to: determining the independence of a
upon its directors, trustees, stockholders, 1. Exercise supervision and jurisdiction director;
Any person who, knowingly members, officers, or employees over all corporations and all persons 14. Impose or recommend new modes by
and with intent to retaliate, responsible for the violation or acting on their behalf, except otherwise which a stockholder, member, director,
commits acts detrimental to indispensable to its commission. provided by RCC; or trustee may attend meetings or cast
a whistleblower such as 2. Aiders and Abettors- Penalty would be a 2. Retain jurisdiction over pending cases their votes, as technology may allow,
interfering with the lawful punishment of a fine not exceeding that involving intra-corporate disputes taking into account the company’s scale,
employment or livelihood of imposed on the principal offenders, at the submitted for final resolution. (PD 902-A); number of shareholders or members,
the whistleblower. discretion of the Court, after taking into a. The SEC shall retain jurisdiction structure, and other factors consistent
account their participation in the offense. over pending suspension of with the basic right of corporate suffrage;
A whistleblower refers to payment/ rehabilitation cases 15. Formulate and enforce standards,
any person who provides C. Authority of the Securities and filed as of 30 June 2000 until guidelines, policies, rules, and
truthful information relating Exchange Commission (Jurisdiction) finally disposed. regulations to carry out the provisions of
to the SEC or possible 3. Impose sanctions for the violation of the this Code; and
commission of any offense The SEC’s visitorial powers. (Sec. 178) RCC, its implementing rules and orders 16. Exercise such other powers provided by
or violation under this Code. of the SEC; law or those, which may be necessary or
SEC. 170. Other Violations 10k – 1M The SEC shall have visitorial powers over all 4. Promote corporate governance and the incidental to carrying out, the powers
of the Code corporations. These powers include: protection of minority investors, through, expressly granted to the SEC.
among others, the issuance of rules and
Violations of any of the other 1. Examination and inspection of records regulations consistent with international Note: In imposing penalties and other
provisions of this Code or its 2. Regulation and supervision of activities best practices; requirements, SEC shall take into consideration
amendments not otherwise 3. Enforcement of compliance 5. Issue opinions to clarify of laws, rules, the size, nature of the business, and capacity
specifically penalized 4. Imposition of sanctions in accordance and regulations; of the corporation.
therein with the Revised Corporation Code. 6. Issue cease and desist orders ex parte to
prevent imminent fraud or injury to the NO COURT BELOW THE CA SHALL HAVE
If the violation is committed public; JURISDICTION (Sec. 179)
Should the corporation, without justifiable
by a corporation, the same cause, refuse or obstruct the SEC’s exercise of 7. Hold corporations in direct or indirect
may, after notice and contempt; Only the CA has the jurisdiction to issue a
powers, the SEC may revoke its certificate of
hearing, be dissolved in incorporation, without prejudice to the 8. Issue subpoena duces tecum and restraining order, preliminary injunction, or
appropriate proceedings summon witnesses to appear in preliminary mandatory injunction in any case,
imposition of other penalties and sanctions under
before the SEC: proceedings before the SEC; dispute, or controversy that directly or indirectly
the RCC.
- Provided, That such 9. In appropriate cases, order the interferes with the exercise of the powers,
dissolution shall not examination, search and seizure of duties, and responsibilities of the SEC that
documents, papers, files and records, falls exclusively within its jurisdiction.
Page 184 of 393 Page 185 of 393

declared in the state of suspension of

JURISDICTIONS payments. The arbitral tribunal (Sec. 181)
4. Appointment of Rehabilitation Receiver or - shall have the power to rule on its own
On Jurisdiction of RTC in Intra-Corporate Management Committee jurisdiction and on questions relating to the
Disputes: validity of the arbitration agreement. When
Section 5 of the Securities Regulation Code What is a management committee? an intra-corporate dispute is filed with a
transferred the jurisdiction of the (SEC) over - Tasked to manage, take custody of and Regional Trial Court, the Court shall dismiss
intra-corporate disputes to RTCs designated by control all existing assets, funds, and the case before the termination of the
the Supreme Court as commercial courts. The records of the corporation. pretrial conference, if it determines that an
existence of an intra-corporate dispute must be - To determine the best way to protect the arbitration agreement is written in the
clearly alleged in the complaint. interest of its stockholders and creditors. corporation’s articles of incorporation, by-
laws, or in a separate agreement.
Two tests to determine existence of intra- What is a Rehabilitation Receiver? - shall have the power to grant interim
corporate dispute - Appointed when the corporation is in measures necessary to ensure enforcement
financial distress. of the award, prevent a miscarriage of
Relationship Test - To rehabilitate. justice, or otherwise protect the rights of the
A dispute is intra-corporate if it is: parties.
1. Between the corporation, partnership or Arbitration for unlisted corporations. (Sec.
association and the public; 181) Final Arbitral award (Sec. 181)
2. Between the corporation, partnership or - Shall be executory after the lapse of fifteen
association and the state insofar as its Where can the arbitration agreement be (15) days from receipt thereof by the parties
franchise, permit or license to operate is found? The same may be provided in the articles and shall be stayed only by the filing of a
concerned; of incorporation or by-laws of an unlisted bond or the issuance by the appellate court
corporation. of an injunctive writ. (Under Sec. 181
3. Between the corporation, partnership or
specifically)
association and its stockholders, partners,
When can cases be referred to arbitration?
members or officers; and When the agreement is in place, disputes 2 kinds of arbitration
4. Among the stockholders, partners or between the corporation, its stockholders or 1. Voluntary- when parties both agree to submit
associates themselves (Philippine members, which arise from the implementation themselves to the jurisdiction of the
Communications Satellite Corp. v. of the articles of incorporation or by-laws, or arbitrators. The parties choose who the
Sandiganbayan, G.R. No. 203023, 2015) from intra-corporate relations. arbitrators will be.
2. Compulsory- The judge is a stranger. There
Nature of the Controversy Test When shall the dispute be non-arbitrable? is still a decision. This kind of arbitration is
The dispute itself must be intrinsically connected When it involves criminal offenses and more commonly known as “litigation”. The
with the regulation of the corporation, partnership interests of third parties. arbitrators are the judges of the courts (MTC,
or association. RTC etc.)
The arbitration agreement. (Sec. 181)
The controversy "must not only be rooted in the - The same shall be binding on the Jurisdiction over Party-List Organizations.
existence of an intra-corporate relationship, but corporation, its directors, trustees, officers, (Sec. 182)
must also refer to the enforcement of the parties' and executives or managers. - The powers, authorities, and responsibilities
correlative rights and obligations under the - To be enforceable, the same should of the SEC involving party-list organizations
Corporation Code as well as the internal and indicate are transferred to the SEC on Elections
intra-corporate regulatory rules of the - the number of arbitrators (COMELEC)
corporation." (Dy Teban Trading Inc. v. Dy, G.R. - the procedure for their appointment. - Within 6 months after the effectivity of the
No. 161803, 2008) - The power to appoint the arbitrators forming RCC, the monitoring, supervision, and
the arbitral tribunal shall be granted to a regulation of such corporations shall be
The following are within the jurisdiction of the designated independent third party. deemed automatically transferred to the
RTC: - Should the third party fail to appoint COMELEC.
1. Fraudulent devices and schemes employed the arbitrators in the manner and - The COMELEC in coordination with the SEC
by directors detrimental to the public interest within the period specified in the shall promulgate the corresponding IRR for
and to other firms arbitration agreement, the parties the transfer of jurisdiction
2. Intra-corporate dispute and with the state in may request the SEC to appoint the
relation to their franchise and right to exist arbitrators. In any case, arbitrators ————- end of topic ————-
3. Controversies in election, appointment of must be accredited or must belong
directors or trustees and petition to be to organizations accredited for the
purpose of arbitration.
Page 186 of 393 Page 187 of 393

ATENEO CENTRAL
V. SECURITIES A. STATE POLICY
TOPIC OUTLINE UNDER THE SYLLABUS:

The State policies underlying the Securities
Regulation Code (SRC) are the following:
V. SECURITIES a. Establish a socially conscious free
A. State Policy market that regulates itself;
B. Definition of Securities b. Encourage the widest participation of
C. Kinds of Securities ownership in enterprises;
1. Exempt Securities c. Enhance the democratization of wealth
2. Exempt Transactions d. Promote the development of the capital
3. Non-exempt Transactions market;
D. Powers and functions of the Securities e. Protect investors;
and Exchange Commission f. Ensure full and fair disclosure about
E. Procedure for registration of securities securities; and
F. Prohibitions on fraud, manipulation, and g. Minimize, if not totally eliminate, insider
insider trading trading and other fraudulent or
SECURITIES
4. Manipulation of security prices manipulative devices (SRC, Sec. 2)
5. Short sales
6. Option trading The overriding objective of the SRC is investor
7. Fraudulent transactions
protection through full and fair disclosure about
8. Insider trading
securities to be offered to the public and by
G. Protection of shareholder interests
Commercial Law 1. Tender offer rule

2. Rules on proxy solicitation
3. Disclosure rule
minimizing fraudulent and manipulative activities
for public companies. Note that the SRC will not
apply to non-public company. A public company
is defined under the SRC as either a publicly-
listed company, or a company with total assets of
at least P50M and with at least 200 shareholders
each holding 100 shares of the same class.
The principal purpose of SRC and its regulations

(also known as the Blue Sky Laws) is to protect
the public from worthless ventures, that have no
basis at all, and the sale of securities therein to
investors, who are then left holding certificates
representing nothing more than a claim to a
square of a blue sky.
B. DEFINTION OFSECURITIES
Securities are shares, participation or interests in

a corporation or in a commercial enterprise or
profit-making venture evidenced by a certificate,
contract, instrument, whether written or electronic
in character. The definition includes investment
contracts. (SRC, Sec. 3.1)
Page 189 of 393

C. KINDS OF SECURITIES scheme partakes the nature of process, the registration statement will be b. Housing and Land Use Rule
investment contracts and thus falls under rendered effective by the SEC and a permit Regulatory Board, or the;
a. “Per Se” Securities: those enumerated the definition of "securities" under the to sell will be issued. Registration allows the c. Bureau of Internal Revenue.
specifically under Sec. 3 of the SRC to SRC (Power Homes Unlimited Corp. v. SEC to ensure that there is full and fair
fall within the definition of “securities”. SEC, G.R. No. 164182, 2008). disclosure of all material information in e. Any security issued by a bank except its
Examples of those named as securities connection with the public offering. own shares of stock. (SRC, 9)
are shares of stock, bonds, fractional Securities Market Participants  In approving the registration of the
undivided interests in oil/gas/other securities, the SEC is not only concerned REMEMBER THIS: When a bank issues
mineral rights, derivatives like options a. Issuer is an originator, maker, obligor, or with the requirement that full disclosure of securities other than its own shares of stock,
and warrants, proprietary or non- creator of the security. (SRC, Sec. 3.2) information is given to the public but the SEC common or preferred, it does not need to
proprietary membership certificates in b. Broker is a person engaged in the is also concerned with the merit of the register the said securities with the SEC as
corporations, etc. business of buying and selling securities securities themselves and the issuer (PSE v. long as the BSP consents thereto. If, however,
for the account of others. (SRC, Sec. 3.3) Court of Appeals, G.R. No. 125469, 1997). the security to be issued by a bank is a share of
b. “Investment Contracts: as defined The client of the broker is a third party. stock, then those shares need to be registered
under the 2015 IRR of the SRC, An c. Dealer is a person, who buys and sells 1. EXEMPT SECURITIES with the SEC prior to any public offering.
investment contract means a contract, securities for his own account in the
transaction or scheme (collectively ordinary course of business. (SRC. Sec. Exempt securities are those to which the 2. EXEMPT TRANSACTIONS
"contract") whereby a person invests his 3.4) A dealer transacts using the dealer’s requirement of registration under Subsection 8.1
money in a common enterprise and is led own resources and not for third parties, of the SRC generally does not apply. The The enumeration of transactions under Sec. 10
to expect profits primarily from the efforts unlike a broker. following are exempt securities: that can qualify as exempt transactions are
of others. An investment contract is d. Prospectus is the document, made by or a. Any security issued or guaranteed by the exclusive and specific. Hence, the exemption is
presumed to exist whenever a person on behalf of an issuer, underwriter or Government of the Philippines, or by any transaction-specific, unlike the exempt
seeks to use the money or property of dealer, to sell or offer securities for sale political subdivision or agency thereof, or securities under Sec. 9 which will always be
others on the promise of profits. to the public through a registration by any person controlled or supervised exempt from registration regardless of the
statement filed with the SEC. (SRC. Sec. by, and acting as an instrumentality of underlying transaction or offering. For the
c. Catch-all – Other instruments as SEC 3.11) This is the offering circular said Government. upcoming bar exam, be familiar or understand the
may determine in the future. containing all material information about rationale for the exemption of the transactions
the issuer and the securities sought to be NOTE: The reason why the Government should under Sec. 10 – either the SEC approved the
Note: “Public offering” for purposes of offered to the public. not be required to furnish a bond is that the State issuance (such as for increase in authorized
registration, means a random or indiscriminate is undoubtedly always solvent (Araneta v. capital stock), or the issuance is approved by a
offering of securities in general to more than Registration Gatmaitan, G.R. Nos. L-8895, L-9191, 1957). court of law (such as judicial sale), or the
nineteen (19) persons, whether solicited or General rule: Securities are prohibited to be sold b. Any security issued or guaranteed by the issuance is pursuant to a contract (such as
unsolicited. or offered for sale or distribution within the government of any country with which the exercise of a right of conversion), or is a private
Philippines (SRC. Sec. 8.1): Philippines maintains diplomatic placement (less than 20 buyers) or a QIB offering
Turner Test a. Without registration statement duly filed relations, or by any state, province or (qualified institutional buyers are those with
The Turner Test is used to determine whether a with and approved by SEC; and political subdivision thereof on the basis sophistication, experience and knowledge
contract is an investment contract within the b. Prior to such sale, information on the of reciprocity: Provided, That the sufficient to form judgment on whether to invest
definition of securities. securities, in such form and with such Commission may require compliance or not in a securities offering).
 Under this test, an investment contract substance as SEC may prescribe, must be with the form and content for disclosures a. Judicial sale of securities: Any judicial
may be a transaction, contract, or made available to each prospective the Commission may prescribe. sale, or sale by an executor,
scheme whereby a person: purchaser. administrator, guardian or receiver or
a. Makes an investment of money, c. Certificates issued by a receiver or by a trustee in insolvency or bankruptcy
b. In a common enterprise, Exception: The following may be sold without trustee in bankruptcy duly approved by
c. With the expectation of profits, need of registration: the proper adjudicatory body. NOTE: As distinguished from exempt securities
d. To be derived primarily from the a. Exempt securities (SRC, Sec. 9) specially issued by the receiver or trustee in a
efforts of others b. Exempt transactions (SRC, Sec. 10) d. Any security or its derivatives the sale or bankruptcy proceeding mentioned above, the
transfer of which, by law, is under the shares covered under exempt transactions are
 The Turner Test was adopted in the NOTE: supervision and regulation of the ordinary shares; however the owner of the shares
Philippines, specifically in the case of  Registration is required whenever a. Office of the Insurance is bankrupt and so the shares are sold.
Power Homes wherein it was determined securities are sold or offered to be sold Commission,
that transactions under a pyramiding to the public. At the end of the registration
Page 190 of 393 Page 191 of 393

b. Sale of foreclosed securities: By or on h. Broker’s transactions: Broker’s iv. Pension fund or retirement approved by the Securities and Exchange
account of a pledge holder or mortgagee transactions, executed upon customer’s plan maintained by the Commission. (SRC, Sec. 8)
or any other similar lien holder, selling or orders, on any registered Exchange or government or managed by
offering for sale or delivery in the ordinary trading market; a bank or other persons The Securities and Exchange Commission may
course of business, not for the purpose of authorized by the BSP to conditionally approve registration statements of
avoiding the provisions of SRC, to i. Pre-incorporation subscription or engage in trust functions securities, subject under terms it may deem
liquidate a bona fide debt, a security subscription to a capital increase: v. Investment company necessary, and may specify the terms and
pledged in good faith as security for such Subscriptions to shares of capital stock vi. Such other person at the conditions under which a written communication,
debt; (1) prior to incorporation or (2) pursuant Commission may determine including any summary prospectus, shall be
to an increase in authorized capital stock as qualified. deemed not to constitute an offer for sale. (SRC,
c. Isolated transaction: An isolated – both to comply with the requirements of Sec. 8.2 and 8.3)
transaction in which any security is sold, the law for minimum subscription; REMEMBER THIS: The parties to the offering
offered for sale, subscription or delivery may seek a confirmation of exempt transaction D. POWERS AND FUNCTIONS OF THE
by the owner thereof, or for his account, j. Exchange of securities with existing status from the SEC, but this step is optional. SECURITIES AND EXCHANGE
not being made in the course of repeated security holders: Exchange of Note that the burden of proving entitlement to an COMMISSION
and successive transactions of a like securities by the issuer exclusively with exemption rests with the claimant. Only a notice
character, and such owner or its existing security holders exclusively, of exempt transaction is required under the 2015 a. Have jurisdiction and supervision over all
representative not being the underwriter where no commission or other IRR of the SRC. corporations, partnership or associations
of such security; remuneration is paid or given directly or who are the grantees of primary
indirectly for soliciting such exchange Notes: franchises and/or a license or a permit
d. Stock dividends: Distribution by a  The difference between (h) and (j) issued by the Government;
corporation of securities to its is that the exchange in (h) is for The SEC may exempt other transactions, if it
stockholders or other security holders as any other security of the issuer finds that the requirements of registration under b. Formulate policies and
stock dividend or other distribution out of while in (j), the exchange is the SRC is not necessary in the public interest or recommendations on issues concerning
surplus; between the issuer and its existing for the protection of the investors such as by the the securities market, advise Congress
security holders wherein the reason of the small amount involved or the limited and other government agencies on all
e. Sale of shares to stockholders not securities exchanged are not from character of the public offering. (SRC, Sec. aspect of the securities market and
underwritten: Sale of capital stock of a the same issuer; 10.2)An example of this provision is a stock propose legislation and amendments
corporation to its own stockholders option plan or an employee stock purchase plan thereto;
exclusively – stock which has already k. Private placements: Sale of securities which is commonly offered by publicly-listed
been issued; by an issuer to fewer than 20 persons companies to their executives and employees. c. Approve, reject, suspend, revoke or
during any twelve-month period; and require amendments to registration
f. Issuance of bonds to a single Issuance from authorized but previously unissued statements, and registration and
purchaser: Issuance of bonds or notes REMEMBER THIS: This exempt transaction capital stock may be granted exemption (Nestle licensing applications;
secured by mortgage upon real estate or which requires as a precondition the offering Philippines v. CA, G.R. No. 86738, 1991)
tangible personal property; to fewer than 20 persons over a 12-month d. Regulate, investigate or supervise the
period is the very essence of what constitutes 3. NON-EXEMPT TRANSACTIONS activities of persons to ensure
g. Transaction pursuant to the right of an offering that is not public. If, however, the compliance;
conversion: Issuance and delivery of offering is made to qualified institutional All transactions involving securities which are
any security in exchange for any other buyers or qualified individual buyers, the offered to the public, unless it is an exempt e. Supervise, monitor, suspend or take over
security of the same issuer pursuant to a number of persons becomes irrelevant as security or an exempt transaction subject to the the activities of exchanges, clearing
right of conversion, provided that the: you can see in the subsequent exemption for provisions of the SRC, needs to be registered as agencies and other SROs;
i. Surrendered has been qualified buyers. such with the Securities and Exchange
registered under the SRC or Commission, unless otherwise provided by law or f. Impose sanctions for the violation of laws
was, exempt, when sold l. Sale to qualified buyers: Sale of the Rules, and as such are non-exempt and rules, regulations and orders, and
ii. Security issued and securities to any of the following qualified transactions. issued pursuant thereto;
delivered in exchange buyers:
would, at the time of i. Bank Securities shall not be sold or offered for sale g. Prepare, approve, amend or repeal rules,
conversion, fall into the class ii. Registered investment or distribution within the Philippines, without a regulations and orders, and issue
entitled to registration; house registration statement duly filed with and opinions and provide guidance on and
iii. Insurance company
Page 192 of 393 Page 193 of 393

supervise compliance with such rules, E. PROCEDURE FOR REGISTRATION OF b. The registration statement, and its i. Termination or Completion of Offering
regulation and orders; SECURITIES attachments, are open to inspection;
and A written notification of completion or termination
h. Enlist the aid and support of and/or Procedure for Registration of Securities c. Copies shall be furnished to of the offering shall be filed by the Issuer with the
deputized any and all enforcement interested parties at such reasonable Commission within three (3) business days from
a. Filing charge as the SEC may prescribe. such completion or termination, and the notice
agencies of the Government, civil or
(SRC. Sec. 12.5[b]) shall state the number of securities sold. (2015
military as well as any private institution, IRR of R.A. 8799 Rule 8.1.1.6)
The issuer must file in the main office of the SEC:
corporation, firm, association or person in
a. Sworn registration statement with NOTE: As part of its registration statement, the
the implementation of its powers and respect to such securities; and Issuer shall submit to the SEC an affidavit of Procedure for Delayed and Continuous
function under its Code; b. Registration statement must include any publication with a copy of the notice that was Offering and Sale of Securities (Shelf
prospectus required (SRC. Sec. 12.1) published or a copy of the pro-forma notice to be Registration)
i. Issue cease and desist orders to prevent published, with the attestation that the publication
fraud or injury to the investing public; NOTE: A registration statement may be has been or will be immediately undertaken. Securities, which are intended to be issued in
withdrawn by the issuer only with SEC’s consent. (2015 IRR of R.A. 8799 Rule 12.5(b).2) tranches at more than one instance after the
j. Punish for the contempt of the This is called a voluntary revocation. (2015 IRR e. Order registration statement has been rendered
Commission, both direct and indirect, in of R.A. 8799, Rule 13.2.) effective by the Commission, may be registered
accordance with the pertinent provisions Within forty-five (45) days after the date of filing, for an offering to be made on a continuous or
b. Signature the SEC shall declare the registration statement delayed basis in the future, for a period not
of and penalties prescribed by the Rules
effective or rejected. (SRC. Sec. 12.6) exceeding three (3) years from the effective date
of Court; The registration statement shall be signed by the of the registration statement under which they are
issuer’s executive officer, its principal operating f. Entry of Order being offered and sold. (2015 IRR of R.A. 8799
k. Compel the officers of any registered officer, its principal financial officer, its Rule 8.1.2)
corporation or association to call comptroller, its principal accounting officer, its The SEC will enter an order declaring the
meetings of stockholders or members corporate secretary or persons performing similar registration statement to be effective. (SRC. Sec. Securities offered after the initial tranche shall
thereof under its supervision; functions accompanied by a duly verified 12.6) comply with the following requirements:
resolution of the board of directors of the issuer
l. Issue subpoena duces tecum and corporation and accompanied by: g. Oath of an Issuer
a. At least five (5) business days prior to the
a. A duly verified resolution of the board of
summon witnesses to appear in any offering or sale of the securities, it shall
directors; Upon effectivity of the registration statement, the
proceedings of the Commission and in disclose to the Commission the required
b. The written consent of the expert, who issuer shall state under oath in every prospectus
appropriate cases, order the information using SEC Form 12-I-SR;
certified any part of the registration that all registration requirements have been met
examination, search and seizure of all b. Filing Fees
statement; and and that all information are true and correct as
documents, papers, files and records, tax c. Upon filing of an RS, the total filing fee
c. If the registration statement includes represented by the issuer or the one making the
shall be computed based on Section 12.5
returns and books of accounts of any shares to be sold by selling shareholders. statement. (SRC. Sec. 12.7)
(a) of the SRC, payable per tranche of
entity or person under investigation as A written certification by the selling
issuance and proportional to the issued
may be necessary for the proper stockholders as to the accuracy of the NOTE: The order of the Commission rendering
value.
disposition of the cases before it, subject information of any part of the registration effective the registration statement shall, at the
d. The filing fees of the subsequent
to the provisions of existing laws; statement. (SRC. Sec. 12.4) expense of the Issuer, be published in a national
tranches shall be payable within seven
newspaper of general circulation and uploaded in
(7) business days prior to
c. Payment of Filing Fee its website within two (2) business days from its
m. Suspend, or revoke, after proper notice commencement of the offer/sale of the
issuance. (2015 IRR of R.A. 8799 Rule 12.5(b).3)
and hearing the franchise or certificate of said securities.
Not more than one-tenth (1/10) of one per centum
registration of corporations, partnership e. The registrant shall execute an
(1%) of the maximum aggregate price of the h. Offer Period of Securities
or associations, upon any of the grounds Undertaking to pay the remaining
securities (SRC. Sec. 12.5[a])
registration fees no later than thirty (30)
provided by law; and The sale of the securities subject of the
business days prior to the expiry of the
d. Publication registration statement shall commence within ten
three (3) year period reckoned from the
n. Exercise such other powers as may be (10) business days from the date of the effectivity
date of effectivity of the RS.
provided by law as well as those which Notice of the filing of the registration statement of the registration statement' and shall continue
may be implied from, or which are shall be immediately published by the issuer, at until the end of the offering period or until the sale
its own expense, in two (2) newspapers of is terminated by the Issuer. If the sale is not
necessary or incidental to the carrying
general circulation in the Philippines, once a commenced within ten (10) business days, the
out of, the express powers granted the
week for two (2) consecutive weeks, reciting that: RS shall be cancelled and all fees paid thereon
Commission to achieve the objectives a. A registration statement for the sale forfeited. (2015 of R.A. 8799 Rule 8.1.1.5)
and purposes of these laws. (SRC, Sec. of such security has been filed,
5)
Page 194 of 393 Page 195 of 393

Rejection and Revocation of Registration other person connected to its party stands to suffer any damage  The issuer, or any
Statement business affairs. from the revocation, it shall prepare person acting on behalf
an order revoking the registration. of the issuer in
a. Grounds for Rejection and Revocation of NOTE: the term “competent judicial or connection with the
Registration Statement administrative body” shall include a foreign court  The Order of Revocation shall distribution of said
a. When the issuer: of competent jurisdiction as provided for under exempt the Issuer from its reporting securities, shall, within
i. Has been judicially declared the Rules of Court. obligations under Section 17.2 of the ten (10) days from
insolvent; SRC unless it still qualifies as a public receipt of notification of
ii. Has violated any of the b. Requirements for Voluntary Revocation company. such election, return the
provision of the SRC, the An Application for Voluntary Revocation of contributions paid by
rules promulgate pursuant Registration of Securities shall include the Consequences of an Incomplete or False and such purchasers without
thereto, or any order of the following documents: (2015 IRR of R.A. Inaccurate Statement In A Material Respect In making any deduction.
Commission of which the 8799 Rule 13.2.1): The Registration Statement
issuer has notice in o Purchasers who decide not to
connection with the offering 1. Verified Petition for Revocation of  If the registration statement is on its face renounce their purchase of
for which a registration Registration; incomplete or inaccurate in any material securities shall be subject to the
statement has been filed respect: terms of the amended offering.
iii. Has been or is engaged or is 2. Board Resolution approving the (SRC, Sec. 14)
about to engage in revocation, certified under oath by the o The Commission shall issue an
fraudulent transactions; corporate secretary and attested to order directing the amendment Grounds For Suspension Of The Registration
iv. Has made any false or by the president or anyone of a registration statement; upon Of A Security
misleading representation of performing a similar function; compliance with such order, the
material facts in any amended registration statement If at any time, the information contained in the
prospectus concerning the 3. List of stockholders indicating their shall become effective; registration statement filed is or has become
issuer or its securities; respective shareholdings as of the misleading, incorrect, inadequate or incomplete
v. Has failed to comply with any latest date; o But if such registration statement in any material respect
requirements that the has already become effective,  The sale or offering for sale of the
Commission may impose as 4. All relevant books and papers of the the issuer needs to publish a security registered thereunder may work
a condition for registration of Issuer, as may be determined by the notice of the proposed or tend to work a fraud
the security for which the Commission; amendments in 2 newspapers of  Pending further investigation of the
registration statement has general circulation in the security registered to ascertain whether
been filed; Philippines stating that the the registration of such security should
5. Proposed Notice of Filing of Petition
b. The registration statement is on its offering in its current form has be revoked on any ground specified in
for Voluntary Revocation of
face incomplete or inaccurate in any been cancelled. the SRC; or
Registration of Securities, reciting the
material respect or includes any
facts supporting the said petition  Refusal to furnish information required by
untrue statements of a material fact
which shall be subject to the approval  If the changes shall result to a derogation the Commission. (SRC, Sec. 15)
required to be stated therein or of rights of existing security holders or
of the Commission; and
necessary to make the statement purchasers of subject securities who VI. Procedure For Suspension Of The Sale Of
therein not misleading; or have paid a portion of the selling price: Securities (SRC, Sec. 15)
c. The issuer, any officer, director or 6. Copy of the official receipt
representing payment of the
controlling person performing similar
prescribed filing fees. o The issuer shall include in the  SEC may order the suspension of the
functions, or any underwriter has above-mentioned publication an offer and sale of securities pending any
been convicted, by a competent offer to rescind all transactions investigation, stating the grounds for
judicial or administrative body, upon NOTE: The Commission may impose such other
requirements or conditions it may deem that have been completed for taking such action.
plea of guilty, or otherwise, of an sale to date, without making any
offense involving moral turpitude and necessary. (2015 IRR of R.A. 8799 Rule 13.2.2)
deduction and wait for thirty (30)  Such order, although binding upon
/or fraud or is enjoined or restrained days for purchasers to respond persons notified thereof, shall be deemed
by the Commission or other c. Procedure for Voluntary Revocation of
Registration of Securities to the rescission offer before confidential, and shall not be published.
competent or administrative body for initiation of the amended
violations of securities, commodities,  If, after fifteen (15) business days
from the publication of the Notice of
offering.  Notice of such order shall be given to the
and other related laws. issuer and every dealer and broker
d. Where the issuer refused to comply Filing of Petition for Voluntary
o Purchasers may, within thirty known as participating in such offering.
with the order of SEC for the Revocation, the Commission finds
(30) days from the date of such
production of all books and papers, that the petition together with all other
papers and documents attached to it,
notification, renounce their  Upon issuance of suspension order, no
administration of oath, or purchase of securities. further offer or sale of such security shall
examination of its officers, or any is on its face complete and that no
Page 196 of 393 Page 197 of 393

be made until lifted or set aside by the from purchasers within 10 days after the the SRC or the SEC rules. (SRC, Sec.
SEC; otherwise, such sale is void. notice is first published. h. Classification, de-classification or re- 24)
classification of securities, which results
 Upon issuance of an order of  If the public offering is already terminated to derogation of rights of existing security Examples of manipulative practices:
suspension, the SEC shall conduct a and the Commission, after due notice holders, as may be determined by the a. Painting the tape - engaging in a series
hearing. and hearing, revokes the effectivity of the Commission. of transactions in securities that are
registration statement under Section 13, reported publicly to give the impression
 If it determines that the sale of any or suspends registration under Section REMEMBER THIS: Material information pertains of activity or price movement in a
security should be revoked, it shall issue 15, the Commission shall publish a notice to any and all information that are “market- security;
an order prohibiting the sale of such of the order of revocation or suspension moving” in that a reasonable investor will
security. (SRC, Sec. 15) in a newspaper of general circulation in consider the information in the investment b. Marking the close - buying and selling
the Philippines and/or post in the decision. Hence, these are what we call “price- securities at the close of the market in an
Publication of the Notice of the Order of Commission’s website. sensitive” information which, for publicly listed effort to alter the closing price of the
Revocation or Suspension companies, need to be fully and promptly security;
NOTE: if the public offering has already disclosed for the benefit of the investing public.
 If during a public offering, the terminated, there is no more return of payments. c. Improper Matched Orders – engaging
Commission, after due notice and F. PROHIBITIONS ON FRAUD, in transaction where both the buy and sell
hearing, revokes the effectivity of a Material Information MANIPULATION, AND INSIDER TRADING orders are entered at the same time with
registration statement under Section 13, the same price and quantity by different
or suspends registration under Section Generally, it is any fact or omission, which is 1. MANIPULATION OF SECURITY PRICES but colluding parties, who have
15. material to the investor in making his decision knowledge that such orders would create
whether he should invest in the security or not. It shall be unlawful for any person, for himself an appearance of active trading of the
 Such order shall be published in: However, the Rules provide for an enumeration or through a dealer or broker, directly and shares;
 A newspaper of general of matters considered as material information. indirectly to –
circulation in the Philippines; With regard to those specifically included in the a. Create a false or misleading appearance d. Hype And Dump – engaging in buying
and/or enumeration, the issuer cannot argue otherwise of active trading in any listed security activity at increasingly higher prices and
to say that those are immaterial: traded in an Exchange; then selling securities in the market at the
 Post(ed) on the Commission’s a. Any event or transaction which creates or higher prices after announcing a glossy
website along with a statement increases a risk on the investments or on b. Effect along, or with others, a series of picture of a particular security as good
that the– the securities covered by the registration; transactions in securities that: investment and thus lure investors to
i. Offering in its current form i. Raises their price to induce trade.
has been cancelled; and b. Increase/decrease in the volume of the purchase;
ii. Issuer subject to such securities being offered at an issue price ii. Depresses their price to induce their e. Wash Sales – engaging in stock trading
order, or any person, higher/lower than the range set and sale; and where there is no genuine change in
acting on behalf of such disclosed in the registration statement iii. Creates active trading to induce actual beneficial ownership of a security
issuer in the distribution of and which results to a derogation of the purchase or sale through but makes it appear that the stocks are
the subject securities and rights of existing security holders, as may manipulative devices actively traded.
has in his possession any be determined by the Commission;
payment for the purchase c. Circulation or dissemination of f. Squeezing The Float – taking
of securities, has the duty c. Major change in the primary business of information to the effect that the price of advantage of a shortage of securities in
to return any and all the registrant; any such security will or is likely to rise or the market by controlling the demand
payments made by fall because of market operations; side and exploiting market congestion
purchasers of the subject d. Reorganization of the company; during such shortages in a way as to
securities within 10 days of d. Make, regarding any security registered create artificial prices
such publication, and e. Change in the work program or use of on an exchange, any statement which is
simultaneously furnish the proceeds; false or misleading with respect to any g. Disseminating false or misleading
issuer a copy of this material fact, and which he knew or had market information through media,
notice. f. Loss, deterioration or substitution of the reasonable ground to believe is false or including the internet. (2015 IRR of
property underlying the securities; misleading; R.A. 8799, Rule 24.1.5)
 Upon receipt of a notice, the issuer and
all persons acting on its behalf in the g. Significant or ten percent (10%) or more e. Effect series of transactions for the 2. SHORT SALES
distribution of the subject securities shall change in the financial condition or purpose of pegging, fixing or stabilizing
immediately terminate the offering and results of operation of the registrant the price of security trade in an Short sales are any sale of a security which the
return any and all payments received unless a report to that effect is filed with Exchange, unless otherwise allowed by seller does not own or any sale which is
the Commission and furnished the consummated by the delivery of a security
prospective purchaser;
Page 198 of 393 Page 199 of 393

borrowed by, or for the account of the seller. require taking advantage of information, mere Material Nonpublic Information Insurance Co., G.R. No. 171815, 2007, as cited
(SRC, Sec. 24) possession is enough (SRC, Sec. 27.4) in Osmeña, 533 SCRA 313).
Who is an insider? (TRIGOD) Information is “material nonpublic” if: Both acquisitions from either the associated
No person shall, directly or indirectly, by the use a. It has not been generally disclosed to the company or the target company must be taken
of any facility of a securities exchange, effect a a. Issuer; public and would likely affect the market into account. If the total acquisition of shares in
short sale in a security registered or listed on any b. Director or Officer of issuer; price of the security after being both the companies exceed the threshold of 35%
securities exchange, where the seller does not c. Person whose Relationship or former disseminated to the public and the lapse percent a tender offer must be made to both
intend or is unable to make delivery of the relationship with issuer gives him access of a reasonable time for the market to corporations.
securities within the prescribed settlement period. to material information not generally absorb the information; or
Failure on the part of the seller to make delivery available to the public; b. Would be considered by a reasonable Target company means any Issuer whose equity
on such date will be construed by the d. Government employee or director or person important under the securities are sought by an Offeror pursuant to a
Commission as prima facie evidence of the lack officer of an exchange, clearing agency circumstances in determining his course tender offer. (2015 IRR of R.A. 8799 Rule 19.1.7)
of intention on his part to make such delivery. and/or self-regulatory organization who of action whether to buy, sell or hold a
(2015 IRR of R.A. 8799, Rule 24.2.2.6) has access to material information; or security (SRC. Sec. 27.2.) Cases
e. A person who learns such information by
A “tender offer” is a publicly announced intention
communication from any of the foregoing G. PROTECTION OF INVESTORS
3. OPTION TRADING by a person acting alone or in concert with other
insiders. NOTE: In securities parlance,
persons to acquire equity securities of a public
this is called “tippee. This tippee must 1. TENDER OFFER RULE
No member of an Exchange shall, directly or company, i.e., one listed on an exchange, among
know that the tipper is an insider” (SRC
indirectly, endorse or guarantee the performance others.
Sec. 3.8)
of any put, call, straddle, option or privilege in Tender Offer Rule  The term is also defined as “an offer by
relation to any security registered on a securities A publicly announced intention by a person, the acquiring person to stockholders of a
Defenses against insider trading acting alone or in concert with other persons, to
exchange. (SRC, Sec. 25) public company for the latter to tender
acquire equity securities of a public company. their shares therein on the terms
a. Proof that information was not gained
4. FRAUDULENT TRANSACTIONS (SRC, Sec. 19) specified in the offer.” (Morales, The
from such relationship or
Philippine Securities Regulation Code,
b. If the other party buying or selling is It also means: a publicly announced intention by
It is unlawful, with respect to the purchase or sale 2005 ed., p. 153, as cited in Osmeña, 533
identified, insider proves that: a person acting alone or in concert with other
of securities: SCRA 313).
i. The disclosed the information to persons (hereinafter referred to as "person") to
a. To employ any device, scheme, or the other party; or
artifice to defraud; acquire outstanding equity securities of a public  Tender offer is in place to protect the
ii. Had reason to believe that the company as defined in SRC Rule 3, or interests of minority stockholders of a
other party already knew of the outstanding equity securities of an associate or
b. Obtain money or property by means of target company against any scheme that
information. (2015 IRR of R.A. related company of such public company which
any untrue statement of a material fact or dilutes the share value of their
8799, Rule 27.1) controls the said public company. (2015 IRR of
any omission to state a material fact, that investments. It affords such minority
is necessary in order to make the R.A. 8799 Rule 19.1.8) shareholders the opportunity to withdraw
Presumption of Insider Trading
statements made, in the light of the or exit from the company under
circumstances under which they were NOTE: The 2015 IRR of the Securities Regulation reasonable terms, a chance to sell their
Purchase or sale by: Code has expanded the tender offer rule to
made, not misleading shares at the same price as those of the
a. Insider intended acquisitions of not just the target public majority stockholders (Cemco Holdings,
b. Insider’s spouse or relatives by affinity or company but also to associate company of the
c. Engage in any act, transaction, practice, Inc. v. National Life Insurance Co., G.R.
consanguinity within the second (2 nd) target company, where the associate company
or course of business which would No. 171815, 2007, as cited in Osmeña,
degree, legitimate or common-law, under controls said target company to incorporate the
operate as a fraud or deceit upon a 533 SCRA 313).
the following conditions: doctrine in Cemco Holdings, Inc. v. national Life
person – actual intent to deceive not i. Transacted after the information
necessary. (SRC, Sec. 26) Insurance.  It is done by filing with the SEC a
came into existence; but
ii. Prior to dissemination of the declaration to that effect, furnishing the
Fraud or deceit is required, not mere negligence, In the Cemco case, the coverage of the issuer with a statement with the facts
information to the public and a mandatory tender offer rule was clarified by the
on the part of offender (SEC v. CA, 246 SCRA lapse of a reasonable time for the required by the SEC, and the publication
738 [1995]) SC to cover not only direct acquisition but also of all requests or invitations for tender.
market to absorb such indirect acquisition or ‘any type of acquisition. The
information. (2015 IRR of R.A. legislative intent behind the tender offer rule
5. INSIDER TRADING 8799, Rule 27.1) Mandatory Tender Offer Rule
makes clear that the type of activity intended to 1. Any person or group of person intends to
It is unlawful for an insider to sell or buy a security be regulated is the acquisition of control of the acquire 35% or more of equity shares in
NOTE: This is a rebuttable presumption of insider listed company through the purchase of shares.
of the issuer, while in possession of material a public company, in one or more
trading. Control may [be] effected through a direct and
information with respect to the issuer that is not transactions within a period of 12 months.
generally available to the public – does not indirect acquisition of stock, and when this takes (2015 IRR of R.A. 8799 Rule 19.2.1)
place, irrespective of the means, a tender offer
must occur (Cemco Holdings, Inc. v. National Life
Page 200 of 393 Page 201 of 393

2. Acquisition of even less than 35% but 2. RULES ON PROXY SOLICITATION c. Current Report – whenever necessary
would result in ownership of more than to make a full, fair and accurate
51% of the total outstanding equity This only refers to solicited proxies. (SRC, Sec. disclosure to the public of every material
securities of a public company (2015 IRR 20) fact or event that occurs, which would
of R.A. 8799 Rule 19.2.5) reasonable be expected to affect
Requirements investors’ decisions in relation to those
Creeping Acquisition a. In writing; signed by the stockholder or securities
Any person or group of person intends to acquire duly authorized representative; and
35% or more of equity shares in a public b. Filed before the scheduled meeting with d. Monthly Report (for issuers of
company, in one or more transactions within a the corporate secretary registered commercial papers) –
period of 12 months. (2015 IRR of R.A. 8799 Rule c. Valid only for the meeting for which it is regarding commercial paper total
19.2.1) intended. issuances outstanding at the end of each
month, within 10 business days following
NOTE: If any acquisition that would result in  Cannot be valid for a period longer than five the end of the month
ownership of over fifty percent (50%) of the total years at one time (Maximum effectivity
outstanding equity securities of a public period: 5 years) REMEMBER THIS: The reportorial obligations of
company, the acquirer shall be required to make public companies under the SRC pertain to
a tender offer under this Rule for all the  Broker or dealer who holds or acquires the Sections 17 (Annual and quarterly reports), 18
outstanding equity securities to all remaining proxy for at least 10% of the outstanding (5% beneficial owners), 20 (Information
stockholders of the said company at a price shares of the issuer shall submit a report Statement), and 23 (change in beneficial
supported by a fairness opinion provided by an identifying the beneficial owner within 10 ownership), among others.
independent financial advisor or equivalent third days after such acquisition to the:
party. The acquirer in such a tender offer shall be o Issuer of the security; Note: Reports Filed By 5% Beneficial Owners -
required to accept all securities tendered. (2015 o The Exchange where the security is any person who directly or indirectly acquires the
IRR of R.A. 8799 Rule 19.2.5) traded; and the beneficial ownership of more than five percent
o SEC. (5%) or such lesser per centum as the
Exemptions to the Mandatory Tender Offer Commission may prescribe, of any class of equity
Rule under the 2015 IRR of the SRC: 3. DISCLOSURE RULE securities of an Issuer, covered by the Disclosure
a. From unissued capital stock, provided Rule, shall file a report within five (5) business
that the acquisition will not result in a 50% This rule only applies to issuer corporations that days after such acquisition submit to the Issuer,
or more ownership; satisfy the any of the following conditions (SRC the Exchange where the security is traded, and to
b. Increase in authorized capital stock; Sec. 17): the Commission a sworn statement prescribed by
c. Foreclosure proceedings; a. Has sold a class of its securities pursuant the SEC (SRC, Sec. 18)
d. Privatization by the government; to a registration;
e. Rehabilitation under court supervision; ----end of topic----
f. Through an open market at the prevailing b. Has a class of securities listed for trading
market price; on an Exchange; or
g. Merger or consolidation; and
h. By any person or group of persons who c. With assets of at least ₱50 Million (or
intends to acquire 35% through an such other amount as SEC shall
exchange trading system. prescribe), and having 200 or more
holders each holding at least 100 shares
NOTE: Any person or group of persons acting in of a class of its equity securities (“Public
concert, who intends to acquire thirty five percent company”)
(35%) of the outstanding voting shares or such
outstanding voting shares that are sufficient to Reportorial Requirements
gain control of the board in a public company a. Annual Report – for fiscal year in which
through the Exchange trading system shall not registration statement became effective
be required to make a tender offer even if such and every fiscal year thereafter, within
person or group of persons acting in concert 135 days after the end of the fiscal year
acquire the remainder through a block sale if,
after acquisition through the Exchange trading b. Quarterly Report – within 45 days after
system, they fail to acquire their target of thirty the end of each of the first three quarters
five percent (35%) or such outstanding voting of the fiscal year
shares that is sufficient to gain control of the
board. (2015 IRR of R.A. 8799 Rule 19.2.3)
Page 202 of 393 Page 203 of 393

ATENEO CENTRAL
VI. BANKING 2. Distinction of banks from quasi-banks

and trust entities
3. Bank powers and liabilities
TOPIC OUTLINE UNDER THE SYLLABUS: a. Corporate powers
b. Banking and incidental powers
VI. BANKING 4. Diligence required of banks in view of
A. THE NEW CENTRAL BANK ACT fiduciary nature of banking
1. State Policies 5. Nature of bank funds and bank
2. Creation of the Bangko Sentral ng deposits
Pilipinas 6. Grant of loans and security
3. Responsibility and primary objective requirements
4. Corporate powers a. Ratio of new worth to total risk
5. Operations of the Bangko Sentral ng assets
Pilipinas b. Single borrower’s limit
a. Authority to obtain data and c. Restrictions on bank exposure
information to directors, officers,
b. Supervision and examination stockholders, and their related
c. Bank deposits and investments interests
d. Prohibitions d. Prohibited acts of borrowers
BANKING
e. Examination and fees e. Floating interest rates and
6. Monetary Board; powers and escalation clauses
functions 7. Penalties for violations
7. How the Bangko Sentral ng Pilipinas a. Fine, imprisonment
handles banks in distress b. Suspension or removal of
a. Conservatorship director or officer
Commercial Law b. Closure
c. Receivership
d. Liquidation
c. Dissolution of bank
D. PHILIPPINE DEPOSIT INSURANCE

8. Administrative sanctions on CORPORATION ACT
supervised entities 1. Basic Policy
9. Rules on bank deposits and 2. Powers and functions of the Philippine
investments by directors, officers, Deposit Insurance Corporation;
stockholders and their related prohibitions
interests 3. Concept of insured deposits
10. Supervision and regulation of bank 4. Liability to depositors
operations a. Deposit liabilities required to be
a. Loans and other credit insured with Philippine Deposit
accommodations Insurance Corporation
b. Selective regulation b. Commencement of liability
i. Margin requirements c. Deposit accounts not entitled to
against letters of credit payment
ii. Required security against d. Extent of liability
bank loans e. Determination of insured
iii. Portfolio ceilings deposits
iv. Minimum capital ratios f. Calculation of liability
11. Rate of exchange i. Per depositor, per capacity
rule
B. LAW ON SECRECY OF BANK ii. Joint accounts
DEPOSITS iii. Mode of payment
1. Purpose iv. Effect of payment of
2. Prohibited acts insured deposits
3. Deposits covered v. Payment of insured
4. Exceptions deposits as preferred credit
5. Garnishment of deposits, including vi. Failure to settle claim of
foreign deposits insured depositor
6. Penalties for violation vii. Failure of depositor to claim
insured deposits
C. GENERAL BANKING ACT (a) Examination of banks
1. Definition and classification of banks and deposit accounts
Page 205 of 393

(b) Prohibition against A. THE NEW CENTRAL BANK ACT negotiations, and transactions with the 4. CORPORATE POWERS
splitting of deposits IMF, and shall carry such accounts as
(c) Prohibition against 1. STATE POLICIES may result from the Philippine Corporate powers of the BSP
issuances of membership in, or operations with IMF. a. To adopt, alter, and use a corporate seal
temporary restraining The State shall maintain a central monetary (Sec. 111) which shall be judicially noticed;
orders authority that shall function and operate as an c. Representation with other financial b. To enter into contracts;
5. Concept of bank resolution institutions. The BSP may represent the c. To own, lease, sell or dispose real and
independent and accountable body corporate in
6. Role of the Philippine Deposit government in dealings, negotiations, or
the discharge of its mandated responsibilities personal property;
Insurance Corporation in relation to
concerning money, banking, and credit. In line transactions with the World Bank and d. To sue and be sued;
banks in distress
with this policy, and considering its unique with other foreign or international e. To acquire and hold assets and incur
a. Closure and takeover
b. Conservatorship functions and responsibilities, the central financial institutions or agencies. (Sec. liabilities essential to the proper conduct
c. Receivership monetary authority established under this Act, 112) of its operations;
d. Liquidation while being a government-owned corporation, d. Fiscal operations. The BSP shall open f. To compromise, condone, or release any
shall enjoy fiscal and administrative autonomy. a general cash account for the Treasurer claim or settled liability to the BSP
(New Central Bank Act [hereinafter “NCBA”], Sec of the Philippines, in which the liquid regardless of the amount, and
1) funds of the Government shall be g. To do and perform such other necessary
deposited, and the transfer of funds from or proper powers to carry out the
2. CREATION OF THE BANGKO SENTRAL this account to be made only upon the purposes of the Act. (Sec. 5)
order of the Philippine Treasurer. (Sec.
NG PILIPINAS (BSP)
114) 5. OPERATIONS OF THE BANGKO
There is hereby established an independent SENTRAL NG PILIPINAS
Primary Objectives of the BSP
central monetary authority, which shall be a body
a. To provide policy directions in areas of A. Authority to obtain data and information
corporate known as the BSP. (NCBA, Sec. 2)
money, banking, and credit, with
supervision over operations of banks, BSP’s has power to require any data:
The BSP is a Constitutionally mandated (not
and with regulatory and examination a. Collective or aggregate data may be
created) authority. (1987 Constitution, Article XII,
powers over money service businesses, released to any interested person
Sec. 20)
credit granting businesses, and payment b. Disaggregated data (i.e. data of individuals
system operators. (Sec. 3)
The State’s central monetary authority is charged and firms).
b. To maintain price stability conducive to a 1. Subject to confidentiality laws;
with the responsibility of administering the
balanced and sustainable growth of the 2. Cannot be made available to the
monetary, banking, and credit system of the
economy and employment (Id.) public except upon court order or
country and is granted the power of supervision
c. To promote and maintain the monetary directive of the Monetary Board;
and examination over bank and non-bank
stability and convertibility of the peso. 3. Data on banks are secured
financial institutions performing quasi-banking
(Id.) pursuant to BSP’s banking
functions, including savings and loan
associations. (Busuego v. Court of Appeals [CA], supervision powers and are
Monetary stability pertains to confidential. Its release is subject
G.R. No. 95326, 1999)
preservation of the international value of to conditions imposed by the
the Philippine currency. (Commissioner Monetary Board, government
3. RESPONSIBILITY AND PRIMARY of Customs v. Eastern Sea Trading, GR
OBJECTIVE agencies authorized by law, orders
No. L-14279, 1961) of the court, or Congress. (Sec. 27)
Responsibilities of the BSP 4. Can be secured from any person
Note: Promotion of financial stability is a or entity, including government
a. Banker of Government. The shared mandate with the National
government’s political subdivisions and entities.
Government i.e., DOF, SEC, IC, and 5. Limited for statistical and policy
instrumentalities (Sec. 110), and their PDIC.
cash balances should be deposited with development purposes.
the BSP, with only minimum working d. To promote broad and convenient access BSP has the power to issue subpoena for the
balances to be held by government- to high quality financial services. (Sec. 3)
owned banks, and such other banks production of books and records, and refusal
e. To oversee the payments and settlement shall be subject to punishment for contempt
incorporated in the Philippines as the systems. (R.A. No. 11127 - National
Monetary Board may designate. (Sec. under the Rules of Court. (Sec. 23)
Payment Systems Act, Sec. 3)
113)
B. Supervision and examination
b. Representation with the International
Monetary Board. The BSP shall
Supervision is a broad term, which includes
represent the government in all dealings,
examination and investigation. Supervision also
Page 206 of 393 Page 207 of 393

includes issuance of rules of conduct and Prohibition on issuance of injunction them, in writing, to receive such
standards, overseeing that laws and regulations No restraining order or injunction shall be issued information. (Sec. 27 [c]) While Sec. 6(a) of the NCBA requires that the
are complied with and enforcing prompt by the court enjoining the BSP from examining d. Borrowing from any institution subject to Governor be subject to confirmation by the
corrective actions. (General Banking Law any institution subject to its supervision or supervision or examination by Commission on Appointments, he is not among
[hereinafter “GBL”], Sec. 4) examination powers except when the action of the BSP unless: government officials expressly mentioned in Sec.
the BSP is plainly arbitrary and made in bad faith. 1. It is transacted on an arm's 16, Article VII of the Constitution who should be
Supervision includes audit. The Commission on (Id.) length basis; confirmed. (Tarrosa vs. Singson, G.R. No.
Audit (COA) and the BSP have concurrent 2. It is fully disclosed to the 111243, 1994)
jurisdiction to audit government banks. (DBP v. C. Authority to approve transfer of shares Monetary Board; and
COA, GR. No. 88435, 2002) 3. It shall be subject to such rules Vacancies
Transfers or acquisitions, or a series thereof, of at and regulations as the Monetary Any vacancy in the Monetary Board created by
Coverage of BSP’s supervision and least ten percent (10%) of the voting shares in Board may prescribe. (Sec. the death, resignation, or removal of any member
examination powers banks or quasi-banks shall require the prior 27[d]) shall be filled by the appointment of a new
a. Banks approval of the BSP. The BSP shall consider the member to complete the unexpired period of the
b. Quasi-banks fitness of the incoming stockholders as may be E. Examination and Fees term of the member concerned. (Sec. 7)
c. Subsidiaries (ownership of more than indicated in their integrity, reputation, and
50% of the voting stock) and affiliates financial capacity. (Sec. 25-A) Banks, quasi-banks, and other BSP-supervised Qualifications
(ownership of 50% or less) of banks and entities shall be examined by BSP examiners in a. Natural-born citizens of the Philippines;
quasi-banks engaged in allied activities. Effect of lack of BSP approval accordance with guidelines, taking into b. At least 35 years of age; (except the
The transfer or acquisition shall have no legal consideration sound and prudent practices. Governor, who should be at least 40
Note: BSP is also granted the authority to effect and cannot be recognized in the books of a. There shall be an interval of at least years of age)
conduct examination of a wholly or the institution or by any government agency. The twelve (12) months between regular bank c. Of good moral character;
majority owned or controlled enterprise transferor-stockholders shall remain accountable examinations. It is no longer annual. d. Of unquestionable integrity;
by a bank, not necessarily engaged in and responsible. (Sec. 25-A) b. Special examinations need at least five e. Of known probity and patriotism; and
allied activities. (GBL, Sec. 7) (5) votes of the members of the Monetary f. With recognized competence in social
Transfer of actual control or management shall Board. and economic disciplines (Sec. 8)
d. Other institutions performing similar make the transferor, the transferee, and any c. The supervised institution shall afford
functions as provided for by special laws person responsible liable. (Id.) BSP examiners full opportunity to Disqualifications
i.e., non-stock savings and loan examine its books and records, assets, a. Disqualifications imposed by R.A. No.
association (R.A. No. 8367), pawnshops D. Prohibitions and general condition, and review its 6713 – Code of Conduct and Ethical
(P.D. No. 114), stand-alone trust entities systems and procedures. Standards for Public Officials;
(GBL, Sec. 79). Personnel of the BSP are hereby prohibited from: d. Reports and papers are confidential and b. Disqualified from being a director, officer,
e. Money service businesses i.e., foreign a. Being an officer, director, lawyer or not open to the public, except when employee, consultant, lawyer, agent or
exchange dealers, money changers and agent, employee, consultant, or incidental to examination proceedings stockholder of any bank, quasi-bank or
remittance agents stockholder, directly or indirectly, of any and when necessary for the prosecution any other institution which is subject to
f. Credit granting businesses institution subject to supervision or of violations. supervision or examination by the BSP;
g. Payment system operators (Sec. 25) examination by the BSP; (Sec. 27[a]) e. There is an annual supervision fee based c. Members coming from the private sector
h. Trust entities (GBL, Sec.4, 79) b. Directly or indirectly requesting or on cost of supervision. (Sec. 28) shall not hold any other public office or
i. Pawnshops (PD 114, Sec. 17) receiving any gift, present or pecuniary or public employment during their tenure.
j. Non-stock savings and loan associations material benefit for himself or another, 6. MONETARY BOARD, POWERS AND d. Person who has been connected directly
(R.A. No. 8367, Sec. 22) from any institution subject to supervision with any multilateral banking or financial
FUNCTIONS
or examination by the BSP; (Sec. 27 [b]) institution or has a substantial interest in
Resolution of examination issues c. Revealing, in any manner, information any private bank in the Philippines, within
The Monetary Board is a seven (7) man body
BSP is required to establish a mechanism for relating to the condition or business of 1 year prior to his appointment;
appointed by the President through which the
resolving issues pertaining to bank examination. any such institution unless: e. No member shall be employed in any
powers and functions of the BSP are exercised.
The resolution “body” shall be independent and 1. Under orders of the court, the such institution within 2 years after the
Its members shall serve a term of six (6) years,
report directly to the Monetary Board. (Sec. 25) Congress or any government expiration of his term except when he
and no member shall be reappointed more than
office or agency authorized by serves as an official representative of the
once. (Sec. 6)
Authority of bank examiners law, or under such conditions as Philippine Government to such
BSP bank examiners are authorized to administer may be prescribed by the institution; and
Composition
oaths and compel the presentation of documents Monetary Board; and f. Person who has substantial interest in
a. Chairman who is the BSP Governor;
of institutions under examination. This authority is 2. The information is to be given to any private bank in the Philippines, within
b. A cabinet member to be designated by
subject to the confidentiality of bank deposits and the Monetary Board or the 1 year prior to his appointment. (Sec. 9)
the President of the Philippines;
government debt securities. (Id.) Governor of the BSP, or to any
c. 5 Members who shall come from the
person authorized by either of
private sector, all of whom shall serve full
time (Id.)
Page 208 of 393 Page 209 of 393

Degree of Diligence b. Direct the management, operations, and 7. HOW THE BANGKO SENTRAL NG
The degree of diligence required of Monetary administration of the BSP; PILIPINAS HANDLES BANKS IN DISTRESS Appointment of Conservator
Board Members, BSP Officials, and Employees, c. Establish a human resource A conservator is appointed based on a report
is now aligned with that required of public officers management system; Methods submitted to the Monetary Board by the
under Sec. 38 and 39 of Chapter 9, Book I of the d. Adopt its annual budget and authorize Conservatorship, Receivership, and Liquidation appropriate supervising or examining department
Revised Administrative Code of 1987. They expenditures; showing that the bank or quasi-bank is in a state
cannot be liable for acts done in the performance e. Indemnify its members and other officials A bank placed under conservatorship remains of illiquidity which is not adequate to protect the
of their official duties “unless there is a clear of the BSP against all costs and open but under the management and control of interest of depositors and creditors. (Id.)
showing of bad faith, malice or gross negligence.” expenses reasonably incurred by such the conservator. On the other hand, when a bank
(Sec. 16) The former requirement of persons by reason of the performance of is ordered closed by the Monetary Board, it is Qualifications of a Conservator
extraordinary diligence was already amended. their functions or duties in accordance taken over by the PDIC as statutory “receiver”, The conservator should be competent and
with the free and harmless, and and the PDIC is directed to proceed with the knowledgeable in bank operations and
General Rule: indemnification clause. (Secs. 15 and 16) liquidation. (Sec. 30(d); New PDIC Charter, Sec. management. (Id.)
Free and Harmless 12)
BSP, members of the Monetary Board, and its Myriad of functions The Monetary Board has exclusive power to
other personnel, are held free and harmless to the BSP is an administrative agency which exercises Before the amendments to the PDIC Charter and designate the conservator. (Koruga v. Arcenas,
fullest extent permitted by law from any liability. "powers and/or functions which may be NCBA by Sec. 12 of R.A. No. 10846 (2016), there G.R. Nos. 168332, 2009)
(Sec. 16) characterized as administrative, investigatory, was a 90-day period of receivership after closure
regulatory, quasi-legislative, or quasi-judicial.” and before a final order of liquidation by the Duration of Conservatorship
Indemnification (Bank of Commerce v. Planter’s Development Monetary Board to determine whether the bank Shall not exceed 1 year. (Sec. 29)
They shall be indemnified for any and all Bank, G.R. Nos. 154470-71 and 154589-90, can still be rehabilitated. This period was
liabilities, losses, claims, demands, damages, 2012) removed by the amendment. PDIC now takes Powers of a Conservator:
deficiencies, costs and expenses of whatsoever over the assets of the closed bank for purposes a. To take charge of the assets, liabilities,
kind and nature that may arise in connection with The BSP Monetary Board is a quasi-judicial of liquidation and thereafter files a petition for and the management thereof;
the exercise of their powers and performance of agency exercising quasi-judicial powers or court assisted liquidation. (A.M. No. 19-12-02-SC b. Reorganize the management;
their duties and functions. (Id.) functions. It has the power to issue subpoena, to Rules on Liquidation of Closed Banks, February c. Collect all monies and debts due said
sue for contempt those refusing to obey the 18, 2020) institution;
Exception: Their actions or omissions are finally subpoena without justifiable reason, or administer d. Exercise all powers necessary to restore
adjudged to be in willful violation of this Act, oaths and compel presentation of books, records, Liquidity its viability;
performed in evident bad faith, or with gross and others, needed in its examination, to impose Ability to pay off obligations when they fall due. e. Report and be responsible to the
negligence. (Id.) fines and other sanctions and to issue cease and Monetary Board; and
desist order. The BSP Monetary Board can An institution which fails to pay its matured f. Where necessary, overrule or revoke the
The legal obligations of diligence and good faith exercise discretion in determining whether obligations or meet the normal demands of actions of the previous management and
that BSP officials owe to the public start with the administrative sanctions should be imposed on withdrawals for deposits due to insufficient cash, board of directors of the bank or quasi-
official acts of the Monetary Board which, rightly banks and quasi-banks. (UCPB v. Ganzon, G.R. or resorts to intermittent/staggered payments or bank. (Id.)
or wrongly, are the cause of loss or injury to third No. 168859, 2009; NCBA, Sec. 37) withdrawals may be considered as suffering from
parties, not any preparatory report or liquidity problems. A bank conservator appointed by the BSP has no
recommendation. (Borlongan v. Reyes, G.R. No. Decisions appealable to the Court of Appeals power to unilaterally rescind contracts entered
161726, 2005) Any petition for certiorari against an act or Insolvency into by the previous management. The power to
omission of BSP, when it acts through the There are two tests for insolvency: revoke cannot extend to post-facto repudiation of
Removal of Members of the Monetary Board Monetary Board, must be filed with the Court of a. Balance sheet test. It is where the perfected transactions otherwise they would
The President may remove any member of the Appeals. (Vivas vs. Monetary Board, G.R. No. realizable assets of the bank is infringe against the non-impairment clause of the
Monetary Board for any of the following reasons: 191424, 2013). insufficient to meet its liabilities Constitution. The law merely gives the
a. The member no longer possesses the (Sec.30[b]) conservator the power to file court actions to
qualifications under NCBA, Sec. 8; Note: This is a petition for review on certiorari b. Equity test. The bank’s inability to pay its revoke contracts that are defective – void,
b. The member is guilty of acts or over decisions of quasi-judicial bodies (Monetary liabilities as they become due in the voidable, unenforceable, or rescissible.
operations which are fraudulent or illegal; Board) under Rule 45 of the Rules of Court. This ordinary course of business (Sec. 30[a]) (Producers Bank v. NLRC, G.R. No. 118069,
c. The member is physically, or mentally is different from a special petition for certiorari for 1998; First Philippine International Bank v. CA,
incapacitated and such incapacity lasted bank closures under Sec. 30 of the NCBA. Either is sufficient ground to close a bank. G.R. No. 115849, 1996)
for more than 6 months;
d. The member is subsequently disqualified A. Conservatorship Remuneration of a Conservator
under NCBA, Sec. 9. (Sec. 10)
A tool in restoring the viability of a bank or quasi- General Rule: The conservator shall receive
Powers and Functions of the Monetary Board bank through measures to address its state of remuneration in an amount not to exceed 2/3 of
a. Issue rules and regulations; illiquidity. For this purpose, the Monetary Board the salary of the president of the institution (i.e.
may appoint a conservator. (Sec. 29)
Page 210 of 393 Page 211 of 393

the bank under conservatorship) in 1 year, C. Receivership g. Has willfully violated a cease-and-desist b. Involuntary Liquidation (Sec. 30)
payable in 12 equal monthly payments. order under NCBA, Sec. 37
The PDIC manages the affairs of the closed bank (Administrative Sanctions) that has Modes of Liquidation
Exception: A conservator connected with the and preserves its assets for the benefit of become final and involves acts or a. Conventional liquidation.
BSP, in which case said conservator shall not be creditors. (New PDIC Charter, Sec. 10[a][b]) transactions which amount to fraud or a b. Purchase of Assets and/or Assumption of
entitled to receive any remuneration or dissipation of assets; (Sec. 30[d]) Liabilities
emolument. (Sec. 29) Note: The receiver also has the duty to continue h. If a bank persists in conducting its
with the liquidation; thus, PDIC as receiver is also business in an unsafe or unsound Note: This shall be further discussed under the
Note: If at any time within one-year period, the the liquidator. (Id., Sec. 4[c]) manner. (GBL, Sec. 56) topic on PDIC.
conservatorship is terminated on the ground that
the institution can operate on its own, the The appointment of a receiver operates to Close Now-Hear Later Doctrine Judicial Remedy from the decision of the
conservator shall receive the balance of the suspend the authority of the bank and of its Due process does not necessarily require prior Monetary Board of BSP placing a bank under
remuneration which he would have received up to directors and officers over its property and hearing; a hearing or an opportunity to be heard conservatorship, receivership, or liquidation
the end of the year; but if the conservatorship is effects. (Villanueva v. CA, G.R. No. 114870, may be subsequent to closure. One can just
terminated on other grounds, the conservator 1995) imagine the dire consequences of a prior hearing; Final and Executory. The action of the Monetary
shall not be entitled to such remaining balance. bank runs would be the order of the day, resulting Board in placing a bank under conservatorship or
(Id.) Requisites for Placement of a Bank under in panic and hysteria. In the process, fortunes placing it under receivership or liquidation shall
Receivership may be wiped out and disillusionment will run the be final and executory and, as a general rule, may
Expenses 1. Report of the head of the supervising gamut of the entire banking community. (Rural not be restrained or set aside by the court.
The expenses attendant to the conservatorship department involving the bank; Bank of Buhi, Inc. vs. CA, G.R. No. L-61689,
shall be borne by the bank or quasi-bank 2. Finding of the Monetary Board of the 1988) Nature of Action
concerned. (Id.) existence of any of the grounds for A petition for certiorari on the ground that the
receivership; The purpose is to prevent unwarranted action taken was in excess of jurisdiction or with
Termination of Conservatorship 3. Decision of the Monetary Board to forbid dissipation of the bank’s assets and as a valid such grave abuse of discretion as to amount to
a. When the Monetary Board is satisfied the institution from doing business which exercise of the police power to protect the lack or excess of jurisdiction.
that the institution can continue to decision may be done summarily and depositors, creditors, stockholders, and the
operate on its own and the without need of prior hearing; and general public. (Central Bank of the Philippines v. Petitioner
conservatorship is no longer necessary; 4. Notice in writing to the Board of Directors CA, G.R. No. 72200, 1993) Petition is filed by the stockholders of record
b. When the Monetary Board determines informing the institution of the Order of representing the majority of the capital stock
that the continuance in business of the the Monetary Board. D. Liquidation within ten (10) days from receipt by the board of
institution would involve probable loss to directors of the institution of the order directing
its depositors or creditors, in which case, Grounds for Receivership The recovery and conversion of assets into cash receivership, liquidation, or conservatorship.
proceedings for receivership and When the Monetary Board finds that a bank or for distribution to all creditors in accordance with (Sec. 30)
liquidation shall be pursued. (Id.) quasi-bank: the rules on concurrence and preference of
a. Notified the BSP or publicly announced credits. PDIC is the receiver and liquidator (AM Court of Appeals
B. Closure a unilateral closure; (Sec. 30[a]) No. 19-12-02-SC, Sec. 1 (m), Rule 2). The petition for certiorari must be filed with the
b. Has been dormant for at least sixty (60) CA, not the SC, in accordance with Rule 65, since
For banks, the Monetary Board may summarily days; (Id.) Note: With the removal of the 90-day the Monetary Board is a quasi-judicial agency.
and without need for prior hearing forbid the c. Suspended the payment of its deposit or receivership to determine if the bank can still be (Vivas, et al. v. Monetary Board, G.R. No.
institution from doing business in the Philippines deposit substitute liabilities continuously rehabilitated, a bank placed under receivership is 191424, 2013)
and designate the PDIC as receiver. The PDIC is for more than 30 days; (GBL, Sec 53) considered also as under liquidation.
directed to proceed with the liquidation of the d. Is unable to pay its liabilities as they Note: Other decisions of the Monetary Board
closed bank. become due in the ordinary course of Types of Liquidation acting as a quasi-judicial body can be elevated to
business (“Equity test”) a. Voluntary liquidation the Court of Appeals by way of a petition for
The Monetary Board shall notify in writing, In case of the voluntary liquidation of any review under Rule 45.
through the PDIC, the board of directors of the Exception: Inability to pay caused by bank organized under the laws of the
closed bank of its decision. (Sec. 30) extraordinary demands induced by Philippines, or of any branch or office in Involuntary dissolution and liquidation
financial panic in the banking community the Philippines of a foreign bank, written CORPORATION NCBA (MONETARY
Note: Formerly, there was a 90-day period to (bank run). (Sec. 30[a]) notice of such liquidation shall be sent to CODE (SEC) BOARD, PDIC)
determine whether the bank can still be the Monetary Board before such Filing of Complaint
rehabilitated. e. Has insufficient realizable assets to liquidation is undertaken, and the Requires filing of a Monetary Board may
meet its liabilities (“Balance Sheet Monetary Board shall have the right to verified complaint and summarily and without
Test”); (Sec. 30[b]) intervene and take such steps as may be proper notice and need for prior hearing,
f. Cannot continue business without necessary to protect the interests of hearing forbid the bank from
involving probable losses to its creditors. (GBL, Sec. 68) doing business
depositors and creditors; (Sec. 30[c])
Page 212 of 393 Page 213 of 393

Prior to dissolution 8. ADMINISTRATIVE SANCTIONS ON 2. Lending or foreign exchange the commission of the prohibited practices or
Requires a BIR Tax PDIC shall SUPERVISED ENTITIES operations or authority to violations. (Sec. 37)
Clearance; SEC shall immediately gather accept new deposits or make new
issue final order of and take charge of all The imposition of administrative sanctions shall investments; (Sec. 37(c)) Procedure on CDO
dissolution after its assets and be fair, consistent, and reasonable. (Sec. 37) 3. Interbank clearing privileges; This is in the nature of a reconsideration of the
submission of tax liabilities and/or (Sec. 37(d)) order. The respondents shall be afforded an
clearance Supervised entities 4. Quasi-banking or other special opportunity to defend their action in a hearing
Authority of the corporation in the dissolution The Monetary Board may impose administrative licenses, including its before the Monetary Board or any committee
Corporation is allowed Bank is not given the sanctions upon: (1) its supervised entities i.e., revocation. (Sec. 37(e)) chaired by any Monetary Board member created
to undertake its own option to undertake its those covered by BSPs supervision and for the purpose, upon request made by the
liquidation or at any own liquidation examination powers, and (2) their directors, Governor respondents within five (5) days from their receipt
time during 3 years officers, or employees. (Sec. 37) Authorized to impose fines not in excess of of the order. Otherwise, the CDO shall become
after its dissolution P100,000 for each transactional violation or final. (Id.)
(In re: Petition for Assistance in the Liquidation of Acts subject to administrative sanction P30,000 per calendar day for violations of a
the Rural Bank of Bokod Benguet, Inc., PDIC v. a. Willful violation of its charter or by-laws; continuing nature. The imposition is final and Injunctions and/or restraining orders
BIR, G.R. No. 158261, 2006) b. Willful delay in the submission of reports executory until reversed, modified, or lifted by the No court, other than the Court of Appeals and the
or publications thereof as required by Monetary Board on appeal. (Sec. 37) Supreme Court, shall issue any temporary
Exclusive jurisdiction of the Liquidation Court law, rules and regulations; restraining order, preliminary injunction, or
Liquidation court is a court where the PDIC as c. Refusal to permit examination into the Resignation or termination from office shall not preliminary mandatory injunction against the BSP
receiver files a petition for assistance in the affairs of the institution; exempt such director, officer, or employee from for any action under the NCBA.
liquidation (judicial liquidation). d. Willful making of a false or misleading administrative or criminal sanctions. (Id.)
statement to the Board or the appropriate Any restraining order or injunction issued in
General Rule: In a judicial liquidation of an supervising and examining department or Administrative Due Process violation of this section is void and of no force and
insolvent bank, all claims against the bank should its examiners; The Monetary Board, as an administrative effect. (Sec. 38-a)
be filed in the liquidation proceeding. (In re: e. Willful failure or refusal to comply with, or agency, is legally bound to observe due process,
Petition for Assistance in the Liquidation of the violation of, any banking law or any order, although they are free from the rigidity of 9. SUPERVISION AND REGULATION OF
Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, instruction or regulation issued by the procedural requirements. The essence of due BANK OPERATIONS
G.R. No. 158261, 2006) Monetary Board, or any order, instruction process is to be afforded a reasonable
or ruling by the Governor; or opportunity to be heard and to submit any A. Loans and other credit accommodations
Exceptions: f. Commission of irregularities, and/or evidence. Petitioners having availed of their
a. When re-filing and re-litigating the case conducting business in an unsafe or opportunity to present their position by letters- As the “lender of last resort” (LOL), the BSP is
before the liquidation court would be an unsound manner as may be determined explanation were not denied due process. authorized to extend rediscounts, discounts,
exercise in futility in view of the number by the Monetary Board. (Sec. 37) (Busuego, et al vs. CA, G.R. No. 95326, 1999) loans and advances to banking institutions
of years the case has been on trial and only. The purpose is limited to influencing the
additional expenses to the party who is Administrative sanctions Preventive suspension volume of credit consistent with the objective of
living in poverty. (Valenzuela v. CA, G.R. Both the Monetary Board and the Governor The Monetary Board has authority to issue price stability and maintenance of financial
No. L-56168, 1988) have administrative disciplinary jurisdiction and preventive suspension orders for up to 120 days stability. (Sec. 81)
b. When more inconveniences would be authority to impose sanctions. for bank officers, directors, and employees. After
caused to the parties, entailing waste of the lapse of the said period, they can be Types of Credit Operations
more money and precious time Monetary Board reinstated unless delay is due to their fault.
(Carandang v. CA, G.R. No. L-44932, a. Fines Normal credit operations
1988); and 1. Not to exceed P1,000,000 for each When suspension is only preventive in nature, no a. Commercial Credits. With maturities of
c. When the issue is the validity of contracts transactional violation, or notice or hearing is necessary. Until such time not more than 180 days related to:
upon which a claim is based. 2. P100,000 per calendar day for that suspended directors have proved their 1. Importation, exportation, purchase
violations of a continuing nature innocence, they may be preventively suspended or sale of readily saleable goods
Note: Even if the case falls within the exceptions, 3. Disgorgement. In case profit is from holding office so as not to influence the and products, or their
the claimant should still file the adjudicated claim gained or loss is avoided as a conduct of investigation, and to prevent the transportation within the
with the liquidator or liquidation court for result of the violation, a fine no commission of further irregularities. (Busuego, et Philippines; or
processing of claims to determine the proper more than three (3) times the profit al v. CA, G.R. No. 95326, 1999) 2. Storing of non-perishable goods
concurrence and preference of credit among the gained, or loss avoided. (Sec. and products which are duly
different creditors of the bank. (Cudiamat v. 37(a)) Cease and desist order (CDO) insured and deposited in
Batangas Savings Bank, G.R. No. 182403, 2010) A CDO, which is immediately executory, can be authorized bonded warehouses or
b. Suspension of: issued by the Monetary Board if the institution in other places approved by the
1. Rediscounting privileges or access and/or the directors, officers or employees Monetary Board. (Sec. 82[a])
to BSP credit facilities; (Sec. 37(b)) concerned continue with or otherwise persist in
Page 214 of 393 Page 215 of 393

b. Production Credits. With maturities of e. Disbursed in 2 tranches: iii. Portfolio ceilings B. LAWS ON SECRECY OF BANK
not more than 360 days related to the 1. 1st tranche (25% of total deposits DEPOSITS
production or processing of agricultural, secured by first class collaterals To prevent or check an expansion of bank credit
animal, mineral, or industrial products. (government securities, secured (to prevent excessive credit risks concentration 1. PURPOSE
(Sec. 82(b)) government guarantees and other and diversify risks), an upper limit may be placed
c. Other Credit. Special credit instruments acceptable collaterals) on the following: R.A. No. 1405 (Bank Secrecy Law) covers
not otherwise re-discountable for 2. Subsequent tranches (vote of at a. Amount of loans and investments which deposits in Peso while R.A. No. 6426 (Foreign
commercial and production credits. (Sec. least 5 members, the Monetary the banks may hold; or Currency Deposits Act) covers deposits in foreign
82(c)) Board with indemnity undertaking b. Rate of increase of such assets within currency. Its purpose is as follows:
d. Advances. The BSP may grant and adequate security (Id.) specified periods of time. (Sec. 107) a. To give encouragement to the people to
advances, not to exceed 80% of the deposit their money in banking
current market value, against the B. Selective regulation Note: Uniform application to all banks or specific institutions; and
following collaterals for fixed periods: categories without discrimination (NCBA, Sec. b. To discourage private hoarding so that
1. Gold coins or bullion Guiding principles of the Monetary Board 85, 84,96, 104 and 107). There is no retroactivity the same may be properly utilized by
2. Securities issued by BSP and a. The supply, availability, and cost of – it can only be applied on the date of notification. banks in authorized loans to assist the
other recognized solvent domestic money are in accord with the needs of the (Id.) economic development of the country.
institutions; Philippine economy (RA 1405, Sec. 1)
3. Commercial and production credit b. Bank credit is not granted for speculative iv. Minimum capital ratios
instruments (maximum 180 days); purposes prejudicial to the national State Policy
4. Utilized portions of advances in interests, and, Monetary Board may (1) prescribe minimum risk- It is hereby declared the policy of the state to
overdraft commercial and c. Regulations shall be applied to all banks based capital adequacy ratios based on protect and preserve the integrity and
production credit instruments; of the same category uniformly and internationally accepted standards and may alter confidentiality of bank accounts. (AMLA, Sec. 2)
5. Government securities and without discrimination. (Sec. 104) said ratios whenever it deems necessary, and (2)
Negotiable bonds with maturity of may require banks to hold capital beyond the Construction of confidentiality
3 and 10 years, respectively. (Sec. i. Margin requirement against letters of credit minimum requirements commensurate to their If there are doubts in upholding the absolutely
82(d)) risk profile. (Sec. 108) confidential nature of bank deposits against
Margin is a deposit of money made by the affirming the authority to inquire into such
Special Credit Operations purchaser or seller of goods. A lower margin 10. RATE OF EXCHANGE accounts, such doubt must be resolved in favor of
Non collateralized but with maturity not to exceed means the importer will only deposit a small confidentiality. (Republic v. Eugenio, G.R. No.
7 days and limited to the purpose of providing amount to enable him to access bank credit. Exchange rate. It is the price of a unit of foreign 174629, 2008)
liquidity to the banking system in times of need. Higher margin means the importer will carry a exchange in terms of domestic currency (e.g., 1
(Sec. 83) higher financing burden of the importation. US$ = Php 53).
2. PROHIBITED ACTS
Emergency Credit Operations The Monetary Board may at any time prescribe The Monetary Board shall determine the
Peso Deposits
This is granted only to banks under the following minimum cash margins (as a percentage) for the exchange rate policy of the country. (Sec. 74).
All deposits of whatever nature with the banks in
circumstances: opening of letters of credit and may relate the size The present policy is a floating rate system, which
the Philippines, including investments in the
a. In periods of national and/or local of the required margin to the nature of the is market driven.
government bonds are considered absolutely
emergency or of imminent financial panic transaction to be financed. (Sec. 105)
confidential and may not be examined, inquired,
– when these directly threaten monetary or looked into by any person except as allowed
and financial stability; and ii. Required security against bank loans
by law. (RA 1405, Sec. 2)
b. During normal periods - To assist a bank
in a precarious financial condition or To promote liquidity and solvency of the banking
The following are liable under RA No. 1405:
under serious financial pressures brought system, BSP may issue regulations on the
a. Any person or government official who
by unforeseen events, or events which, following:
examines, inquires, or looks into bank
though foreseeable, could not be a. Maximum permissible maturities of loans
deposits or government bond
prevented by the bank concerned. (Sec. and investments (short, medium, or long
investments in any instance not allowed
84) term, but BSP issuances are guidelines,
by law.
not fixed limits).
b. Any official or employee of the banking
Subject to compliance with the following b. Kind and amount of security (real estate,
institution who makes a disclosure
conditions: chattels, intangibles) to be required
concerning bank deposits to another in
a. Bank is not insolvent against the various credit operations of
any instance not allowed by law (Id., Sec.
b. Secured by first class or acceptable banks. (Sec. 106)
3); and
collaterals c. Any person who commits a violation of
c. Limited to equivalent of 50% of deposits any provision of this law. (Id., Sec. 5)
d. Upon an affirmative vote of at least five
(5) Monetary Board members, and
Page 216 of 393 Page 217 of 393

Foreign Currency Deposits Note: Other funds or properties in the bank which Deposits with any Banking Institution, 3. A taxpayer, information on whose
All foreign currency deposits are absolutely are not in the nature of deposits are still Sec. 2). account is requested by a foreign
confidential and cannot be examined, inquired, or confidential. No director, officer, employee, or tax authority. (NIRC, Sec. 6(f))
looked into by any person, government official, agent of any bank shall, without order of a court Fishing for information as to the amount of
bureau, or office, whether judicial or of competent jurisdiction, disclose to any damages it can recover does not fall within the c. Unclaimed balances. Disclosure to the
administrative or legislative, or any other private unauthorized person any information relative to exception. Since the subject matter of the dispute Treasurer of the Philippines for dormant
or public entity. (RA No. 6426, Sec. 8) the funds or properties in the custody of the bank is not the money deposited in the drawer's deposits for at least 10 years. (Act 3936,
belonging to private individuals, corporations, or account, it does not, by itself, warrant the Sec. 2)
The following are liable under RA No. 6426: any other entities. (GBL, Sec. 55(1)(b)) examination of the bank deposits. (Union Bank
a. Any person or government official who vs. CA, GR No. 134699, 1999) d. BSP periodic or special examination.
examines, inquires, or looks into foreign 4. EXCEPTIONS To ensure compliance of the covered
currency deposits without written The subject matter of the action is to be institution with the Anti Money
permission of the depositor. (Id., Sec. 8) Grounds to allow examination of a bank determined from the indictment that charges Laundering Act. (NCBA, Sec. 25; RA
b. Anyone who shall attach, garnish, or account under Section 2 of RA No. 1405: respondent with the offense, and not from the 9160 – Anti-Money Laundering Act
subject the foreign currency deposit to a. Where the depositor consents in evidence sought. The information charges (AMLA), Sec. 11)
any other order or process of any court, writing. qualified theft. There was no mention of the
legislative body, or other administrative supposed bank account in which the funds Annual testing solely limited to the
body. (Id.) Note: A waiver of rights (RA 1405) must represented by the checks have allegedly been determination of the existence and true
c. Any official or employee of the banking be voluntary, knowingly, intelligently, and kept to allow testimony on the bank account. identity of the owners of the accounts.
institution who makes a disclosure with sufficient awareness of the relevant (BSB Group vs. Go, GR No. 168644, 2010) (AMLA, Sec. 9[a])
concerning bank deposits to another in circumstances and likely consequences.
any instance not allowed by law. (Id., There must be evidence to show an e. Human Security Act (RA 9372). After
Inquiry into the whereabouts of the amount
Sec. 10) actual intention to relinquish the right. determining existence of probable cause,
converted necessarily extends to whatever is
d. Any person who commits a violation of Mere silence on the part of the holder of concealed (being in the name of persons other the Court of Appeals may authorize
any provision of this law as well as the right should not be construed as a than the one responsible for the illegal examination of and gathering of
regulation of the Monetary Board surrender thereof. (Doña Adela Export information on deposits, placements,
acquisition) inasmuch as the case is aimed at
pursuant to this law. (Id.) International, Inc. v. TIDCORP, G.R. No. trust accounts, assets, and records in a
recovering the amount converted. (Mellon Bank
201931, 2015) v. Magsino, G.R. No. 71479, 1990) bank or financial institution; (RA 9372,
3. DEPOSITS COVERED Sec. 27) of the following:
Examples of waiver: Waiver in case of 1. A person charged with or
Additional exceptions to the Secrecy of Bank suspected of the crime of terrorism
Peso Deposits. All (peso) deposits of whatever DOSRI loans (NCBA, Sec. 26) and
Deposits Act or conspiracy to commit terrorism;
nature with banks or banking institutions in the waiver of a taxpayer in case of
a. Violations of Anti-Graft and Corrupt 2. Any judicially declared and
Philippines including trust accounts. (Ejercito v. compromise of tax liability. (Tax Code,
Practices Act. Section 8 of RA 3019 outlawed terrorist organizations,
Sandiganbayan, G.R. No. 157294-95, 2006) Sec. 6[f])
directs that bank deposits shall be taken associations, or group of persons;
into consideration in its enforcement, or
Deposits refer to money or funds placed in a b. Impeachment Cases. It is necessary
notwithstanding any provision of the law 3. Any member of such organization,
bank which can be withdrawn on depositor’s that there be an order issued by the
to the contrary. (PNB v. Gancayco, GR. association, or group of persons in
order or demand. It is characterized as being in impeachment court or by its authorized
No. L-18343, 1965) a bank or financial institution and
the nature of a simple loan and creates a creditor- officer to allow examination.
debtor relationship between the depositor and the the gathering of any relevant
The Courts are authorized to examine information about the same from
bank. (NCC, Art. 1980) While trust funds are It is limited to Peso deposits, as it is not
bank deposits of spouses and unmarried said bank or financial institution.
different, by jurisprudence, this is included in the an exemption to the absolute
children of government officials found to (RA 9372, Sec. 28)
broad category of deposits under RA 1405. confidentiality of foreign currency
have unexplained wealth under RA 3019
deposits under RA 6426. (Philippine
– Anti-Graft and Corrupt Practices Act. f. Anti-Money Laundering Act (AMLA).
Investment in bonds issued by the Government Savings Bank v. Senate, G.R. No.
(RA 3019, Sec. 8) Upon order of a competent court in cases
of the Philippines, its political subdivisions, and its 200238, 2012)
instrumentalities. (RA 1405, Sec. 2) of violation of the AMLA where there is
b. Commissioner of Internal Revenue probable cause of money laundering,
c. By Court Order in cases of;
(CIR). The CIR can inquire into the bank except that no court order is required in
Foreign currency deposits (RA No. 6426) and 1. Bribery
accounts of the following taxpayers: cases of:
deposits in offshore banking units (PD No. 1246, 2. Dereliction of duty of public
1. A decedent to determine his gross 1. Kidnapping for ransom
Sec. 8) are considered as absolutely confidential. officials
estate; 2. Drug trafficking
RA No. 6426 only provided for written permission
2. Any taxpayer who has filed an 3. Hijacking, destructive arson, and
of the depositor as an exception. However, other d. Money invested or deposited is
application for compromise of his murder including those
exceptions evolved by jurisprudence and subject of litigation (RA 1405 – An Act
tax liability on the ground of perpetrated by terrorists against
statutes. Prohibiting Disclosure of or Inquiry into
financial incapacity; and
Page 218 of 393 Page 219 of 393

non-combatants and similar and their subsidiaries and affiliates 5. BSP and PDIC when there is a 6. PENALTIES FOR VIOLATION
targets. (AMLA, Sec. 11) concerning: finding of unsafe or unsound
1. Any property or funds that are in banking practice. (Id., Sec. 8) Bank Secrecy Law
g. Plunder. Sec. 1(d) and 4 of the Plunder any way related to financing of 6. COA and PCGG. (1987 Imprisonment of not more than five (5) years, or
Law (RA 7080). terrorism or acts of terrorism; or Constitution, Art. IX (D), Sec. a fine of not more than twenty thousand pesos
2. Any property or funds of any 2(1); EO 1, Sec. 3[e]) (Php 20,000), or both, at the discretion of the
Plunder (RA 7080, Sec. 2), which is person or persons in relation to court. (RA 1405, Sec. 5)
amassing or accumulating ill-gotten whom there is probable cause to c. Jurisprudence (equity). The following
wealth by series of overt or criminal acts, believe that such person or exceptions are provided on grounds of Foreign Currency Deposits Act
is also analogous to bribery. Therefore, persons are committing or equity. Imprisonment of not less than one (1) year but not
the exception to R.A. 1405 applicable in attempting or conspiring to commit 1. Account of non-resident alien more than five (5) years, or fine not less than five
cases of bribery must also apply to cases or participating in or facilitating the found guilty of raping a minor thousand pesos (Php 5000) but not more than
of plunder. (Ejercito v. Sandiganbayan, financing of terrorism or acts of was allowed on the basis of twenty five thousand pesos (Php 20,000.) or both.
G.R. Nos. 157294-95, 2006) terrorism. (RA 10168, Sec. 10) equity. (Salvacion v. Central (RA 6426, Sec. 10)
Bank of the Philippines, G.R.
h. Unsafe and unsound banking k. Bank Resolution. When there is a failure 94723, 1997)
practices. BSP and PDIC may inquire of Prompt Corrective Action as declared 2. A co-payee of a check who filed
into bank deposits (both Peso and by the Monetary Board due to capital a suit for recovery of a sum of
Foreign Currency Deposits) and all deficiency, the PDIC or its duly money was considered as a
information related thereto if there is a authorized officers or employers may depositor because of the
finding of unsafe or unsound banking examine, inquire, or look at the deposit distinctive circumstances of the
practice. (New PDIC Charter, Sec. 9) records of the bank. (New PDIC Charter, case. (China Banking
Sec. 11[c]) Corporation v. Court of Appeals,
i. In-Camera Inspection. The G.R. 14068, 2006)
Ombudsman is granted the express The information cannot be shared by
powers to examine and have access to PDIC to other persons, including the 5. GARNISHMENT OF DEPOSITS,
bank accounts and records. (RA 6770 – BSP. INCLUDING FOREIGN DEPOSITS
Ombudsman Act, Sec. 15)
l. Presidential Commission on Good Peso deposits
Requisites: Governance (PCGG). Investigation by RA 1405 does not preclude deposits from being
1. Pending case before a court of the PCGG to recover ill-gotten wealth garnished to ensure satisfaction of a judgment.
competent jurisdiction; (EO 1, Sec. 3[e]) There is no real inquiry in such a case, and if the
2. Account must be clearly identified; existence of the deposit is disclosed, the
3. The inspection is limited to the m. Commission on Audit (COA). Audit on disclosure is purely incidental to the execution
subject matter of the pending case; government deposits by the COA. (1987 process. (China Bank v. Ortega, G.R. L-34964,
4. The bank personnel and the Constitution, Art. IX (D), Sec. 2[1]) 1973)
account holder must be notified to
be present during the inspection, Grounds for Disclosure of Foreign Currency Foreign currency deposits
and such inspection may cover Deposits. Anyone who shall attach, garnish, or subject this
only the account identified in the a. Upon written permission of depositor to order or process of any court, legislative body,
pending case. (Marquez v. b. Under Other Laws (as discussed) government agency or other administrative body
Desierto, G.R. 135882, 2001) 1. CIR. (NIRC, Sec. 6[f]) shall be held liable. (RA 6426, Sec. 8)
2. AMLC – with our without a court
Note: An investigation by the Office of the order under the AMLA and Note: Jurisprudence created 2 exceptions on
Ombudsman is not a pending litigation to Terrorism Financing Prevention ground of equity as discussed earlier.
allow examination of a bank account. and Suppression Act. (AMLA,
(Marquez v. Desierto, G.R. No. 135882, Sec. 11; RA 10168, Sec. 10) Note: Deposits maintained by banks with the
2001) 3. BSP in limited examination to BSP as part of their reserve requirements shall be
ensure compliance of supervised exempt from attachment, garnishments, or any
j. Terrorism Financing Prevention and institutions to AMLA. (AMLA, other order or process of any court, government
Suppression Act (RA 10168). The Anti- Sec. 11) agency, or any other administrative body issued
Money Laundering Council (AMLC), 4. PDIC in banking resolution when to satisfy the claim of a party other than the
without a court order, is authorized to there is failure of PCA. (New Government, or its political subdivisions, or
inquire into or examine bank deposits PDIC Charter, Sec. 11[c]) instrumentalities. (NCBA, Sec. 103)
and investments with any banking
institution or non-bank financial institution
Page 220 of 393 Page 221 of 393

C. GENERAL BANKING ACT b. Discounting and negotiating promissory Islamic Investment Bank of the Philippines, Sec. for the borrower's own account, for the purpose
notes, drafts, bills of exchange, and other 3) of relending or purchasing of receivables and
1. DEFINITION AND CLASSIFICATION OF evidence of debt; other obligations. (NCBA, Sec. 95)
BANKS c. Accepting or creating demand deposits; Islamic banking is based on the Islamic concept
d. Receiving other types of deposits and of banking: risk sharing rather than speculation. The phrase “obtaining funds from the public”
Banks deposit substitutes; Essentially, this is based on basic principles and shall mean borrowing from twenty (20) or more
Entities engaged in the lending of funds obtained e. Buying and selling foreign exchange and rulings of Sharia, or Islamic law. interest (riba) is lenders at any one time. (Id.)
in the form of deposits. (GBL, Sec. 3.1) gold or silver bullion; prohibited. (RA 11439 – An Act Providing for the
f. Acquiring marketable bonds and other Regulation and Organization of Islamic Banks, For this purpose, “lenders” shall refer to
Note: Banks have a primary franchise from the debt securities; and Sec. 2[a][4]) individuals and corporate entities that are not
Securities and Exchange Commission (SEC) and g. Extending credit, subject to such rules as acting as financial intermediaries, subject to
a secondary banking franchise from the BSP. Its the Monetary Board may promulgate. Note: There are two existing laws on Islamic the safeguards and regulations issued by the
corporate powers are exercised within its banking (Sec. 29) Banks, (1) RA No. 6848, and (2) R.A. No. 11439. Monetary Board. (Id.)
license. The latter law is a legal framework which allows
Unlike Universal Banks, Commercial Banks can the creation of Islamic banks in the Philippines. Note: The definition of deposit substitutes in the
Elements invest only in allied enterprises (bank-related banking laws was brought about by an
a. Engaged in lending of funds activities), which may be financial or non- Foreign Banks observation that banks and non-bank financial
b. Obtained in the form of deposits financial. (Secs. 30, 31, and 32) A foreign bank is a banking corporation formed, intermediaries have increasingly resorted to
c. From the public, which shall mean 20 or organized or existing under any law other than issuing a variety of debt instruments, other than
more persons Thrift Banks those of the Republic of the Philippines. (RA bank deposits, to obtain funds from the public.
They are organized for the purpose of, among 11232 – Revised Corporation Code, Sec. 140) (BDO v. RCBC, G.R. No. 198756, 2016)
How Banks are Structured other things, accumulating savings of depositors
General Rule: Banks are corporations. (Sec. and investing them with capital loans, financing Foreign banks are allowed to enter the Philippine Under the NIRC, deposit substitutes include not
8[a]) However, cooperative banks may also be homebuilding, providing short term capital, banking system under any of the following only the issuances and sales of banks and quasi-
formed under the Cooperative Code, but it has to medium and long term financing for small and modes: banks for relending or purchasing receivables
secure a secondary franchise from the BSP to medium enterprises and individuals engaged in a. Acquiring, purchasing, or owning up to and other similar obligations, but also debt
engage in banking. (RA 9520, Sec. 23[i]) agriculture, services, industry and housing. (RA 100% of the voting stock of an existing instruments issued by commercial, industrial, and
7906 - Thrift Banks Act, Sec. 3[a][1]) bank; other non-financial companies to finance their
Classification of Banks b. Investing in up to 100% of the voting own needs or the needs of their agents or
They include savings and mortgage banks, stock of a new banking subsidiary dealers. (Id.)
Universal Banks private development banks, and stock savings incorporated under the laws of the To determine whether the financial assets are
In addition to the powers authorized for a and loans associations organized under existing Philippines; or deposit substitutes, the “20 or more individual or
commercial bank in Section 29, they shall have laws. (Id.) c. Establishing branches with full banking corporate lenders” rule must apply. (Id.)
the authority to exercise the powers of an authority. (RA 10641 – An Act Allowing
investment house as provided in existing laws Rural Banks the Full Entry of Foreign Banks in the When the Government Securities Eligible Dealer
and the power to invest in non-allied enterprises Banks which are designed to make needed credit Philippines, Sec. 2) (GSED) sells the government securities to 20 or
as provided in this Act. (Sec. 23) available and readily accessible in the rural areas more investors, the government securities are
on reasonable terms. (RA No. 7353 - Rural Act, Other Classification of Banks as determined deemed to be in the nature of a deposit substitute.
Investment House Sec. 2) by the Monetary Board (Sec. 3) (BDO v. Republic, G.R. No. 198756, 2016)
It is an intermediary between security issuers and
investors. It engages in underwriting of securities, Cooperative Banks 2. DISTINCTION OF BANKS FROM QUASI- Trust Entities
among other things. (PD 129, Sec. 2) Once organized, the majority shares of which is BANKS AND TRUST ENTITIES A stock corporation, or a person duly authorized
owned and controlled by cooperatives, primarily by the Monetary Board to engage in trust
Non-allied enterprises to provide financial and credit services to Quasi-Banks business, and act as a trustee, administer any
They are non-bank related activities (e.g., cooperatives and their members. (RA 9520 – Refer to entities engaged in the borrowing of trust or hold property in trust or on deposit, for
agriculture, mining, manufacturing, public utilities, Philippine Cooperative Code, Art. 2) funds through the issuance, endorsement, or use, benefit or behoof of another (GBL. Sec. 79)
etc.). (MORB – Manual of Regulations for Banks, assignment with recourse or acceptance of
Appendix 19) Islamic Banks deposit substitutes as defined in NCBA, Sec. 95 Bank, Quasi-Bank, and Trust Entity
Created by Congress to promote and accelerate for purposes of relending or purchasing of BANK QUASI-BANK TRUST
Commercial Banks socio-economic development of the Autonomous receivables and other receivables. (Sec. 4[3]) ENTITY
They shall have, in addition to the general powers Region by performing banking, financing, and Entities Entities Entities
incident to corporations: investment operations and to establish and Deposit Substitutes engaged in engaged in the engaged in
a. All such powers as may be necessary to participate in agricultural, commercial, and An alternative form of obtaining funds from the the lending of borrowing of trust,
carry on the business of commercial industrial ventures based on the Islamic concept public, other than deposits, through the issuance, funds funds through investment
banking such as accepting drafts and of banking. (RA 6848 – Charter of the Al-Amanah endorsement, or acceptance of debt instruments obtained in the issuance or management,
issuing letters of credit; acceptance of and fiduciary
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the form of deposit business in aid of any political party or candidate or accepted standards, including those of 5. NATURE OF BANK FUNDS AND BANK
deposits. substitutes for methodology. for purposes of partisan political activity; the BIS; and DEPOSITS
the purpose of j. To establish pension, retirement, and b. Exempt particular categories of
relending or other plans for the benefit of its directors, transactions from such ratios, ceilings By the nature of its business, banks derive its
purchasing trustees, officers, and employees; and and limitations, but not limited to funds principally from its deposit taking or quasi-
receivables or k. To exercise such other powers as may be exceptional cases or to enable a bank or banking operations. It also gets funds from the
other essential or necessary to carry out its quasi-bank under rehabilitation or during public when it acts as a trust entity under Chapter
obligations. purpose or purposes as stated in the a merger or consolidation to continue in IX of the GBL.
articles of incorporation. (RA 11232, Sec. business with safety to its creditors,
3. BANK POWERS AND LIABILITIES 35) depositors and the general public. (Sec. Nature of Bank Funds
5) The bank can make use as its own, the money
B. Banking and incidental powers deposited. (Tan Tiong Tick v. American
A. Corporate powers
4. DILIGENCE REQUIRED OF BANKS IN Apothecaries, G.R. No. L-43682, 1938)
Operations and activities of banks shall be
As banks are required to organize as stock VIEW OF FIDUCIARY NATURE OF
subject to BSP supervision, which shall include: Nature of Bank Deposits
corporations, they shall have the powers BANKING
a. Issuance of rules of conduct or the Bank deposits are in the nature of irregular
enumerated under Sec. 35 of the Revised
establishment of standards of operation deposits. Fixed, savings, and current deposits of
Corporation Code: Highest Degree of Diligence
for uniform application to all institutions or money in banks and similar institutions shall be
a. To sue and be sued in its corporate The fiduciary nature of banking requires high
functions covered; governed by the provisions concerning simple
name; standards of integrity and performance. (Sec. 2)
b. Conduct of examination to determine loans. (NCC, Art. 1980)
b. To have perpetual existence unless the
compliance with laws and regulations;
certificate of incorporation provides Fiduciary relationship
c. Oversee compliance with laws and The fiduciary relationship does not "convert the
otherwise;
regulations; The bank’s obligation to observe high standards
c. To adopt and use a corporate seal; of integrity and performance is deemed written contract between the bank and its depositors
d. Regular investigation (not oftener than from a simple loan to a trust agreement, whether
d. To amend its articles of incorporation in into every deposit agreement between a bank
once a year) to determine whether it is express or implied." It simply means that the bank
accordance with the provisions of this and its depositor. (Philippine Banking Corp. v.
conducting its business on safe or sound is obliged to observe "high standards of integrity
Code; CA, G.R. No. 127469, 2004)
basis; and performance" in complying with its
e. To adopt by-laws, not contrary to law,
e. Inquire into solvency and liquidity of the obligations under the contract of simple loan.
morals, or public policy, and to amend or Banking is vested with public interest
institution; or (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013)
repeal the same in accordance with this As a business affected with public interest and
f. Enforce prompt corrective action. (Sec.
Code; because of the nature of its functions, the bank is
4) Bank Deposit as a simple loan
f. In case of stock corporations, to issue or under obligation to treat the accounts of its
sell sticks to subscribers and to sell depositors with meticulous care, always having in Bank acquires ownership of money deposited;
Examination by BSP obligation to pay the amount, but no obligation to
treasury stocks in accordance with the mind the fiduciary nature of their relationship.
When examining a bank, BSP shall have the return the same money. (Guingona, Jr. v. City
provisions of this Code; and to admit (Simex International (Manila) Inc. v CA, G.R. No.
authority to examine an enterprise that is wholly Fiscal of Manila, G.R. No. L-60033, 1984)
members to the corporation if it be a non- 88013, 1990)
or majority-owned or controlled by the bank. (Sec.
stock corporation;
7) Payment to proper party-depositor (Fultron Iron
g. To purchase, receive, take or grant, hold, Banks are expected to exercise the highest
convey, sell, lease, pledge, mortgage degree of diligence in the selection and Works Co. v. China Banking Corp., G.R. No.
BSP Authority Over Quasi-Banks and Trust 32576, 1930)
and otherwise deal with such real and supervision of their employees. By the very
Entities
personal property, including securities nature of their work, the degree of responsibility,
The BSP shall also have supervision over the Deposits are not preferred credits. (Central Bank
and bonds of other corporations, as the care and trustworthiness expected of their
operations of and exercise regulatory powers v. Morfe, G.R. No. L-38427, 1975)
transaction of the lawful business of the employees and officials is far greater than those
over quasi-banks, trust entities and other financial
corporation may reasonably and of ordinary clerks and employees. (Philippine
institutions which under special laws are subject Bank has the right to set-off or compensation.
necessarily require, subject to the Commercial and International Bank v. CA, G.R.
to BSP supervision. (Sec. 4) (Gullas v. Philippine National Bank, G.R. No.
limitations prescribed by law and the No. 121413, 2001)
Constitution; 4391, 1935)
BSP Powers Policy Direction; Ratios,
h. To enter into partnership, joint venture, Banking business is impressed with public
Ceilings, and Limitations Kinds of Deposits
merger, consolidation, or any other interest, of paramount importance thereto is the
The BSP shall provide policy direction in the a. Savings Deposits. They are interest
commercial agreement with natural and trust and confidence of the public in general, the
areas of money, banking, and credit. Thus, the bearing deposits without a stated
juridical persons; highest degree of diligence is expected, and high
Monetary Board may do the following: maturity.
i. To make reasonable donations, including standards of integrity and performance are even
a. Prescribe ratios, ceilings, limitations, or b. Negotiable Order of Withdrawal
those for the public welfare or for hospital, required of it. (Bank of the Philippine Islands v.
other forms of regulation on the different (NOW). They are interest bearing deposit
charitable, cultural, scientific, civic, or Casa Montessori Internationale, G.R. No.
types of accounts and practices of banks accounts that combine the payable on
similar purposes: Provided, That no 149454, 2004)
and quasi-banks which shall, to the demand feature and investment feature
foreign corporation shall give donations
extent feasible, conform to internationally of savings accounts.
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c. Time Deposits. They are issued for a Exclusion from computation – non risk assets use the assets of the bank for their benefit. (Go v.
specific period of time (Sec. 216, MORB), In the exercise of this authority, the Monetary For purposes of SBL coverage, loans, and other BSP, G.R. No. 178429, 2009)
and generally cannot legally be Board shall, to the extent feasible, conform to credit accommodations and guarantees shall
withdrawn before maturity or within a internationally accepted standards, including exclude those which are: General Prohibition: No director or officer of
specified number of days. (BPI Family those of the Bank for International Settlements a. Secured by obligations of the BSP or any bank shall, directly or indirectly, for himself
Savings v. First Metro Investment, G.R. (BIS). (Sec. 34) Philippine Government; or as the representative or agent of others:
132390, 2004) b. Fully guaranteed by the Government as a. Borrow from such bank;
d. Demand Deposits. They are those B. Single borrower’s limit (SBL) to the payment of principal and interest; b. Become a guarantor, endorser, or surety
liabilities of the BSP and of other banks, c. Covered by assignment of deposits for loans from such bank to others; or
which are denominated in Philippine General Rule: The total amount of loans, credit maintained in the lending bank and held c. Be an obligor or incur any contractual
currency and are subject to payment in accommodations and guarantees that may be in the Philippines; liability to the bank. (Sec. 36)
legal tender upon demand by the extended by a bank to any person, partnership, d. Under letters of credit, to the extent
presentation of checks. Only banks duly association, corporation, or other entity shall not covered by margin deposits; A stockholder to fall under this provision should
authorized by the BSP may issue exceed 20% of the net worth of such bank. The e. Those which the Monetary Board may, own at least 1% of the subscribed capital of the
demand deposits. (NCBA, Sec. 59) basis for determining compliance with single from time to time, specify as non-risk bank. (MORB, Sec. 341[c])
borrower limit is the total credit commitment of items. (Sec. 35.5.)
Checks representing demand deposits do not the bank to the borrower. (Sec. 35.1) An indirect borrowing includes one that is made
have legal tender power and their acceptance in Inclusion of Parent Corporation by a third party, but the DOSRI has a stake in the
the payment of debts, both public and private, is Exception: The SBL may be increased by an Even if a parent corporation, partnership, transaction; a case where the DOSRI acted for
at the option of the creditor. However, a check additional 10% of Net Worth of such bank association, entity, or an individual who owns or his own benefit, using the name of an
which has been cleared and credited to the provided the additional liabilities of any borrower controls a majority interest in such entities has no unsuspecting person and using dummies to
account of the creditor shall be equivalent to a are adequately secured by trust receipts, liability to the bank, the Monetary Board may circumvent the requirements of the law. (Soriano
delivery to the creditor of cash in an amount equal shipping documents, warehouse receipts, or prescribe the combination of the liabilities of v. BSP, G.R. No. 162336, 2010)
to the amount credited to his account. (NCBA, other similar documents transferring or securing subsidiary corporations or members of the
Sec. 60) title covering readily marketable, non-perishable partnership, association, entity or such individual Related Interest is considered as indirect
goods which must be fully covered by insurance. under certain circumstances, including but not borrowing or the Directors, Officers and
6. GRANT OF LOANS AND SECURITY It shall include: limited to any of the following situations: Stockholders.
a. Direct liability of the maker or acceptor of a. Parent corporation, partnership, a. Spouse or relative within the first degree
REQUIREMENTS
paper discounted with or sold to such association, entity, or individual (including adoption)
bank and the liability of a general guarantees the repayment of the b. Partnership where the spouse or relative
A. Ratio of net worth to total risk assets
endorser, drawer or guarantor who liabilities; is a general partner
obtains a loan or other credit b. Liabilities were incurred for the c. Co-ownership of the property mortgaged
The Monetary Board shall prescribe the minimum
accommodation from or discounts paper accommodation of the parent corporation to secure the loan or other credit
ratio which the net worth of a bank and its
with or sells papers to such bank; or another subsidiary or of the accommodations
subsidiaries must bear to its total risk assets
b. In the case of an individual who owns or partnership, association, or entity or such d. Interlocking directorship or officership
which may include contingent accounts. (Sec. 34)
controls a majority interest in a individual; or between the bank and the borrower
corporation, partnership, association or c. Subsidiaries though separate entities e. Corporation at least 20% of the capital
Risk-based Capital
any other entity, the liabilities of said operate merely as departments or stock or equity is owned by DOS of the
It is expressed as the percentage of qualifying
entities to such bank; divisions of a single entity. (Sec. 35.4) lending bank. (MORB, Sec. 341[e])
capital to risk-weighted assets.
c. In the case of a corporation, all liabilities
to such bank of all subsidiaries in which C. Restrictions on bank exposure to Exception: The director or officer may do so,
Risk-weighted Assets
such corporation owns or controls a directors, officers, stockholders, and their provided the following requirements are complied
These are assets of the bank weighted according
majority interest; and related interests with:
to risks (e.g., cash is zero risk, while non-
d. In the case of a partnership, association, a. Written approval of the majority of all the
performing loan is given a risk of 120%).
or other entity, the liabilities of the Principles directors of the bank, excluding the
members thereof to such bank. (Sec. The Monetary Board is granted the authority to director borrowing and recorded in the
Capital
35.2) regulate the amount of loans and credit books of the bank. (Sec. 36)
----------- = Ratio (CAR)
Assets accommodations extended to DOSRI. (Sec. 36) b. The reportorial requirement where
Note: The Monetary Board has set the SBL at such approval should be entered upon
25% (Sec. 303, MORB, but temporarily increased The prohibition on DOSRI loans is intended as a the records of the corporation, and a copy
Note: The existing Capital Adequacy Ratio (CAR)
to 30% for 6 months effective March 2020) of the protection against over-borrowing of bank funds of the entry be transmitted to the
requirement is 10%. It is an indicator of a bank’s
net worth. by bank’s DOSRI, as such over-borrowings may appropriate supervising department of
ability to absorb a reasonable amount of loss. The
minimum CAR requirement is a means to protect lead to bank failures. (Soriano v. BSP, G.R. No. the BSP. (Id.; Go v. BSP, GR No.
bank’s depositors and promote stability in the 162336, 2010) Banks are not created for the 178429, 2009)
banking system at the same time. benefit of their directors and officers, they cannot c. Ceiling requirement. The limit on the
amount of loans and credit
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accommodations that can be extended to The violation consists in the failure to observe and Trust Corporation (Solid Bank) v. CA, G.R. No. False statement
the bank’s DOSRI is equivalent to their comply with procedural, reportorial, or ceiling 114286, 2001) The willful making of a false or misleading
respective unencumbered deposits and requirements prescribed by law in the grant of a statement on a material fact to the Monetary
book value of their paid-in capital loan to a director, officer, stockholder and other Note: Benchmark interest rates are the reference Board or to the examiners of the BSP shall be
contribution in the bank, excluding the related interests in the bank. The elements of rate to peg the rate (e.g. Interbank Call Loan punished by a fine of not less than P100,000 nor
following: abuse of confidence, deceit, fraud or false Rate, BSP rates, Government securities rates, more than P2,000,000 or by imprisonment of not
1. Secured by assets considered as pretenses, and damage, which are essential to treasury rate benchmark, PHP BVAL rates). more than five (5) years, or both, at the discretion
non-risk by the Monetary Board; the prosecution for estafa, are not elements of a of the court. (NCBA, Sec. 35)
2. In the form of fringe benefits; or DOSRI violation. (Soriano vs BSP, G.R. Nos. Escalation Clause
3. Extended by a cooperative bank to 159517-18, 2009) It refers to stipulations allowing an increase in the Violation of the NCBA and other banking laws,
its cooperative shareholders. (Id.) interest rate agreed upon by the contracting rules, regulations, orders, or instructions
Thus, a person be held liable both for estafa parties. They are valid stipulations in commercial
d. Terms. Not less favorable to the bank through falsification of commercial documents contracts to maintain fiscal stability and to retain The persons responsible for the following
than those offered to others. (Id.) and violation of Sec. 83 of the GBL (DOSRI) for a the value of money in long term contracts. violations shall be punished by a fine of not less
e. Waiver of Secrecy. DOSRI loans are single transaction. than P50,000 nor more than P200,000 or by
also subject to the waiver of secrecy of It has to comply with the principles on mutuality of imprisonment of not less than two (2) years nor
bank deposits. (NCBA, Sec. 26) Administrative: removal. After due notice to the contracts. The contract must bind both more than ten (10) years, or both, at the discretion
board of directors of the bank, the office of any contracting parties; its validity or compliance of the court:
Requisites of a DOSRI loan: bank director or officer who violates the cannot be left to the will of one of them. (NCC, a. When a bank or quasi-bank, including
a. Borrower is a director, officer or provisions of this Section may be declared Art. 1308) their subsidiaries and affiliates, engages
stockholder of a bank; vacant. in allied activities or other entity which
b. He contracts any loan or financial The bank cannot be given an unbridled right to under this Act or special laws is subject
accommodation; D. Prohibited acts of borrowers adjust the interest independently and upwardly. to BSP supervision; or
c. Loan or financial accommodation is from: Such would negate the mutuality of contracts. b. When any person or entity willfully
1. his bank or No borrower of a bank shall engage in these (Floirendo v. Metropolitan Bank, G.R. No. violates this Act or other pertinent
2. a bank that is a subsidiary of a prohibited transactions: 148325, 2007) banking laws being enforced or
bank holding company of which a. Fraudulently overvalue property offered implemented by the BSP or any order,
both his bank and the lending bank as security for a loan or other credit If a provision neither states an increase nor a instruction, rule, or regulation issued by
are subsidiaries or accommodation from the bank; decrease in interest rate, but said clause simply the Monetary Board. (NCBA, Sec. 36)
3. a bank in which a controlling b. Furnish false, make misrepresentation, states that the interest rate should be based on
proportion of the shares is owned or suppress material facts in the loan the prevailing market rate, it violates the mutuality B. Suspension or removal of director or
by the same interest that owns a application for the purpose of obtaining, of contracts. (Polotan Sr. v. Court of Appeals, officer
controlling proportion of the shares renewing, or increasing a loan or other G.R. No. 119379, 1998)
of his bank; and credit accommodation or extending its If the offender is a director or officer of a bank,
d. The loan or financial accommodation of period; 7. PENALTIES FOR VIOLATIONS quasi-bank, or trust entity, the Monetary Board
the director, officer or stockholder, singly c. Attempt to defraud the bank in the event may also suspend or remove such director or
or with that of his related interest, is in of a court action to recover a loan or other A. Fine, imprisonment officer who violated the provisions of the GBL.
excess of 5% of the capital and surplus of credit accommodation; or (Sec. 66)
the lending bank or in the maximum d. Offer any director, officer, employee, or Refusal to make reports or permit
amount permitted by law (Sec. 36), agent of a bank any gift, fee, commission, examination C. Dissolution of bank
whichever is lower. or any other form of compensation in The willful refusal to file the required report or
order to influence them in approving a permit any lawful examination into the affairs of If the violation is committed by a corporation, such
Waiver of Secrecy of Bank Deposits loan or other credit accommodation. such institution, as required in writing by the corporation may be dissolved by quo warranto
If the loan is a DOSRI loan, the lending bank shall (Sec. 55.2 Monetary Board or the head of the supervising proceedings instituted by the Solicitor General
require the director, officer, or stockholder to and examining department, shall subject its (Id.)
waive the secrecy or confidentiality of his E. Floating interest rates and escalation officer, owner, agent, manager, director, or
deposits of whatever nature in all banks in the clauses officer-in-charge to a fine not less than P50,000
Philippines (NCBA, Sec. 26) nor more than P2,000,000 or by imprisonment of
Floating Rate of Interest not less than one (1) year nor more than five (5)
Offenses While it may be acceptable, for practical reasons years, or both, at the court’s discretion. (NCBA,
Criminal. Failure to comply with each given the fluctuating economic conditions, for Sec. 34)
requirement is already a violation of DOSRI Rules banks to stipulate that interest rates on a loan not
(prosecution of 3 offenses), and violation of each be fixed and instead be made dependent upon Note: This applies to affiliate companies whose
requirement is an offense in itself. (Go v. BSP, prevailing market conditions, there should always transactions are subject to examination under this
GR No. 178429, 2009) be a reference rate upon which to peg such Act.
variable interest rates. (Consolidated Bank and
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D. PHILIPPINE DEPOSIT INSURANCE the privileges granted to it by law may be authorized by either of them in writing to C. Deposit accounts not entitled to
CORPORATION ACT exercised and enjoyed; receive such information. (Sec. 10[e]) payment
g. To exercise all powers specifically
1. BASIC POLICY granted by the provisions of this Act, and Borrowing from any bank or banking institution by PDIC shall not pay deposit insurance for the
such incidental powers as shall be examiners and other personnel of the following accounts or transactions, whether
The Philippine Deposit Insurance Corporation necessary to carry on the powers so examination departments of PDIC shall be denominated, documented, recorded, or booked
(PDIC) shall promote and safeguard the interests granted; prohibited only with respect to the particular as deposit by the bank:
of the depositing public by providing insurance h. To conduct examination of banks with institution in which they are assigned or are a. Investment products such as bonds and
coverage on all insured deposits and helping prior approval of the Monetary Board; conducting an examination. (Sec. 9) securities, trust accounts, and other
maintain a sound and stable banking system. i. To act as receiver; similar instruments;
(New PDIC Charter, Sec. 1) j. To prescribe such rules and regulations Borrowing from any bank or banking institution by b. Deposit accounts or transactions which
as it may deem necessary to carry out the personnel of other departments, offices, or units are unfunded, fictitious or fraudulent;
2. POWERS AND FUNCTIONS OF THE provisions of this Act; of the PDIC shall be prohibited during the period c. Deposit accounts or transactions
k. The PDIC may establish its own that a transaction of such institution with the PDIC constituting, and/or emanating from,
PHILIPPINE DEPOSIT INSURANCE
provident fund which shall consist of is being evaluated, processed, or acted upon by unsafe and unsound banking practice/s,
CORPORATION; PROHIBITIONS contributions made by both by PDIC and such personnel. (Sec. 9) as determined by PDIC, in consultation
by its officers and employees to a with the BSP, after due notice and
PDIC Board of Directors common fund for the payment of benefits 3. CONCEPT OF INSURED DEPOSITS hearing, and publication of a cease and
The powers and functions of the PDIC shall be to such officers or employees or their desist order issued by PDIC against such
vested in and exercised by a Board of Directors heirs; Insured deposit deposit accounts or transactions; and
which shall be composed of 7 members. (Sec. 3) l. To compromise, condone, or release, in It is the amount due to any bona fide depositor for d. Deposits that are determined to be the
whole or in part, any claim or settled legitimate deposits in an insured bank as of the proceeds of an unlawful activity as
Composition liability to the PDIC, regardless of the date of closure but not to exceed P500,000. (Sec. defined under AMLA. (Sec.5[g])
7 members, appointed by the President of the amount involved, under such terms and 5[j])
Philippines, for a term of 6 years with 1 conditions as may be imposed by the if such recognition would increase the aggregate
reappointment: Board of Directors to protect the interest Note: This amount may be increased if there are amount of the insured deposits in such closed
a. Ex officio Chairman: Secretary of of PDIC, and to write off PDIC’s conditions which threaten the monetary and bank, neither PDIC nor such other insured bank
Finance receivables and assets which are no financial stability of the banking system that may shall be required to recognize any person as the
b. Ex officio Member: BSP Governor longer recoverable or receivable; have systemic consequences. There has to be a owner of any portion of a deposit whose name or
c. President and Vice Chairman: Appointed m. To determine qualified interested unanimous approval by the Board of Directors, interest is not disclosed on the records of the
by the President of the Philippines, to acquirers or investors for any of the chaired by the Secretary of Finance, and closed bank. (Sec. 21[c])
serve a full-time basis. modes of resolution or liquidation of approved by the President of the Philippines. (Id.)
d. 4 Members from the private sector to be banks; Pending the determination and payment of the
appointed by the President of the n. To determine the appropriate resolution 4. LIABILITY TO DEPOSITORS depositor’s liability as a stockholder of the closed
Philippines. (Id.) method and to implement the same for a bank, or of any liability to said bank or its receiver
bank subject of resolution; and A. Deposit liabilities required to be insured which is not offset against a claim due from the
Powers of PDIC o. To determine the appropriate mode of
with Philippine Deposit Insurance bank, PDIC may withhold payment of a portion of
The PDIC as a corporate body shall have the liquidation of a closed bank and to the insured deposit due to it as payment of such
following powers: implement the same. (Sec. 9) Corporation liability. (Sec. 16[e])
a. To adopt and use a corporate seal;
b. To have succession until dissolved by an Prohibitions The deposit liabilities of any bank, which is D. Extent of liability
Act of Congress; Personnel of the PDIC are prohibited from: engaged in the business of receiving deposits or
c. To make contracts; a. Being an officer, director, consultant, which thereafter may engage in the business of The maximum deposit insurance coverage is
d. To sue and be sued, complain, and employee or stockholder, directly or receiving deposits, shall be insured with the P500,000.00 per depositor, per bank. (Sec. 3)
defend, in any court of law in the indirectly, of any bank or banking PDIC. (Sec. 6)
Philippines; institution except as otherwise provided E. Determination of insured deposits
e. To appoint such officers and employees in this Act; B. Commencement of liability
as are not otherwise provided for in this b. Receiving any gift or thing of value from In determining such amount due to any depositor,
Act, to define their duties, fix their any officer, director or employee thereof: The PDIC shall commence the determination of there shall be added together all deposits in the
compensation, require bonds, and fix c. Revealing in any manner, except under insured deposits due the depositors of a closed bank maintained in the same right and capacity
penalty thereof, and to dismiss them for order of the court or authorized herein in bank upon its actual takeover of the closed bank. for his or her benefit either in his or her own name
cause; such condition or business of any such It shall give notice to the depositors of the closed or in the name of others. (Sec. 5[j])
f. To prescribe by-laws consistent with law, institution. The prohibition shall not be bank of the insured deposits due them by
regulating the manner in which its held to apply to the giving of information whatever means deemed appropriate by the
general business may be conducted, and to the Board of Directors or to any person Board of Directors. (Sec. 21[a])
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F. Calculation of liability National Government in the order of preference 5. CONCEPT OF BANK RESOLUTION
under Article 2244 of the NCC. (Id.) To avoid overlapping of efforts, the examination
i. Per depositor, per capacity rule shall maximize the efficient use of the relevant Resolution
vi. Failure to settle claim of insured depositor reports, information, and findings of the BSP, Resolution refers to the actions undertaken by the
All deposit accounts by a depositor in a closed which it shall make available to the Corporation. PDIC to:
bank maintained in the same right and capacity If there is failure to settle the claim for insured (Id.) a. Protect depositors, creditors, and the
shall be added together. (Id.) deposit within six (6) months from the date of filing Deposit Insurance Fund;
and such failure was due to grave abuse of (b) Prohibition against splitting of deposits b. Safeguard the continuity of essential
ii. Joint accounts discretion, gross negligence, bad faith, or malice, banking services or maintain financial
the responsible PDIC directors, officers, or Splitting of deposits occurs whenever a deposit stability; and
A joint account, regardless of whether the employees shall, upon conviction, be subject to account with an outstanding balance of more than c. Prevent deterioration or dissipation of
conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be imprisonment from six (6) months to one (1) year. the statutory maximum amount of insured deposit bank assets. (Sec. 5[s])
insured separately from any individually-owned (Sec. 19) maintained under the name of natural or juridical
deposit account. (Id.) persons is broken down and transferred into 2 or Grounds for Resolution
Note: The period shall not apply if the validity of more accounts in the name/s of natural or juridical The PDIC, in coordination with the BSP, may
If the account is held jointly by two or more natural the claim requires the resolution of issues of facts persons or entities who have no beneficial commence the resolution of a bank upon:
persons, or by two or more juridical persons or and or law by another office, body, or agency, or ownership on transferred deposits in their names a. Failure of Prompt Corrective Action
entities, the maximum insured deposit shall be by the PDIC together with such office, body, or within 120 days immediately preceding or during (PCA) as declared by the Monetary
divided into as many equal shares as there are agency. (Id.) a bank-declared bank holiday, or immediately Board; or
individuals, juridical persons or entities, unless a preceding a closure order issued by the Monetary b. Request by a bank to be placed under
different sharing is stipulated in the document of vii. Failure of depositor to claim insured Board. It is for the purpose of availing the resolution. (Sec. 11[a][1][2])
deposit. deposits maximum deposit insurance coverage. (Sec.
26[e]) The PDIC shall inform the bank of its eligibility for
If the account is held by a juridical person or entity Unless otherwise waived by PDIC, if the entry into resolution. (Sec. 11)
jointly with one or more natural persons, the depositor of the closed bank shall fail to claim his (c) Prohibition against issuances of
maximum insured shall be presumed to belong insured deposits within two (2) years from actual temporary restraining orders Obligations of stockholders, directors,
entirely to such juridical person or entity. (Id.) takeover of the closed bank by the receiver or officers, or employees of the bank
does not enforce his claim within two (2) years, all No court, except the Court of Appeals, shall issue a. Ensure bank compliance with the terms
Note: The aggregate of the interest of each co- rights with respect to the insured deposit shall be any temporary restraining order, preliminary and conditions prescribed by the PDIC
owner over several joint accounts, whether barred. injunction, or preliminary mandatory injunction for resolution of the bank;
owned by the same or different combinations of (Sec. 21[e]) against the PDIC for any action under the PDIC b. With PDIC’s consent, engage an
individuals, juridical persons, or entities, shall Charter. (Sec. 27) independent appraiser or auditor to
likewise be subject to the maximum insured (a) Examination of banks and deposit determine the valuation of the bank
deposit of P500,000. (Id.) accounts This prohibition shall apply in all cases, disputes consistent with generally accepted
or controversies instituted by a private party, the valuation standards;
iii. Mode of payment The PDIC as a body corporate shall have the insured bank, or any shareholder of the insured c. Ensure prudent management and
power to conduct examination of banks with prior bank. (Id.) administration of the bank’s assets,
It shall be paid either (1) by cash or (2) by making approval of the Monetary Board. (Sec. 9.8) liabilities, and records; and
available to each depositor a transferred deposit Supreme Court d. Cooperate with the PDIC in the conduct
in another insured bank. (Sec. 19) Note: No examination can be conducted within The Supreme Court may issue a restraining order or exercise of any or all its authorities
twelve (12) months from the last examination or injunction when the matter is of extreme under this Act and honor in good faith its
iv. Effect of payment of insured deposits date. urgency involving a constitutional issue, such that commitment or undertaking with the
unless a temporary restraining order is issued, PDIC on the resolution of the bank. (Sec.
The PDIC, upon payment of any depositor, shall The PDIC may, in coordination with the BSP, grave injustice and irreparable injury will arise. 11[d])
be subrogated to all the rights of the depositor conduct a special examination as the Board of The applicant shall file a bond in an amount to be
against the closed bank to the extent of such Directors, by an affirmative vote of a majority of fixed by the Supreme Court and such bond shall Within a period of 180 days from a bank’s entry
payment. (Sec. 20) all of its members, if there is a threatened or accrue in favor of the PDIC if the court should into resolution, the PDIC, through the affirmative
impending closure of a bank. (Id.) finally decide that the applicant was not entitled to vote of at least 5 members of the board, shall
v. Payment of insured deposits as preferred the relief sought. (Id.) determine whether the bank may be resolved
credit Notwithstanding the provisions of RA 1405, as through (1) purchase of all its assets and
amended, RA 6426, as amended, RA 8791, and Any restraining order or injunction issued in assumption of all its liabilities, (2) merger or
All payments by the PDIC of insured deposits in other laws, the PDIC and/or the BSP, may inquire violation of this Section is void and of no force and consolidation with, or (3) acquisition, by a
closed banks partake of the nature of public into or examine deposit accounts and all effect and any judge who has issued the same qualified investor. (Sec. 11[e])
funds, and as such, must be considered a information related thereto in case there is a shall suffer the penalty of suspension of at least
preferred credit similar to taxes due to the finding of unsafe or unsound banking practice. 60 days without pay. (Id.) Upon a determination by the PDIC that the bank
(Id.) may not be resolved, the Monetary Board may act
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in accordance with the receivership and bank in their possession, custody, including assets over which the bank has
liquidation proceedings under NCBA, Sec. 30. administration, or management. (Id.) equitable interest; Note: Payment of these fees, including
e. Appoint or hire persons or entities of any unpaid advances under the
6. ROLE OF THE PHILIPPINE DEPOSIT d. When the circumstances so warrant, the recognized competence in banking, immediately preceding paragraph, shall
INSURANCE CORPORATION IN RELATION local government unit and law finance, asset management, or remedial be subject to approval by the liquidation
enforcement agencies concerned shall, management, as its deputies, assistant, court.
TO BANKS IN DISTRESS
upon request, immediately provide or agents;
assistance to the receiver during the f. Appoint or hire persons or entities of n. Distribute the available assets of the
A. Closure and takeover service of notice of closure and actual recognized competence in forensic and closed bank, in cash or in kind, to its
takeover operations to ensure the orderly fraud investigations; creditors in accordance with the Rules on
Whenever a bank is ordered closed by the
conduct thereof. (Sec. 14[d]) g. Pay accrued utilities, rentals, and Concurrence and Preference of Credits
Monetary Board, the PDIC shall be designated as
salaries of personnel of the closed bank under the NCC or other laws;
receiver and it shall proceed with the takeover B. Conservatorship for a period not exceeding three (3) o. Dispose records of the closed bank that
and liquidation of the closed bank in accordance
months, from available funds of the are no longer needed in the liquidation in
with the PDIC Charter. (Sec. 12[a]) A conservator is appointed by the Monetary closed bank; accordance with the guidelines set by the
Board based on competence and knowledge in h. Collect loans and other claims of the PDIC, notwithstanding the laws on
Notice of Closure and Takeover Activities bank operations and management. (NCBA, Sec. closed bank and modify, compromise, or archival period and disposal of records;
a. Upon the designation of the PDIC as 29) There is no express provision providing for restructure the terms and conditions of and
receiver, it shall serve a notice of closure the appointment of PDIC as conservator. such loans or claims as may be deemed p. Exercise inherent and necessary powers
to the highest-ranking officer of the bank
advantageous to the interests of the for the effective discharge of its duties as
present in the bank premise, or in the Banks closed by the Monetary Board shall no creditors of the closed bank; receiver. (Sec. 13[b])
absence of such officer, post the notice longer be rehabilitated. The PDIC, as receiver, i. Hire or retain private counsel;
of closure in the bank premises of on its shall immediately proceed with the takeover and j. Borrow or obtain a loan, or mortgage, Surplus Dividends
main entrance. (New PDIC Charter, Sec. liquidation. (NCBA, Sec. 39; New PDIC Charter, pledge, or encumber any asset of the After the payment of all liabilities and claims
14[a]) Sec. 12[a]) closed bank, when necessary to (1) against the closed bank, the receiver shall pay
preserve or prevent dissipation of its surplus, if any, dividends at the legal rate of
Note: The closure of the bank shall be C. Receivership assets, (2) redeem its foreclosed assets, interest from date of takeover to date of
deemed effective upon the service of the
or (3) minimize losses to its depositors distribution to creditors and claimants of the
notice of closure. Thereafter, the receiver Authorities of a Receiver and creditors; closed bank in accordance with the Rules on
shall take over the bank and exercise the In addition to its powers as receiver under existing k. If the stipulated interest rate on deposits Concurrence and Preference of Credits under the
powers of the receiver. (Sec. 14[a]) laws, the PDIC is also empowered to do the is unusually high compared with Civil Code or other laws before distribution to the
following: prevailing applicable interest rates, the shareholders of the closed bank. (Sec. 13[c])
b. The receiver shall have authority to use a. Represent and act for and on behalf of receiver may reduce the rate to a
reasonable force, including the authority the closed bank; D. Liquidation
reasonable rate;
to force open the premises of the bank,
and exercise such acts necessary to take A closed bank under receivership can The PDIC, as receiver is also liquidator. PDIC is
Note: Any modifications or reductions
actual physical possession and custody only sue or be sued through its receiver, authorized to adopt and implement without need
shall apply only to earned or unpaid
of the bank and all its assets, records, the Philippine Deposit Insurance of consent of the stockholders, BOD, creditors,
interest.
documents, and take charge of its affairs Corporation (PDIC). Thus, a bank under and depositors of the closed bank, any or a
upon the service of the notice of closure. receivership cannot file a case without combination of the following modes of liquidation:
l. Utilize available funds of the bank,
(Sec. 14[b]) PDIC’s authority. (Banco Filipino Savings a. Conventional liquidation; and
including funds generated by the receiver
and Mortgage Bank v. BSP, G.R. No. from the conversion of assets to pay for b. Purchase of assets and/or liabilities (Sec.
c. Directors, officers, employees, or agents 200678, 2018) 13[a])
reasonable costs and expenses incurred
of a bank hold money and other assets of
for the preservation of the assets and
the bank in trust or under administration b. Gather and take charge of all the assets, Modes of liquidation under the New PDIC
liquidation of the closed bank, without
or management by them for the bank in records, and affairs of the closed bank, Charter
need for approval of the liquidation court;
their fiduciary capacity. (Sec. 14[c]) and administer the same for the benefit a. Conventional Liquidation. The assets
of the creditors; Note: For banks with insufficient funds, gathered by the receiver shall be
Upon service of notice of closure to the c. Convert the assets of the closed bank to evaluated and verified as to their
the PDIC is authorized to advance the
bank, all directors, officers, employees, cash or other forms of liquid assets, as existence, ownership, condition, and
foregoing costs and expenses, and
or agents of the closed bank shall have far as practicable; other factors to determine their realizable
collect payments, as and when funds
the duty to immediately account for, d. Bring suits to enforce liabilities of the value. (Sec. 16)
become available.
surrender, and turn over to the receiver, directors, officers, employees, agents of
and provide information relative to the the closed bank and other entities related b. Purchase of Assets and/or
m. Charge reasonable fees for the
assets, records, and affairs of the closed or connected to the closed bank or to Assumption of Liabilities. The receiver
liquidation of the bank from the assets of
collect, recover, and preserve all assets, the bank; shall have the authority to facilitate and
Page 234 of 393 Page 235 of 393

implement the purchase of the assets of The powers, voting rights, functions, and Payment of separation pay, or benefits
the closed bank and the assumption of its duties, as well as the allowances, provided for by law shall be made from i. On actions pending for or against the
liabilities by another insured bank, remuneration and perquisites of the available assets of the bank in closed bank
without need for approval of the directors, officers, or stockholders (DOS) accordance with the Rules on
liquidation court. It shall be exercised in of such bank are terminated upon its Concurrence and Preference of Credits General Rule: Actions pending for or
accordance with the Rules on closure. under the Civil Code or other laws. (Sec. against the closed bank in any court or
Concurrence and Preference of Credits 13[e][4]) quasi-judicial body shall, upon motion of
under the NCC or other laws, subject to DOS shall be barred from interfering in the receiver, be suspended for a period
such terms and conditions as the PDIC any way with the assets, records, and e. On contractual obligations. Receiver not exceeding 180 days and referred to
may prescribe. (Sec. 15) affairs of the bank. (Sec. 13[e][2]) may cancel, terminate, rescind, or mandatory mediation.
repudiate any contract of the closed bank
The disposition of the branch licenses Note: The receiver shall exercise all that is not necessary for the orderly Exception: Actions pending before the
and other bank licenses of the closed authorities as may be required to liquidation of the bank, or is grossly Supreme Court. (Sec. 13[e][9])
bank shall be subject to the approval of facilitate the liquidation of the closed disadvantageous to the closed bank, or
the BSP. (Id.) bank for the benefit of all its creditors. for any ground provided by law. (Sec. j. On final decisions against the closed
(Id.) 13[e][5]) bank. Execution and enforcement of a
Note: Such action of the receiver to final decision of a court other than the
determine whether a bank may be c. On the assets. Upon service of closure, f. On interest payments. The liability of a liquidation court against the assets of a
subject of a purchase of assets and all the assets of the closed bank shall be bank to pay interest on deposits and all closed bank shall be stayed.
assumption of liabilities transactions shall deemed in custodia legis in the hands of other obligations as of closure shall
be final and executory and may not be set the receiver, and as such, these assets cease upon its closure without prejudice Prevailing party shall file the final
aside by any court. may not be subject to attachment, to NCBA, Sec. 85. decision as a claim with the liquidation
garnishment, execution, levy or any other court and settle in accordance with the
Effects of Bank Liquidation court processes. Provided: The receiver shall have the Rules on Concurrence and Preference of
The placement of a bank under liquidation shall authority, without need for approval of Credits under the Civil Code or other
have the following effects: A judge, officer of the court or any person the liquidation court, to assign, as laws. (Sec. 13[e][10])
a. On the corporate franchise or who shall issue, order, process or cause payment to secured creditors, the bank
existence. Upon placement by the the issuance or implementation of the assets serving as collaterals to their k. On docket and other court fees.
Monetary Board of a bank under garnishment order, levy, attachment, or respective loans up to the extent of the Payment of docket and other court fees
liquidation, it shall continue as a body execution, shall be liable outstanding obligations including relating to all cases or actions filed by the
corporate until the termination of the interests as of date of closure (valuation receiver with any judicial or quasi- judicial
winding up period. (Sec. 13[e][1]) Provided: collaterals securing the loans based on the prevailing market value of bodies shall be deferred until the action is
and advances granted by the BSP shall the collaterals). (Sec. 13([e][6]) terminated with finality
Note: Winding up period is 6 months from not be included in the assets of the closed
the date of publication of notice of the bank for distribution to other creditors Note: The BSP shall collect interest and Any such fees shall constitute as a first
approval by the court of the final asset other appropriate charges on all loans lien on any judgment in favor of the
distribution plan of the closed bank. (Sec. Provided, further: the proceeds in excess and advances it extends, the closure, closed bank or in case of unfavorable
1[c]) of the amount secured shall be returned receivership, or liquidation of the debtor- judgment, such fees shall be paid in
by the BSP to the receiver. (Sec. 13[e][3]) institution notwithstanding. (NCBA, Sec. liquidation costs and expenses during the
Such continuation as a body corporate 85) distribution of the assets. (Sec. 13[e][11])
shall only be for the purpose of Note: Any preliminary attachment or
liquidating, settling, and closing its garnishment on any of the assets of the g. On liability for penalties and l. On assets, records, and documents of
assets. closed bank existing at the time of closure surcharges for later payment and non- the bank. All assets, records, and
shall not give any preference to the payment of taxes. From the time of documents in the possession of the
The receiver shall represent the closed attaching or garnishing party. Upon closure, the closed bank shall not be closed bank at the time of its closure are
bank in all cases by or against the closed motion of the receiver, the preliminary liable for the payment of penalties and presumed held by the bank in the concept
bank and prosecute and defend suits by attachment or garnishment shall be lifted surcharges arising from the late payment of an owner. (Sec. 13[e][12])
or against it. (Sec. 13[e][1]) and/or discharged. or non-payment of real property tax,
capital gains tax, transfer tax and similar Assets and documents of the closed
Note: In no case shall the bank be d. On labor relations. The employer- charges. (Sec. 13[e][7]) bank shall retain their private nature even
reopened and permitted to resume employee relationship between the if administered by the receiver. (Sec.
baking business after being placed under closed bank and its employees shall be h. On bank charges and fees on 13[e][14])
liquidation. (Sec. 13[e][1]) deemed terminated upon service of the services. Receiver may impose charges
notice of closure of the bank. and fees for services rendered after bank ————- end of topic ————-
b. On the Powers and Functions of its closure such as the execution of pertinent
directors, officers, and stockholders. deeds and certifications. (Sec. 13[e][8])
Page 236 of 393 Page 237 of 393

ATENEO CENTRAL
VII. INTELLECTUAL PROPERTY a. Dominancy Test

b. Holistic Test
c. Idem Sonans
7. Well-Known Marks
8. Rights Conferred by Registration
VII. INTELLECTUAL PROPERTY
9. Use by Third Parties of Names, Etc.
A. INTELLECTUAL PROPERTY RIGHTS IN
Similar to Registered Mark
GENERAL
10. Infringement and Remedies
1. Intellectual Property Rights
a. Trademark Infringement
2. Differences Between Copyright,
b. Damages
Trademarks, and Patents
c. Requirement of Notice
3. Technology Transfer Arrangement
d. Penalties
11. Unfair Competition
INTELLECTUAL
B. PATENTS
12. Registration of Marks Under the
1. Patentable Invention
Madrid Protocol
2. Non-Patentable Invention
a. Coverage
3. Ownership of a Patent
b. Rights Conferred
a. Right to a Patent
c. Requirements for Registration
PROPERTY
b. First-to-File Rule
d. Term of Protection
c. Invention Created Pursuant to
a Commission
D. COPYRIGHT
d. Right of Priority
1. Basic Principles
4. Grounds for Cancellation of a Patent
2. Copyrightable Works
5. Remedy of the True and Actual
Commercial Law Inventor
6. Rights Conferred by a Patent
a. Original Works
b. Derivative Works
3. Non-copyrightable works
7. Limitations of Patent Rights
4. Rights of copyright owner
a. Prior User
5. Rules on ownership of copyright
b. Use by the Government
6. Limitations on copyright
8. Patent Infringement
a. Fair use
a. Tests in Patent Infringement
7. Copyright infringement
i. Literal Infringement
a. Remedies
ii. Doctrine of
b. Criminal penalties
Equivalents
b. Civil and Criminal Action
c. Prescriptive Period
d. Defenses in Action for
Infringement
9. Licensing
a. Voluntary
b. Compulsory
10. Assignment and Transmission of
Rights
C. TRADEMARKS
1. Definition of Marks, Collective Marks,
and Trade Names
2. Acquisition of Ownership of Mark
3. Acquisition of Ownership of Trade
Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing
Similarity Between Marks
Page 239 of 393

A. Intellectual Property RIGHTS IN 2. To guarantee that those Generally, during the life of the inventive step and is (c) industrially applicable
GENERAL articles come up to a Copyright author and for 50 years after shall be patentable. It may be, or may relate to, a
certain standard of quality his death [life + 50] product, or process, or an improvement of any of
1. INTELLECTUAL PROPERTY RIGHTS 3. To advertise the articles 10 years, renewable for periods the foregoing. (Sec. 21, IP Code)
which they symbolize of 10 years after the expiration
The State recognizes that an effective intellectual Trademarks A. Novelty
1. To foster and reward of the original term (perpetual
and industrial property system is vital to the invention; protection as long as renewed)
development of domestic and creative activity, An invention shall not be considered new if it
2. To promote disclosures of Patents 20 years from grant
facilitates transfer of technology, attracts foreign forms part of a prior art. (Sec. 23, IP Code).
inventions to stimulate
investments, and ensures market access for our Novelty is an essential requisite of patentability of
Patents further innovation 3. TECHNOLOGY TRANSFER
products. The use of intellectual property bears an invention or discovery. An invention is not new
3. To ensure that ideas in the ARRANGEMENT
a social function. To this end, the State shall if it has been disclosed or used in public, or sold
public domain remain there
promote the diffusion of knowledge and in the market before the patent application for the
for the free use of the Contracts or agreements involving the transfer of
information for the promotion of national invention is filed. (Manzano v. Court of Appeals,
public systematic knowledge for the manufacture of a
development and progress and the common G.R. No. 113388, 1997).
SUBJECT MATTER product, the application of a process, or rendering
good. (Sec. 2, IP Code)
Original intellectual creations in of a service including management contracts; and
Prior Art – It consists of:
Copyright the literary and artistic domain the transfer, assignment or licensing of all forms
All agreements concerning industrial property are a. Everything which has been made available to
(literary and artistic works) of intellectual property rights, including licensing
intimately connected with economic the public anywhere in the world, before the
Any visible sign capable of of computer software except computer software
development. Industrial property encourages Trademarks filing date or the priority date of the
distinguishing the goods developed for mass market. (Sec. 4, IP Code)
investments in new ideas and inventions and application claiming the invention; and
A product, process or any
stimulates creative efforts for the satisfaction of b. The whole contents of an application for a
Patents improvement thereof which is a B. PATENTS
human needs. They speed up transfer of patent, utility model, or industrial design
technical solution of a problem
technology and industrialization, and thereby registration, published in accordance with
ELEMENTS A patent is a grant issued by the Intellectual
bring about social and economic progress. this Act, filed or effective in the Philippines,
1. Literary or artistic work Property Office of the Philippines (IPOPHL).
(Mirpuri v. Court of Appeals, G.R. No. 114508, with a filing or priority date that is earlier than
2. Independently created Through the patent, a patent holder is given the
1999). the filing or priority date of the application:
Copyright (originality) exclusive right to exclude others from making,
Provided
3. Involves minimal or a using, importing, and selling the patented
Intellectual property protection is merely a means i. An application which has validly
modicum of creativity innovation for a limited period of time.
towards the end of making society benefit from claimed the filing date of an earlier
the creation of its men and women of talent and 1. Visible sign application shall be prior art with
2. Capable of distinguishing The validity of the patent issued by the Philippines
genius. This is the essence of intellectual Trademarks effect as of the filing date of such
[distinctive] the goods or Patent Office and the question over the
property laws, and it explains why certain earlier application;
services of an enterprise inventiveness, novelty, and usefulness of the
products of ingenuity that are concealed from the ii. The applicant or the inventor
1. Technical solution of a improved process therein specified and
public are outside the pale of protection afforded identified in both applications are not
problem in a field of human described are matters which are better
by the law. It also explains why the author or the one and the same. (Sec. 24, IP
activity determined by the Philippines Patent Office. The
creator enjoys no more rights than are consistent Code)
Patents 2. Must be new (novelty) technical staff of the Philippines Patent Office,
with public welfare. (ABS-CBN Broadcasting
3. Involves an inventive step; composed of experts in their field, have, by the B. Inventive Step
Corp. v. Philippine Multi-Media System, Inc., G.R.
(non-obvious) issuance of the patent in question, accepted the
Nos. 175769-70, 2009).
4. Industrially applicable thinness of the private respondent's new tiles as An invention involves an inventive step if, having
WHEN PROTECTION BEGINS a discovery. There is a presumption that the regard to prior art, it is not obvious to a person
2. DIFFERENCES BETWEEN COPYRIGHT, Philippines Patent Office has correctly skilled in the art at the time of the filing date or
Upon creation (but registration
TRADEMARKS, AND PATENTS determined the patentability of the improvement priority date of the application claiming the
needed only to recover
Copyright by the private respondent of the process in invention. (Sec. 26.1, IP Code)
RATIONALE damages in cases of
infringement) question. (Aguas v. De Leon, G.R. No. L-32160,
1. To promote creativity 1982)
Upon grant of trademark Person Skilled in the Art (POSITA)
Copyright 2. To encourage creation of Trademarks
registration A hypothetical person presumed to be an
works
Patents Upon grant of patent 1. PATENTABLE INVENTION ordinary practitioner aware of what was common
1. To indicate origin or
TERM OF PROTECTION general knowledge in the art at the relevant date.
Trademarks ownership of the articles to Any technical solution of a problem in any field of He or she is also presumed to have:
which they are attached human activity which is (a) new, involves an (b)
Page 240 of 393 Page 241 of 393

1. knowledge of all references that are considered to be the same substance, unless generis protection of plant varieties and employee’s regular duties UNLESS there
sufficiently related to one another and to the they differ significantly in properties with animal breeds and a system of community is an agreement to the contrary.
pertinent art; regard to efficacy; intellectual rights protection.
2. knowledge of all arts reasonably pertinent to Right of Priority
the particular problems with which the For drugs and medicines, the following are Note: Congress has already enacted the An application for patent filed by any person who
inventor was involved; and unpatentable: Plan Variety Protection Act which grants a has previously applied for the same invention in
3. normal means and capacity for routine work Certificate of Plant Variety Protection for another country which by treaty, convention, or
and experimentation at his or her disposal. a. Discovery of a new form or new varieties that are: (a) new, (b) distinct, (c) law affords similar privileges to Filipino citizens,
property of a known substance UNLESS uniform, and (d) stable. (Sec. 4, Plant shall be considered as filed as of the date of filing
In the case of drugs and medicines, there is no it results in the enhancement of the Variety Protection Act) the foreign application, provided that:
inventive step if the invention results from: substance’s efficacy; 5. Aesthetic creations; and 1. The local application expressly claims
1. the mere discovery of a new form or new b. Discovery of any new property or use 6. Anything which is contrary to public order or priority;
property of a known substance which does of a known substance; and morality. (Sec. 22, IP Code) 2. It is filed within twelve (12) months from
not result in the enhancement of the known c. Mere use of a known process UNLESS the date the earliest foreign application
efficacy of that substance, such process results in a new product 3. OWNERSHIP OF A PATENT was filed; and
2. the mere discovery of any new property or that employs at least one new reactant. 3. A certified copy of the foreign application
new use for a known substance, or Term of Patent together with an English translation is
3. the mere use of a known process unless such 2. Schemes, rules and methods of performing The term of a patent shall be 20 years from the filed within six (6) months from the date
known process results in a new product that mental acts, playing games or doing filing date of the application. (Sec. 54, IP Code) of filing in the Philippines.
employs at least one new reactant. (Sec. business, and programs for computers;
26.2, IP Code) Right to a Patent 4. GROUNDS FOR CANCELLATION OF A
General Rule: Computer programs are The right to a patent belongs to the inventor, his PATENT
C. Industrial Applicability subjects of copyright. heirs, or assigns. When two (2) or more persons
have jointly made an invention, the right to a Any interested person may, upon payment of the
An invention that can be produced and used in Exceptions: The computer program is still patent shall belong to them jointly. (Sec. 28, IP required fee, petition to cancel the patent or any
any industry shall be industrially applicable. (Sec. subject of copyright protection; in addition, Code) claim thereof, or parts of the claim, on any of the
27, IP Code). Industrial applicability refers to an the machine or article described below may following grounds:
invention’s real-life benefit and practical use. be patentable if the computer program: First-to-File Rule 1. That what is claimed as the invention is
(1) is implemented by a particular machine in If two (2) or more persons have made the not new or patentable;
2. NON-PATENTABLE INVENTIONS a non-conventional and non-trivial invention separately and independently of each 2. That the patent does not disclose the
manner, or other, the right to the patent shall belong to the invention in a manner sufficiently clear
The following shall be excluded from patent (2) transforms an article from one state to person who filed an application for such and complete for it to be carried out by
protection: another, then it may be patentable. invention, or where two or more applications are any person skilled in the art; or
filed for the same invention, to the applicant who 3. That the patent is contrary to public order
1. Discoveries, scientific theories and 3. Methods for treatment of the human or animal has the earliest filing date or the earliest priority or morality.
mathematical methods, and in the case of body by surgery or therapy and diagnostic date. (Sec. 29, IP Code)
drugs and medicines, the mere discovery of methods practiced on the human or animal Note: Where the grounds for cancellation relate
a new form or new property of a known body; Invention Created Pursuant to a Commission to some of the claims or parts of the claim,
substance which does not result in the The person who commissions the work shall own cancellation may be effected to such extent only.
enhancement of the known efficacy of that Note: This prohibition, however, does not the patent, unless otherwise provided in the
substance, or the mere discovery of any new apply to products and compositions for use in contract. (Sec. 30, IP Code)
property or new use for a known substance,
5. REMEDY OF THE TRUE AND ACTUAL
any of these methods. INVENTOR
or the mere use of a known process unless If an employee made the invention in the course
such known process results in a new product 4. Plant varieties or animal breeds or essentially of his regular employment, the patent shall If a person, who was deprived of the patent
that employs at least one new reactant. biological process for the production of plants belong to: without his consent or through fraud, is declared
or animals; 1. The employee, the inventive activity is by final court order or decision to be the true and
For the purpose of this clause, salts, esters, not part of his regular duties (even if the actual inventor, the court shall order for his
ethers, polymorphs, metabolites, pure form, Note: This provision shall not apply to micro- employee uses the time, facilities, and substitution as patentee, or at the option of the
particle size, isomers, mixtures of isomers, organisms and non-biological and materials of the employer); true inventor, cancel the patent, and award actual
complexes, combinations, and other microbiological processes. Further, 2. The employer, if the invention is the and other damages in his favor if warranted by
derivatives of a known substance shall be Congress may enact a law providing sui result of the performance of the the circumstances. (Sec. 68, IP Code)
Page 242 of 393 Page 243 of 393

without proportionally dividing proceeds country entering the territory of the 8. PATENT INFRINGEMENT
The remedies of the true and actual inventor are: therewith. (Sec. 107, IP Code) Philippines temporarily or accidentally.
(a) Substitution as patentee, and Consists of the following acts:
(b) Cancellation of the patent. 7. LIMITATIONS OF PATENT RIGHTS Note: Such invention must be used (1) making, using, offering for sale, selling,
In both remedies, damages may be awarded. exclusively for the needs of the ship, vessel, or importing a patented product or a
The patentee has no right to prevent third parties aircraft, or land vehicle and not used for the product obtained directly or indirectly
Note: There must first be a final court order in the following circumstances: manufacturing of anything to be sold within from a patented process; or
declaring that he is the true and actual inventor. 1. Using a patented product which has been put the Philippines. (2) use of a patented process without the
on the market in the Philippines by the owner authorization of the patentee constitutes
Patent Application by Persons Not Having the of the product, or with his express consent, A. Prior User patent infringement.
Right to a Patent insofar as such use is performed after that
If a person other than the applicant is declared by product has been so put on the said market. Prior User Notes:
final court order or decision as having the right to Any prior user, who, in good faith was using the To be able to effectively and legally preclude
the patent, such person may, within three (3) Note: With regard to drugs and medicines, invention or has undertaken serious preparations others from copying and profiting from the
months after the decision has become final: the limitation on patent rights shall apply after to use the invention in his enterprise or business, invention, a patent is a primordial requirement.
(a) Prosecute the application as his own a drug or medicine has been introduced in the before the filing date or priority date of the No patent, no protection. (Pearl & Dean (Phil.) v.
application in place of the applicant; Philippines or anywhere else in the world. application on which a patent is granted, shall Shoemart, G.R. No. 148222, 2003)
(b) File a new patent application in respect The right to import the drugs and medicines have the right to continue the use thereof within
of the same invention; shall be available to any government agency the territory where the patent produces its effect. There can be no infringement of a patent until a
(c) Request that the application be refused; or any private third party. The right of prior user may only be transferred or patent has been issued, since whatever right one
or (d) Seek cancellation of the patent, if assigned together with enterprise or business, or has to the invention covered by the patent arises
one has already been issued. (Sec. 67, 2. Where the act is done privately and on a non- with the part of his enterprise or business in which alone from the grant of patent. (Creser Precision
IP Code) commercial scale or for a non-commercial use or preparations for use have been made. Systems, Inc. v. Court of Appeals, G.R. No.
purpose, and the economic interests of the 118708, 1998)
B. Use by the Government
6. RIGHTS CONFERRED BY A PATENT patentee are not significantly prejudiced;
3. Where the act consists of making or using In order to infringe a patent, a machine or device
A Government agency or third person authorized
A patent shall confer on its owner the following exclusively for experimental use of the must perform the same function, or accomplish
by the Government may exploit the invention
exclusive rights: invention for scientific purposes or the same result by identical or substantially
even without agreement of the patent owner
1. Where the subject matter of a patent is a educational purposes and such other identical means and the principle or mode of
where:
product, to restrain, prohibit and prevent activities directly related to such scientific or operation must be substantially the same. (Del
1. The public interest, in particular, national
any unauthorized person or entity from educational experimental use; Rosario v. Court of Appeals, G.R. No. 115106,
security, nutrition, health or the development
making, using, offering for sale, selling or 4. In the case of drugs and medicines, where 1996)
of other sectors, as determined by the
importing that product; the act includes testing, using, making or appropriate agency of the government, so
2. Where the subject matter of a patent is a selling the invention including any data However: The exclusive right of a patentee to
require; or
process, to restrain, prevent or prohibit related thereto, solely for purposes make, use and sell a patented product, article or
2. A judicial or administrative body has
any unauthorized person or entity from reasonably related to the development and process exists only during the term of the patent.
determined that the manner of exploitation,
using the process, and from submission of information and issuance of (Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
by the owner of the patent or his licensee, is
manufacturing, dealing in, using, selling approvals by government regulatory 167715, 2010)
anti- competitive; or
or offering for sale, or importing any agencies required under any law of the 3. In the case of drugs and medicines, there is
product obtained directly or indirectly Philippines or of another country that A. Tests in Patent Infringement
a national emergency or other circumstance
from such process. regulates the manufacture, construction, use of extreme urgency requiring the use of the 1. Literal Infringement
or sale of any product; invention; or Resort must be had to the words of the claim. If
Rights of Joint Owners 5. Where the act consists of the preparation for 4. In the case of drugs and medicines, there is accused matter clearly falls within the claim, then
If two or more persons own patent and invention individual cases, in a pharmacy or by a a public non- commercial use of the patent by there is literal infringement.
covered thereby, each of the joint owners shall be medical professional, of a medicine in the patentee, without satisfactory reason; or
entitled to personally make, use, sell or import the accordance with a medical prescription or 5. In the case of drugs and medicines, the To determine whether the particular item falls
invention for his own profit. Provided, neither of acts concerning the medicine so prepared; demand for the patented article in the within the literal meaning of the patent claims, the
joint owners shall be entitled to grant licenses or and Philippines is not being met to an adequate Court
to assign his right, title or interest or part thereof 6. Where the invention is used in any ship, extent and on reasonable terms, as a. Compares the claims of the patent and
without consent of other owner or owners, or vessel, aircraft, or land vehicle of any other determined by the Secretary of the the accused product within the overall
Department of Health.
Page 244 of 393 Page 245 of 393

context of the claims and specifications, not exceed three (3) times the amount of from date of the commission of the crime.
and Note: This criminal action is without prejudice to actual damages. (Sec. 84, IP Code)
b. Determines whether there is exact the institution of a civil action for damages,
identity of all material elements. (Godines 3. The court may order that the infringing D. Defenses in Action for Infringement
v. Court of Appeals, G.R. No. 97343, The criminal action herein provided shall goods, materials and implements
1993) prescribe in three (3) years from date of the predominantly used in the infringement In an action for infringement, the defendant may
commission of the crime. (Sec. 84, IP Code) be destroyed without compensation. show the invalidity of the patent, or any claim
2. Doctrine of Equivalents 4. Damages cannot be recovered for acts of thereof, on any of the following grounds:
Infringement also occurs when a device The burden of proof to substantiate a charge for infringement committed before the a. That what is claimed as the invention is
appropriates a prior invention by incorporating its patent infringement rests on the plaintiff. (Smith infringer had known, or had reasonable not new or patentable;
innovative concept and, albeit with some Kline Beckman Corp. v. Court of Appeals, G.R. grounds to know of the patent. b. That the patent does not disclose the
modification and change, performs substantially No. 126627, 2003) invention in a manner sufficiently
the same function in substantially the same way Note: It is presumed that the infringer clear and complete for it to be carried
to achieve substantially the same result. (Smith Infringement Action by a Foreign National had known of the patent if the words out by any person skilled in the art; or
Kline Beckman Corp. v. Court of Appeals, G.R. Any foreign national or juridical entity who meets “Philippine Patent” and the number of the c. That the patent is contrary to public
No. 126627, 2003) the requirements of Section 3 (Rule on patent appear on the patented product or order or morality.
Reciprocity) and not engaged in business in the on the container or package or the
Under the doctrine of equivalents, there is still Philippines, to which a patent has been granted advertising material of the patented Note: These are the same grounds for the
patent infringement when: or assigned under this Act, may bring an action product or process. cancellation of a patent.
a. There is an appropriation of the inventive for infringement of patent, whether or not it is
step of a prior invention; licensed to do business in the Philippines under Contributory Infringer – jointly and severally 9. LICENSING
b. The subsequent invention has been existing law. (Sec. 77, IP Code). liable with the infringer if he:
modified or changed; and a. actively induces the infringement of a A. Voluntary Licensing
c. Despite such changes, the subsequent 1. Civil Action patent; or
To encourage the transfer and dissemination of
invention performs substantially the Any patentee, or anyone possessing any right, b. provides the infringer with a component
technology, prevent or control practices and
same function in substantially the same title or interest in and to the patented invention, of a patented product or of a product
conditions that may constitute an abuse of
way to achieve substantially the same whose rights have been infringed, may bring a produced by a patented process knowing
intellectual property rights having an adverse
result. civil action before a court of competent it to be used for infringing the patented
effect on competition and trade.
jurisdiction, to recover from the infringer such invention.
Rationale: Such imitation would leave room for damages sustained thereby, plus attorney’s fees
All technology transfer arrangements must
the unscrupulous copyist to make unimportant and other expenses of litigation, and to secure an 2. Criminal Action
comply with the provisions of the IP Code.
and insubstantial changes and substitutions in injunction for the protection of his rights. (Sec. 76, If infringement is repeated by the infringer or by
the patent which, though adding nothing, would IP Code). anyone in connivance with him after finality of the
Prohibited Clauses
be enough to take the copied matter outside the judgment against the infringer, the offenders
The following provisions shall be deemed prima
claim, and hence outside the reach of the law. Civil remedies for infringement: shall, without prejudice to the institution of a civil
facie to have an adverse effect on competition
(Godines v. Court of Appeals, G.R. No. 97343, (1) recovery of damages, attorney’s fees, action for damages, be criminally liable. Upon
and trade:
1993) and litigation costs; and conviction, the offenders shall suffer:
1. Those which impose upon the licensee the
(2) injunction. a. imprisonment for the period of not less
B. Civil and Criminal Action obligation to acquire from a specific source
than six months but not more than three
capital goods, intermediate products, raw
Rules on Civil Remedies years, and/or
Criminal Action for Repetition of Infringement materials, and other technologies, or of
1. If the damages are inadequate or cannot b. a fine of not less than P100,000 but not
If infringement is repeated by the infringer or by permanently employing personnel indicated
be readily ascertained with reasonable more than P300,000.
anyone in connivance with him after finality of the by the licensor;
certainty, the court may award by way of
judgment of the court against the infringer, the C. Prescriptive Period 2. Those pursuant to which the licensee
damages a sum equivalent to reasonable
offenders shall be criminally liable therefor and, reserves the right to fix the sale or resale
royalty.
upon conviction, shall suffer imprisonment for the 1. No damages can be recovered for acts of prices of the products manufactured on the
2. The court may award damages in a sum
period of not less than six (6) months but not more infringement committed more than four (4) basis of the license;
above the amount found as actual
than three (3) years and/or a fine of not less than years before the institution of the action for 3. Those that contain restrictions regarding the
damages sustained.
One hundred thousand pesos (P100,000) but not infringement. (Sec. 79, IP Code) volume and structure of production;
more than Three hundred thousand pesos Note: The amount may award an amount 2. The criminal action for repetition of
(P300,000), at the discretion of the court. more than the actual damages but must infringement shall prescribe in three (3) years
Page 246 of 393 Page 247 of 393

4. Those that prohibit the use of competitive Use of Invention by Government

technologies in a non-exclusive technology Mandatory Provisions Exceptional Cases A Government agency or third person authorized
transfer arrangement; The following provisions shall be included in all Non-conformance with the requirements in a by the Government may exploit the invention
5. Those that establish full or partial purchase voluntary license contracts: voluntary licensing contract may be allowed even without agreement of the patent owner
option in favor of the licensor; 1. That the laws of the Philippines shall govern where, after evaluation by the DITTB, substantial where:
6. Those that obligate the licensee to transfer the interpretation of the agreement and in the benefits will accrue to the economy such as in the a) The public interest, in particular, national
for free to the licensor the inventions or event of litigation, the venue shall be the following exceptional or meritorious cases: security, nutrition, health or the
improvements that may be obtained through proper court in the place where the licensee 1. High technology content, development of other sectors, as
the use of the licensed technology; has its principal office; 2. Increase in foreign exchange earnings, determined by the appropriate agency of
7. Those that require payment of royalties to the 2. That continued access to improvements in 3. Employment generation, the government, so requires; or
owners of patents for patents which are not techniques and processes related to the 4. Regional dispersal of industries and/or, b) A judicial or administrative body has
used; technology shall be made available during 5. Substitution with or use of local raw determined that the manner of
8. Those that prohibit the licensee to export the the period of the technology transfer materials, or exploitation, by the owner of the patent or
licensed product unless justified for the arrangement; 6. Registered companies with pioneer his licensee is anti-competitive; or
protection of the legitimate interest of the 3. That, in the event the technology transfer status. c) In the case of drugs and medicines, there
licensor such as exports to countries where arrangement shall provide for arbitration, the is a national emergency or other
exclusive licenses to manufacture and/or Procedure of Arbitration of the Arbitration B. Compulsory Licensing circumstance of extreme urgency
distribute the licensed product(s) have Law of the Philippines or the Arbitration Law requiring the use of the invention; or
already been granted; of the United Nations Commission on The Director of Legal Affairs may grant license to d) In the case of drugs and medicines, there
9. Those which restrict the use of the International Trade Law (UNCITRAL) or the exploit patented invention, even without is public non-commercial use of the
technology supplied after the expiration of the Rules of Conciliation and Arbitration of the agreement of patent owner, in favor of any person patent by the patentee, without
technology transfer arrangement, except in International Chamber of Commerce shall who has shown his capability to exploit invention, satisfactory reason; or
cases of early termination of the technology apply and the venue of arbitration shall be the under any of the following circumstances: e) In the case of drugs and medicines, the
transfer arrangement due to reason(s) Philippines or any neutral country; and 1. National emergency or other demand for the patented article in the
attributable to the licensee; 4. That the Philippine taxes on all payments circumstances of extreme urgency; or Philippines is not being met to an
10. Those which require payments for patents relating to the technology transfer 2. Where public interest, in particular, adequate extent and on reasonable
and other industrial property rights after their arrangement shall be borne by the licensor. national security, nutrition, health or terms, as determined by the Secretary of
expiration or termination of the technology development of other vital sectors of the Department of Health. (Sec. 74.1, IP
transfer arrangement; Rights of Licensor national economy as determined by the Code)
11. Those which require that the technology Absent a contrary provision in technology transfer appropriate agency of the Government,
recipient shall not contest the validity of any arrangement, the grant of a license shall not so requires; or Terms and Conditions of the Compulsory
of the patents of the technology supplier; prevent the licensor from granting further licenses 3. Where a judicial or administrative body License
12. Those which restrict the research and to third persons nor from exploiting the subject has determined that manner of 1. The scope and duration of such license
development activities of the licensee matter of the technology transfer arrangement exploitation by patent owner or his shall be limited to the purpose for which
designed to absorb and adapt the transferred himself. licensee is anti-competitive; or it was authorized;
technology to local conditions or to initiate 4. In case of public non-commercial use of 2. The license shall be non-exclusive;
research and development programs in Rights of Licensee patent by patentee, without satisfactory 3. The license shall be non-assignable,
connection with new products, processes or The licensee shall be entitled to exploit the reason; or except with that part of the enterprise or
equipment; subject matter of the technology transfer 5. If patented invention is not being worked business with which the invention is
13. Those which prevent the licensee from arrangement during the whole term of the in Philippines on commercial scale, being exploited;
adapting the imported technology to local technology transfer arrangement. although not capable of being worked, 4. Use of the subject matter of the license
conditions, or introducing innovation to it, as without satisfactory reason: Provided, shall be devoted predominantly for the
long as it does not impair the standards Non-Registration that importation of patented article shall supply of the Philippine market;
prescribed by the licensor; and Technology transfer arrangements that conform constitute working or using the patent; or
14. Those which exempt the licensor from liability with the previous requirements need not be 6. Where the demand for patented drugs Note: This shall not apply where the
for non-fulfillment of his responsibilities under registered with the Documentation, Information and medicines is not being met to an grant of the license is based on the
the technology transfer arrangement and/or and Technology Transfer Bureau (DITTB). Non- adequate extent and on reasonable ground that the patentee’s manner of
liability arising from third party suits brought conformance, however, shall automatically terms, as determined by the Secretary of exploiting the patent is determined by
about by the use of the licensed product or render the technology transfer arrangement the Department of Health. (Sec. 96, IP judicial or administrative process to be
the licensed technology. unenforceable, unless the technology transfer Code) anti-competitive.
15. Other clauses with equivalent effects. agreement is considered as an exceptional case.
Page 248 of 393 Page 249 of 393

5. The license may be terminated upon entire patent and invention, in which event the C. TRADEMARKS Spectrum of Distinctiveness of Trademark
proper showing that circumstances which parties become joint owners thereof. An (Zantarain’s Inc. v. Old Grove Smokehouse, 698
led to its grant have ceased to exist and assignment may be limited to a specified territory. Modern authorities on trademark law view F.2d 786, 1983) (from weakest to strongest)
are unlikely to recur; (Sec. 104, IP Code) trademarks as performing three distinct functions: 1. Generic – refers to a particular genus or
6. The patentee shall be paid adequate (1) they indicate origin or ownership of the articles class of which an individual article or service
remuneration taking into account the Form of Assignment to which they are attached; is a member (e.g. escalator, cellophane, etc.)
economic value of the grant or The assignment must be in writing, (2) they guarantee that those articles come up to a. It can never attain trademark
authorization. (Sec. 100, IP Code) acknowledged before a notary public or other a certain standard of quality; and protection.
officer authorized to administer oath or perform (3) they advertise the articles they symbolize. b. If a registered trademark becomes
Amendment, Cancellation, Surrender of notarial acts, and certified under the hand and (Mirpuri v. Court of Appeals, G.R. No. 114508, generic as to a particular product or
Compulsory License official seal of the notary or such other officer. 1999) service, the mark’s registration is
Upon request of patentee, or licensee, Director of (Sec. 105, IP Code) subject to cancellation.
Legal Affairs may amend decision granting 1. DEFINITIONS OF MARKS, COLLECTIVE 2. Descriptive – identifies a characteristic or
compulsory license, upon proper showing of new Requirements for Recording of Assignment MARKS, AND TRADE NAMES quality of an article or service such as its
facts or circumstances justifying such a. It must be in writing and accompanied by color, odor, function, dimensions, or
amendment; or may cancel compulsory license if: an English translation, if it is in a Mark ingredients
1. Ground for grant of compulsory license language other than English or Filipino; Any visible sign capable of distinguishing the
no longer exists and is unlikely to recur; b. It must be notarized; goods (trademark) or services (service mark) of General Rule: It is not ordinarily protectable
2. Licensee has neither begun to supply c. It must be accompanied by an an enterprise and shall include a stamped or as a trademark because, like a generic term,
domestic market nor made serious appointment of a resident agent, if the marked container of goods. (Sec. 121.1, IP Code) it belongs to the public domain. (Ong Ai Gui
preparation therefore; or assignee is not residing in the v. Director of Patents, G.R. No. L-6235, 1955)
3. Licensee not complied with prescribed Philippines; Collective Mark
terms of license. (Sec. 101, IP Code) d. It must identify the letters patent involved Any visible sign designated as such in the Exception: When the doctrine of secondary
by number and date and give the name application for registration and capable of meaning applies in such a way that it has
Licensee’s Exemption from Liability of the owner of the patent and the title of distinguishing the origin or any other common acquired a secondary meaning in the minds
Any person who works a patented product, the invention. In the case of an characteristic, including the quality of goods or of the consumers. (Sec. 123.2)
substance and/or process under a compulsory application for a patent, it should state the services of different enterprises which use the
license, shall be free from any liability for application number and the filing date of sign under the control of the registered owner of 3. Suggestive – requires the consumer to
infringement. In case of voluntary licensing, it the application and give the name of the the collective mark. (Sec. 121.2, IP Code) exercise the imagination in order to draw a
must be proven that no collusion with licensor applicant and the title of the invention. If conclusion as to the nature of the goods or
existed. This is without prejudice to rightful patent the assignment was executed Trade Name services
owner to recover from licensor whatever he may concurrently with or subsequent to the Any name or designation identifying or 4. Arbitrary or Fanciful – bear no relationship
receive as royalties under the license. (Sec. 102, execution of the application but before distinguishing an enterprise (Sec. 121.3, IP to the products or services to which they are
IP Code) the application is filed or before its Code); applied; protectable without proof of
application number is ascertained, it secondary meaning (e.g. Adidas, Rolex, etc.)
10. ASSIGNMENT AND TRANSMISSION OF should adequately identify the application A name or designation may not be used as a
RIGHTS by its date of execution, the name of the trade name if, by its nature or the use to which 2. ACQUISITION OF OWNERSHIP OF A
applicant, and the title of the invention. such name or designation may be put: MARK
Patent owners shall also have the right to assign, e. It must be accompanied by the required 1. It is contrary to public order or morals;
transfer by succession the patent, and conclude fees. 2. It is liable to deceive trade circles or the The rights in a mark shall be acquired through
licensing contracts for the same. public as to the nature of the enterprise registration made validly in accordance with the
identified by that name; or provisions of this law. (Zuneca Pharmaceutical v.
Note: Patents or applications for patents and 3. It is similar to a mark or a trade name Natrapharm, Inc., G.R. No. 211850, 2020)
invention to which they relate, shall be protected owned by another person and its use
in the same way as the rights of other property would likely mislead the public. Note: Any person who shall procure registration
under the Civil Code. (Sec. 103, IP Code) in the Office of a mark by a false or fraudulent
A trade name refers to the business and its declaration or representation, whether oral or in
Assignment of Inventions goodwill; a trademark refers to the goods. (Canon writing, or by any false means, shall be liable in a
An assignment may be of the entire right, title or Kabushiki Kaisha v. Court of Appeals, G.R. No. civil action by any person injured thereby for any
interest in and to the patent and the invention 120900, 2000) damages sustained in consequence thereof.
covered thereby, or of an undivided share of the (Sec. 162, IP Code)
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NOTE: Proof of substantially exclusive 4. NON-REGISTRABLE MARKS considered well-known in accordance

The registration of trademark under the law is and continuous commercial use in the with the preceding paragraph, which is
required to give notice to the entire world that a Philippines for five (5) years before the A mark cannot be registered if it: registered in the Philippines with respect
mark has already been registered. The failure to date on which the claim of distinctiveness a. Consists of immoral, deceptive or to goods or services which are not similar
give notice of registration bars recovery of is made is prima facie evidence of scandalous matter, or matter which may to those with respect to which registration
damages for trademark infringement, without distinctiveness. (Sec. 123.2, IP Code) disparage or falsely suggest a is applied for.
prejudice to other causes of action based on other connection with persons, living or dead,
laws. (Cagayan Valley Enterprises, Inc. v. Court Duration and Renewal institutions, beliefs, or national symbols, Note: Under this provision, (i) the use of
of Appeals, G.R. No. 78413, 1989) A certificate of registration shall remain in force or bring them into contempt or disrepute; the mark in relation to those goods or
for 10 years: Provided, That the registrant shall b. Consists of the flag or coat of arms or services must indicate a connection
The owner of the registered mark shall not be file a declaration of actual use and evidence to other insignia of the Philippines or any of between those goods or services, and
entitled to recover profits or damages in any suit that effect, or shall show valid reasons based on its political subdivisions, or of any foreign the owner of the registered mark; and (ii)
for infringement, unless the acts have been the existence of obstacles to such use, as nation, or any simulation thereof; the interests of the owner of the
committed with knowledge that such limitation is prescribed by the Regulations, within 1 year from c. Consists of a name, portrait or signature registered mark are likely to be damaged
likely to cause confusion, to cause mistake, or to the fifth anniversary of the date of the registration identifying a particular living individual by such use.
deceive. Such knowledge is presumed if the of the mark. Otherwise, the mark shall be except by his written consent, or the
registrant gives notice that his mark is registered removed from the Register by the Office. name, signature, or portrait of a g. Is likely to mislead the public, particularly
by displaying with the mark the words “Registered deceased President of the Philippines, as to the nature, quality, characteristics
Mark” or the letter R within a circle or if the A certificate of registration may be renewed for during the life of his widow, if any, except or geographical origin of the goods or
defendant had otherwise actual notice of the periods of 10 years at its expiration upon payment by written consent of the widow; services;
registration. (Sec. 158, IP Code) of the prescribed fee and upon filing of a request. d. Is identical with a registered mark h. Consists exclusively of signs that are
belonging to a different proprietor or a generic for the goods or services that
Doctrine of Secondary Meaning 3. ACQUISITION OF OWNERSHIP OF mark with an earlier filing or priority date, they seek to identify;
A word or phrase originally incapable of exclusive in respect of: i. Consists exclusively of signs or of
TRADE NAME
appropriation with reference to an article in the i. The same goods or services, or indications that have become customary
market (because it is geographically or otherwise Notwithstanding any laws or regulations providing ii. Closely related goods or or usual to designate the goods or
descriptive) might nevertheless have been used for any obligation to register trade names, such services, or services in everyday language or in bona
for so long and so exclusively by one producer names shall be protected, even prior to or without iii. If it nearly resembles such a fide and established trade practice;
with reference to his article that, in the trade and registration, against any unlawful act committed mark as to be likely to deceive or j. Consists exclusively of signs or of
to that branch of the purchasing public, the word by third parties. (Sec. 165.2.a, IP Code) cause confusion; indications that may serve in trade to
or phrase has come to mean that the article was e. Is identical with, or confusingly similar to, designate the kind, quality, quantity,
his property. (Pearl & Dean (Phil.) v. Shoemart, In particular, any subsequent use of the trade or constitutes a translation of a mark intended purpose, value, geographical
G.R. No. 148222, 2003) name by a third party, whether as a trade name which is considered by the competent origin, time or production of the goods or
or a mark or collective mark, or any such use of a authority of the Philippines to be well- rendering of the services, or other
Secondary meaning is established when a similar trade name or mark, likely to mislead the known internationally and in the characteristics of the goods or services;
descriptive mark no longer causes the public to public, shall be deemed unlawful. (Sec. 165.2.b, Philippines, whether or not it is registered k. Consists of shapes that may be
associate the goods with a particular place but to IP Code) here, as being already the mark of a necessitated by technical factors or by
associate the goods with a particular source. person other than the applicant for the nature of the goods themselves or
(Shang Properties Realty Corp. v. St. Francis Doctrine of Secondary Meaning Applicable to registration, and used for identical or factors that affect their intrinsic value;
Development Corp., G.R. No. 190706, 2014) Trade Names similar goods or services; l. Consists of color alone, unless defined
The doctrine’s application has been extended to by a given form; or
Requirements for a Geographically- corporate names since the right to use a Note: In determining whether a mark is m. Is contrary to public order or morality.
descriptive Mark to Acquire Secondary corporate name to the exclusion of others is well-known, account shall be taken of the (Sec. 123.1, IP Code)
Meaning based upon the same principle which underlies knowledge of the relevant sector of the
1. The secondary meaning must have the right to use a particular trademark or public, rather than of the public at large, 5. PRIOR USE OF MARK AS
arisen as a result of substantial tradename. (Lyceum of the Philippines, Inc. v. including knowledge in the Philippines
REQUIREMENT
commercial use of a mark in the Court of Appeals, G.R. No. 101897, 1993) which has been obtained as a result of
Philippines; and the promotion of the mark. Under Trademark Law (old rule): The rights to
2. Such use must result in the a trademark were acquired through a “first-to-
distinctiveness of the mark insofar as the f. Is identical with, or confusingly similar to, use” system. (Sec. 5, Republic Act No. 166)
goods or the products are concerned. or constitutes a translation of a mark
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Under the IP Code (new rule): The rights in a public or to deceive already the mark of a person entitled to the of Well-Known Marks cited with approval
mark shall be acquired through registration made consumers. benefits of this Convention and used for identical in Sehwani v. In-N-Out)
validly in accordance with the provisions of this (Citigroup v Citystate, G.R. No. 205409, 2018) or similar goods. These provisions shall also
law. (Sec. 122, IP Code) apply when the essential part of the mark Criteria for determining whether a mark is well-
Idem Sonans constitutes a reproduction of any such well- known:
Prior use no longer determines the acquisition of Literally “same sound” in Latin; an identity of known mark or an imitation liable to create 1. Duration, extent and geographical area
ownership of a mark in light of the adoption of the sound in the pronunciation of words or names. confusion therewith. (Art. 6bis, Paris Convention) of any use of the mark, in particular, the
rule that ownership of a mark is acquired through duration, extent and geographical area of
registration made validly in accordance with the As to the syllabication and sound of the two trade- Note: The essential requirement under this any promotion of the mark, including
provisions of the IP Code. (Zuneca names “Sapolin” and “Lusolin” being used for Article is that the trademark to be protected must advertising or publicity and the
Pharmaceutical v. Natrapharm, Inc., G.R. No. paints, it seems plain that whoever hears or sees be “well-known” in the country where protection is presentation, at fairs or exhibitions, of the
211850, 2020) them cannot but think of paints of the same kind sought. The power to determine whether a goods and/or services to which the mark
and make. (Sapolin Co., Inc. v. Germann & Co., trademark is well-known lies in the “competent applies;
6. TESTS TO DETERMINE CONFUSING Ltd., G.R. No. 45502, 1939). authority of the country of registration or use.” 2. Market share, in the Philippines and in
SIMILARITY BETWEEN MARKS This competent authority would be either the other countries, of the goods and/or
Two letters of “SALONPAS” are missing in registering authority, if it has the power to decide services to which the mark applies;
To aid in determining the similarity and likelihood “LIONPAS”: the first letter a and the letter s. Be this, or the courts of the country in question if the 3. Degree of the inherent or acquired
of confusion between marks, our jurisprudence that as it may, when the two words are issue comes before a court. (Sehwani, Inc. v. In- distinction of the mark;
has developed two (2) tests: the dominancy test pronounced, the sound effects are confusingly N-Out Burger, Inc., G.R. No. 171053, 2007) 4. Quality-image or reputation acquired by
and the holistic test. similar. And where goods are advertised over the the mark;
radio, similarity in sound is of especial. The The question of whether or not respondent's 5. Extent to which the mark has been
Dominancy Test Holistic Test importance of this rule is emphasized by the trademarks are considered “well-known” is registered in the world;
Focuses on the Entails a increase of radio advertising in which we are factual in nature, involving as it does the 6. Exclusivity of registration attained by the
similarity of the consideration of the deprived of the help of our eyes and must depend appreciation of evidence adduced before the mark in the world;
prevalent features of entirety of the marks entirely on the ear. “SALONPAS” and BLA-IPO. The settled rule is that the factual 7. Extent to which the mark has been used
the competing as applied to the “LIONPAS”, when spoken, sound very much findings of quasi-judicial agencies, like the IPO, in the world;
trademarks that might products, including alike. Similarity of sound is sufficient ground for which have acquired expertise because their 8. Exclusivity of use attained by the mark in
cause confusion and the labels and this Court to rule that the two marks are jurisdiction is confined to specific matters, are the world;
deception, thus packaging, in confusingly similar when applied to merchandise generally accorded not only respect, but, at times, 9. Commercial value attributed to the mark
constituting determining confusing of the same descriptive properties. (Marvex even finality if such findings are supported by in the world;
infringement. similarity. Commericial Co., Inc. v. Petra Hawpia & Co., substantial evidence. (Sehwani, Inc. v. In-N-Out 10. Record of successful protection of the
G.R. No. L-19297, 1966) Burger, Inc., G.R. No. 171053, 2007) rights in the mark;
If the competing The discerning eye of 11. Outcome of litigations dealing with the
trademark contains the observer must The determining point in trademark infringement Factors Which Shall Not be Required in issue of whether the mark is a well-known
the main, essential, focus not only on the is a likelihood of confusion. The fact that Determining Whether a Mark is a Well-known mark; and
and dominant predominant words CEEGEEFER is idem sonans for CHERIFER is Mark: 12. Presence or absence of identical or
features of another, but also on the other enough to violate respondent's right to protect its 1. that the mark has been used in, or that similar marks validly registered for or
and confusion or features appearing on trademark, CHERIFER. (Latest SC decision is the mark has been registered, or that an used on identical or similar goods or
deception is likely to both marks in order Prosel v. Tynor, G.R. No. 248021, 2020) application for registration of the mark services and owned by persons other
result, infringement that the observer may has been filed in or in respect of the than the person claiming that his mark is
occurs. Exact draw his conclusion 7. WELL-KNOWN MARKS Member State; a well-known mark.
duplication or whether one is 2. that the mark is well known in, or that the
imitation is not confusingly similar to The countries of the Union undertake, ex officio if mark has been registered, or that an (Rule 102, Rules and Regulations On
required. the other. their legislation so permits, or at the request of an application for registration of the mark Trademarks, Servicemarks, Tradenames
interested party, to refuse or to cancel the has been filed in or in respect of, any and Marked or Stamped Containers)
The question is registration, and to prohibit the use, of a jurisdiction other than the Member State;
whether the use of the trademark which constitutes a reproduction, an 3. that the mark is well known by the public
marks involved is imitation, or a translation, liable to create at large in the Member State. (Part I, Art.
likely to cause confusion, of a mark considered by the 2.3, 1999 Joint Recommendation
confusion or mistake competent authority of the country of registration Concerning Provisions on the Protection
in the mind of the or use to be well known in that country as being
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8. RIGHTS CONFERRED BY 9. USE BY THIRD PARTIES OF NAMES, Note: It is immaterial that there was no actual The general impression of the ordinary purchaser
REGISTRATION ETC. SIMILAR TO REGISTERED MARK sale of goods or services using the infringing buying under the normally prevalent conditions in
material as long as the acts mentioned were trade and giving the attention such purchasers
The owner of a registered mark shall have the Registration of the mark shall not confer on the actually committed. (Sec. 155, IP Code) usually give in buying that class of goods, is the
exclusive right: registered owner the right to preclude third parties touchstone. (Del Monte Corp v. Court of Appeals,
1. to prevent all third parties not having the from using bona fide their names, addresses, The “likelihood of confusion” is the gravamen of G.R. No. 78325, 1990)
owner’s consent pseudonyms, a geographical name, or exact trademark infringement. But likelihood of
2. from using in the course of trade identical indications concerning the kind, quality, quantity, confusion is a relative concept, the particular, and Right of Foreign Corporation to Sue in
or similar signs or containers for goods or destination, value, place of origin, or time of sometimes peculiar, circumstances of each case Trademark or Service Mark Enforcement
services which are identical or similar to production or of supply, of their goods or services: being determinative of its existence. Thus, in Action
those in respect of which the trademark Provided, that such use trademark infringement cases, more than in other Any foreign national or juridical person who
is registered 1. Is confined to the purposes of mere kinds of litigation, precedents must be evaluated meets the requirements of Section 3 of the IP
3. where such use would result in a identification or information, and in the light of each particular case. (Philip Morris, Code and does not engage in business in the
likelihood of confusion. 2. Cannot mislead the public as to the Inc. v. Fortune Tobacco Corp., G.R. No. 158589, Philippines may bring a civil or administrative
source of the goods or services. (Sec. 2006) action hereunder for opposition, cancellation,
Note: In case of the use of an identical sign for 148, IP Code) infringement, unfair competition, or false
identical goods or services, a likelihood of To establish trademark infringement, the designation of origin and false description,
confusion shall be presumed. (Sec. 147.1, IP 10. INFRINGEMENT AND REMEDIES following elements must be shown: whether or not it is licensed to do business in the
Code) i. The validity of plaintiff’s mark; Philippines under existing laws. (Sec. 160, IP
A. Trademark Infringement ii. The plaintiff’s ownership of the mark; Code)
The exclusive right of the owner of a well-known and
mark which is registered in the Philippines, shall A person shall be liable for trademark iii. The use of the mark or its colorable Limitations to Actions for Infringement
extend to goods and services which are not infringement if, without the consent of the owner imitation by the alleged infringer 1. A registered mark shall have no effect
similar to those in respect of which the mark is of the registered mark, he: results in “likelihood of confusion.” against any person who, in good faith,
registered, Provided: i. Uses in commerce any reproduction (McDonald's Corp. v. L.C. Big Mak before the filing date or the priority date,
1. That the use of that mark in relation to or colorable imitation of a registered Burger, Inc., G.R. No. 143993, 2004) was using the mark for the purposes of
those goods or services would indicate a mark or the same container or a his business or enterprise.
connection between those goods or dominant feature thereof in The phrase “colorable imitation” denotes such a
services and the owner of the registered connection with the sale, offering for “close or ingenious imitation as to be calculated Note: Such right may only be transferred
mark; and sale, distribution, advertising of any to deceive ordinary persons, or such a or assigned together with his enterprise
2. That the interests of the owner of the goods or services which is likely to resemblance to the original as to deceive an or business or with that part of his
registered mark are likely to be damaged cause confusion, or to cause ordinary purchaser giving such attention as a enterprise or business in which the mark
by such use. (Sec. 147.2, IP Code) mistake, or to deceive; purchaser usually gives, and to cause him to is used.
purchase the one supposing it to be the other”.
Note: This includes other preparatory (Etepha, A.G. v. Director of Patents, G.R. No. L- Note: cf. (Zuneca v. Natrapharm, G.R.
The ownership of a trademark or tradename is a steps necessary to carry out the sale of 20635, 1966) No. 211850, 2020 - wherein the SC held
property right that the owner is entitled to protect. any goods or services. that the first to file rule shall prevail
However, when a trademark is used by a party for The use of an identical or colorable imitation of a against a user of a mark in good faith.)
a product in which the other party does not deal, ii. Reproduces or colorably imitates a registered trademark by a person for the same
the use of the same trademark on the latter's registered mark or a dominant goods or services or closely related goods or 2. Where an infringer who is engaged solely
product cannot be validly objected to. (Canon feature thereof and applies such services of another party constitutes in the business of printing the mark or
Kabushiki Kaisha v. Court of Appeals, G.R. No. reproduction or colorable imitation to infringement. It is a form of unfair competition other infringing materials for others is an
120900, 2000) signs, packages, or advertisements because there is an attempt to get a free ride on innocent infringer, the owner of the right
intended to be used in commerce the reputation and selling power of another infringed shall be entitled as against such
upon or in connection with the sale, manufacturer by passing of one’s goods as infringer only to an injunction against
offering for sale, distribution, or identical or produced by the same manufacturer future printing.
advertising of goods or services as those carrying the other mark (brand). 3. Where the infringement complained of is
which likely to cause confusion, or to (Commissioner of Internal Revenue v. San contained in or is part of paid
cause mistake, or to deceive. Miguel Corp., G.R. Nos. 205045 & 205723, 2017) advertisement in a periodical or in an
electronic communication, the remedies
of the owner of the right infringed as
Page 256 of 393 Page 257 of 393

against the publisher or distributor of C. Damages; Requirement of Notice in which he deals, or his business, or services for the effect is to pass off on the public the goods of
periodical or electronic communication those of the one having established such one man as the goods of another. It is not
shall be limited to an injunction against In any suit for infringement, the owner of the goodwill, or who shall commit any acts calculated necessary that any particular means should be
the presentation of such advertising registered mark shall not be entitled to recover to produce said result, shall be guilty of unfair used to this end. (Mighty Corp. v. E. & J. Gallo
matter in future issues. profits or damages UNLESS the acts have been competition. (Sec. 168.2, IP Code) Winery, G.R. No. 154342, 2004)
committed with knowledge that such imitation is
Note: This shall apply only to innocent likely to cause confusion, or to cause mistake, or Any conduct the end and probable effect of which Trademark Unfair
infringers. to deceive. Such knowledge is presumed if: is to deceive the public or pass off the goods or Infringement Competition
1. The registrant gives notice that his mark business of a person as that for another Passing off of
is registered by displaying with the mark Unauthorized
4. There shall be no infringement of constitutes actionable unfair competition. one’s goods
the words “Registered Mark” or the letter Essence use of a
trademarks or tradenames of imported or (Alhambra Cigar vs. Mojica, G.R. No. L-8937, as those of
R within a circle, or trademark
sold drugs and medicines as well as 1914) another
imported or sold off-patent drugs and 2. The defendant had otherwise actual Fraudulent
medicines PROVIDED, the marks notice of the registration. (Sec. 158, IP Essentially, what the law punishes is the act of Unnecessary Essential
Intent
appearing thereon have been registered Code) giving one’s goods the general appearance of the Prior Prerequisite
marks that have not been tampered or goods of another, which would likely mislead the Unnecessary
Registration to the action
unlawfully modified. D. Penalties buyer into believing that such goods belong to the
latter. (Manuel C. Espiritu et. al. v. Petron Corp. 12. REGISTRATION OF MARKS UNDER
B. Damages Independent of the civil and administrative
et. al., G.R. No. 170891, 2009)
sanctions imposed by law, a criminal penalty of THE MADRID PROTOCOL
The owner of a registered mark may recover imprisonment from 2 to 5 years and a fine ranging
The “true test” of unfair competition is whether the The Madrid Protocol provides a cost-effective and
damages from any person who infringes his from P50,000 to P200,000 shall be imposed on
acts of the defendant have the intent of deceiving efficient way for trademark holders to ensure
rights. The measure of the damages suffered any person who is found guilty of committing any
or are calculated to deceive the ordinary buyer protection for their marks in multiple countries
shall be either: of the acts of trademark infringement, unfair
making his purchases under the ordinary through the filing of one application with a single
1. The reasonable profit which the competition, or false description or
conditions of the particular trade to which the office, in one language, with one set of fees, in
complaining party would have made had representation. (Sec. 170, IP Code)
controversy relates. One of the essential one currency. The Philippines acceded to the
the defendant not infringed his rights, or requisites in an action to restrain unfair
Power of Court to Order Infringing Material Madrid Protocol with effect on July 25, 2012.
2. The profit which the defendant actually competition is proof of fraud; the intent to deceive,
made out of the infringement. Destroyed
actual or probable must be shown before the right A. Coverage
In any action involving a violation of a right of the
to recover can exist. (Superior Commercial
If the measure of damages cannot be readily owner of the registered mark, the court may order An international application may be filed only by
Enterprises v. Kunnan Enterprises Ltd., et. al.,
ascertained with reasonable certainty, the court that goods found to be infringing be disposed of a natural person or a legal entity having an
G.R. No. 169974, 2010)
may award as damages a reasonable percentage outside the channels of commerce in such a industrial or commercial establishment in, or
based upon the amount of gross sales of the manner as to avoid any harm caused to the right being domiciled in, or a national of, the
Trademark Infringement vs. Unfair
defendant or the value of the services in holder or destroyed without compensation of any Philippines.
Competition
connection with which the mark or trade name sort. (Sec. 157.1, IP Code)
The law on unfair competition is broader and
was used in the infringement of the rights of the more inclusive than the law on trademark An international mark registered under the Madrid
complaining party. (Sec. 156.1, IP Code) 11. UNFAIR COMPETITION infringement. Trademark infringement is more System can only be protected within the
limited, but it recognizes a more exclusive right territories of State parties to the Madrid Union.
Note: Where there was actual intent to mislead A person who has identified in the mind of the
derived from the trademark adoption and
the public or to defraud the complainant, the court public the goods he manufactures or deals in, his The protection resulting from any international
registration by the person whose goods or
may double the amount of damages to be business or services from those of others, registration effected under the Madrid Protocol
business is first associated with it. The law on
awarded. (Sec. 156.3, IP Code) whether or not a registered mark is employed, before the date of entry into force of the
trademarks is a specialized subject distinct from
has a property right in the goodwill of the said Philippines cannot be extended to it. International
the law on unfair competition, although the two
On application of the complainant, the court may goods, business or services so identified, which registrations with dates prior to July 25, 2012 are
subjects are entwined with each other and are
impound during the pendency of the action, sales will be protected in the same manner as other not allowed.
dealt with together in the IP Code.
invoices and other documents evidencing sales. property rights. (Sec. 168.1, IP Code)
(Sec. 156.2, IP Code) Hence, even if one fails to establish his exclusive B. Rights Conferred
Any person who shall employ deception or any
property right to a trademark, he may still obtain
other means contrary to good faith by which he From the date of the international registration, the
relief on the ground of his competitor's unfairness
shall pass off the goods manufactured by him or protection of the mark in each of the designated
or fraud. Conduct constitutes unfair competition if
Page 258 of 393 Page 259 of 393

Contracting Parties is the same as if the mark had Minimum requirements to submit an D. COPYRIGHT without copying that selection or arrangement
been the subject of an application for registration international application from another work), and that it display some
filed directly with the Office of that Contracting 1. Name, address, and contact details of the 1. BASIC PRINCIPLES minimal level of creativity. (Feist Publications, Inc.
Party. applicant or the address and contact details v. Rural Telephone Service Co., Inc., 499 U.S.
of the applicant’s representative, if any; Copyright is not primarily about providing the 340, 1991)
An international registration is, therefore, 2. The Designated Contracting Parties; strongest possible protection for copyright
equivalent to a bundle of national registrations. 3. Reproduction of the mark; and owners so that they have the highest possible Note: The requisite level of creativity is extremely
4. Indication of the goods and services for which incentive to create more works. The control given low; even a slight amount will suffice.
Limitations: registration of the mark is sought. to copyright owners is only a means to an end:
Although an international registration is a single 5. Payment of the following fees: the promotion of knowledge and learning. The Authorship
registration: a. Basic fee; goal of copyright is to promote creativity and An author is “he to whom anything owes its origin;
1. Protection may be refused by some of the b. Complementary fee in respect of encourage creation of works. (ABS-CBN Corp. v. originator; maker; one who completes a work of
designated Contracting Parties, or the each designated Contracting Party Gozon, G.R. No. 195956, 2015) science or literature.” (Burrow-Giles Lithographic
protection may be limited or renounced for which no individual fee is payable; Company v. Sarony, 111 U.S. 53, 1884)
with respect to only some of the c. Supplementary fee in respect of each The copyright for a work is acquired by an
designated Contracting Parties. class of goods and services beyond intellectual creator from the moment of creation Note: The author must be a natural person. (Sec.
2. It may also be invalidated with respect to the third even in the absence of registration and deposit 171.1, IP Code)
one or more of the designated (Columbia Pictures v. CA, G.R. No. 110318,
Contracting Parties. Note: No supplementary fee is payable 1996)
2. COPYRIGHTABLE WORKS
3. Any action for infringement of an where all the designations are ones in
international registration must be brought respect of which an individual fee has to The focus of copyright is the usefulness of the A. Original Literary or Artistic Works
separately in each of the Contracting be paid. artistic design, and not its marketability. The
Parties concerned. central inquiry is whether the article is a work of These are original intellectual creations in the
D. Term of Protection art. (Ching v. Salinas Sr., G.R. No. 161295, 2005) literary and artistic domain protected from the
C. Requirements for Registration moment of their creation and shall include in
An international registration is effective for 10 Idea-Expression Dichotomy particular:
A mark may be the subject of an international years. It may be renewed for further periods of 10 Unlike a patent, a copyright gives no exclusive a. Books, pamphlets, articles and other writings;
application only if it has already been registered, years on payment of the prescribed fees. right to the art disclosed; protection is given only b. Periodicals and newspapers;
or if its registration has been applied for in the to the expression of the idea — not the idea itself. c. Lectures, sermons, addresses, dissertations
IPOPHL to be able to file an international The international registration may be renewed in (Mazer v. Stein, 347 U.S. 201, 1954) prepared for oral delivery, whether or not
application. This is called the Basic Registration respect of all the designated Contracting Parties reduced in writing or other material form;
or Basic Application, as the case may be. or in respect of only some of them. Purely Statutory Right d. Letters;
Copyright is purely a statutory right. Being a e. Dramatic or dramatico-musical compositions;
An international application must be presented to Note: It may not be renewed in respect of only statutory grant, the rights are only such as the choreographic works or entertainment in
the International Bureau through the IPOPHL. An some of the goods and services recorded in the statute confers, and may be obtained and dumb shows;
international application which is presented direct International Register. If the holder wishes to enjoyed only with respect to the subjects and by f. Musical compositions, with or without words;
to the International Bureau by the applicant will remove some of the goods and services from the the persons, and on terms and conditions g. Works of drawing, painting, architecture,
not be considered as such and will be returned to international registration, he must separately specified in the statute. (Joaquin, Jr. v. Drilon, sculpture, engraving, lithography or other
the sender. request cancellation in respect of those goods G.R. No. 108946, 1999) works of art; models or designs for works of
and services. art;
The Philippines, as an office of origin, has Originality
designated the English language for the filing of The method of registration through the IPOPHL, Originality is the sine qua non of copyright. If the Work of Architecture
international applications and any as laid down by the IP Code, is distinct and basic design reflected in a work or art does not Copyright in a work of architecture shall
communications for transmittal to the separate from the method of registration through owe its origin to the putative copyright holder, include the right to control the erection of any
International Bureau through the IPOPHL. All the WIPO, as set in the Madrid Protocol. then that person must add something original to building which reproduces the whole or a
other documents required to be submitted directly Comparing the two methods of registration that design, and then only the original addition substantial part of the work either in its
to the IPOPHL by the applicant must also be in despite their being governed by two separate may be copyrighted. (Meshwerks, Inc. v. Toyota original form or in any form recognizably
English. systems of registration is thus misplaced. (IPAP Motor Sales U.S.A., 528 F.3d 1258, 2008) derived from the original
v. Sec. Ochoa, G.R. No. 204605, 2016)
Originality requires only that the author make the Note: The copyright in any such work shall
selection or arrangement independently (i.e., not include the right to control the
Page 260 of 393 Page 261 of 393

reconstruction or rehabilitation in the same B. Derivative Works information contained in the reports. Copyright of justice, before administrative
style as the original of a building to which that protects the manner of expression of news agencies, in deliberative assemblies, and
copyright relates. (Sec. 186, IP Code) The following derivative works shall be protected reports, "the particular form or collocation of in meetings of public character.
by copyright: words in which the writer has communicated it."
h. Original ornamental designs or models for 1. Dramatizations, translations, adaptations, Such protection extends to electronic news Note: The author of speeches, lectures,
articles of manufacture, whether or not abridgments, arrangements, and other reports as well as written reports. sermons, addresses, and dissertations
registrable as an industrial design, and other alterations of literary or artistic works; and mentioned in the preceding paragraphs
works of applied art; 2. Collections of literary, scholarly or artistic The idea/expression dichotomy is a complex shall have the exclusive right of making a
i. Illustrations, maps, plans, sketches, charts works, and compilations of data and other matter if one is trying to determine whether a collection of his works.
and three-dimensional works relative to materials which are original by reason of the certain material is a copy of another. This
geography, topography, architecture or selection or coordination or arrangement of dichotomy would be more relevant in Publication or republication by the government in
science; their contents. (Sec. 173.1, IP Code) determining, for instance, whether a stage play a public document of any copyrighted work shall
j. Drawings or plastic works of a scientific or was an infringement of an author’s book involving not be taken to cause any abridgment or
technical character; Derivative works shall be protected as new the same characters and setting. In this case, annulment of the copyright or to authorize any
k. Photographic works including works works, provided however, that such new work: however, respondents admitted that the material use or appropriation of such work without the
produced by a process analogous to a. Shall not affect the force of any subsisting under review — which is the subject of the consent of the copyright owner. (Sec. 176.3, IP
photography; lantern slides; copyright upon the original works employed controversy — is an exact copy of the original. Code)
l. Audiovisual works and cinematographic or any part thereof, or Respondents did not subject ABS-CBN’s footage
works and works produced by a process b. Be construed to imply any right to such use to any editing of their own. The news footage did 4. RIGHTS OF COPYRIGHT OWNER
analogous to cinematography or any process of the original works, or to secure or extend not undergo any transformation where there is a
for making audio-visual recordings; copyright in such original works. need to track elements of the original. (ABS-CBN Copyright or Economic Rights
m. Pictorial illustrations and advertisements; Corp. v. Gozon, G.R. No. 195956, 2015) Copyright or economic rights shall consist of the
n. Computer programs; and Published Edition of Work exclusive right to carry out, authorize or prevent
In addition to the right to publish granted by the Works of the Government the following acts:
Computer author, his heirs, or assigns, the publisher shall A work of the Government is a work created by 1. Reproduction of the work or substantial
An electronic or similar device having have a copyright consisting merely of the right of an officer or employee of the Philippine portion of the work;
information-processing capabilities reproduction of the typographical arrangement of Government or any of its subdivisions and
the published edition of the work. (Sec. 174, IP instrumentalities, including government-owned or Reproduction
Computer Program Code) controlled corporations as part of his regularly Making of 1 or more copies, temporary or
A set of instructions expressed in words, prescribed official duties. (Sec. 171.11, IP Code) permanent, in whole or in part, of a work
codes, schemes or in any other form, which 3. NON-COPYRIGHTABLE WORKS or a sound recording in any manner or
is capable when incorporated in a medium No copyright shall subsist in any work of the form
that the computer can read, or causing the No protection shall extend to any: Government of the Philippines. However, the
computer to perform or achieve a particular 1. Idea, procedure, system, method or Government is not precluded from receiving and 2. Dramatization, translation, adaptation,
task or result. operation, concept, principle, discovery holding copyrights transferred to it by abridgment, arrangement or other
or mere data [IPSMOC-PDD]; assignment, bequest or otherwise. transformation of the work;
o. Other literary, scholarly, scientific and artistic 2. News of the day and other miscellaneous 3. The first public distribution of the original
works. facts having the character of mere items General Rule: Prior approval of the government and each copy of the work by sale or
of press information; or agency or office wherein the work is created shall other forms of transfer of ownership;
(Sec. 172.1, IP Code) 3. Official text of a legislative, administrative be necessary for exploitation of such work for 4. Rental of the original or a copy of an
or legal nature, as well as any official profit. audiovisual or cinematographic work, a
Note: Works are protected by the sole fact of their translation thereof. (Sec. 175, IP Code) work embodied in a sound recording, a
creation, irrespective of their mode or form of Such agency or office may impose as a condition computer program, a compilation of data
expression, as well as of their content, quality and The expression of an idea is protected by the payment of royalties. and other materials or a musical work in
purpose. (Sec. 172.2, IP Code) copyright, not the idea itself. graphic form, irrespective of the
It is axiomatic that copyright protection does not Exception: No prior approval or conditions shall ownership of the original or the copy
extend to news "events" or the facts or ideas be required for the use of any purpose of: which is the subject of the rental;
which are the subject of news reports. But it is 1. Statutes, rules and regulations, or
equally well-settled that copyright protection does 2. Speeches, lectures, sermons, Rental
extend to the reports themselves, as addresses, and dissertations, Transfer of the possession of the original
distinguished from the substance of the pronounced, read or rendered in courts or a copy of a work or a sound recording
Page 262 of 393 Page 263 of 393

for a limited period of time, for profit- 5. RULES ON OWNERSHIP OF

making purposes COPYRIGHT Copyright remains with the The purpose and character requirement
creator, unless there is a is important in view of copyright’s goal to
5. Public display of the original or a copy of Rules on Ownership written stipulation to the promote creativity and encourage
the work; Copyright ownership shall be governed by the contrary. creation of works. Hence, commercial
6. Public performance of the work; and following rules:  Copyright belongs to the use of the copyrighted work can be
producer, the author of weighed against fair use.
Definitions of Public Performance TYPE OF the scenario, the
OWNERSHIP
a. For Non-audiovisual work – WORK composer of the music, The “transformative test” is generally
reciting, playing, dancing, acting or Original the film director, and the used in reviewing the purpose and
otherwise performing the work, either Literary and Copyright belongs to the author of the work so character of the usage of the copyrighted
directly or by means of any device or Artistic author of the work. adapted. work. Courts must look into whether the
process Works  The producer shall copy of the work adds “new expression,
b. For Audiovisual work – showing of  Co-authors shall be the exercise the copyright to meaning or message” to transform it into
Audiovisual
its images in sequence and the original owners of the an extent required for the something else. (ABS-CBN Corp. v.
Work
making of the sounds accompanying copyright. exhibition of the work in Gozon, G.R. No. 195956, 2015)
it audible  In the absence of any manner.
c. For Sound recording – making the agreement, rights shall 2. The nature of the copyrighted work;
recorded sounds audible at a place be governed by the rules Exception: Right to collect
or at places where persons outside on co-ownership. performing license fees for If the nature of the work is more factual
the normal circle of a family and that the performance of musical than creative, then fair use will be
Joint
family’s closest social acquaintances Note: If a work of joint compositions, with or without weighed in favor of the user. (ABS-CBN
Authorship
are or can be present authorship consists of parts words, which are Corp. v. Gozon, G.R. No. 195956, 2015)
that can be used separately incorporated into the work
7. Other communication to the public of the and the author of each part Copyright belongs to the 3. The amount and substantiality of the
work, e.g. online/Internet. can be identified, the author writer subject to the portion used in relation to the copyrighted
of each part shall be the provisions of Article 723 of work as a whole; and
Communication to the public original owner of the the Civil Code wherein it
Any communication to the public, including copyright in the part that he Letters provides that the court may An exact reproduction of a copyrighted
broadcasting, rebroadcasting, retransmitting has created. authorize their publication or work, compared to a small portion of it,
by cable, broadcasting, and retransmitting by Copyright shall belong to: dissemination if the public can result in the conclusion that its use is
satellite, and includes the making of a work 1. Employee: creation of good or the interest of justice not fair.
available to the public by wire or wireless the object of copyright is so requires.
means in such a way that members of the not a part of his regular However, there may also be cases
public may access these works from a place duties even if the 6. LIMITATIONS ON COPYRIGHT where, though the entirety of the
and time individually chosen by them employee uses the time, copyrighted work is used without
facilities and materials of A. Fair Use consent, its purpose determines that the
Employee’s usage is still fair. For example, a parody
the employer.
Work The fair use of a copyrighted work for criticism, using a substantial amount of
2. Employer: work is the
result of the performance comment, news reporting, teaching including copyrighted work may be permissible as
of his regularly-assigned limited number of copies for classroom use, fair use as opposed to a copy of a work
duties, UNLESS there is scholarship, research, and similar purposes is not produced purely for economic gain.
an agreement, express an infringement of copyright. (ABS-CBN Corp. v. Gozon, G.R. No.
or implied, to the 195956, 2015)
contrary In determining whether the use made of a work in
Ownership of the work any particular case is fair use, the factors to be 4. The effect of the use upon the potential
Independent belongs to the person other considered shall include: [PuCha-Nat-Su-E] market for or value of the copyrighted
Contractor’s than the employer who 1. The purpose and character of the use, work. (Sec. 185.1, IP Code)
Work commissioned the work and including whether such use is of a
who pays for it. commercial nature or is for non-profit If a court finds that the use had or will
educational purposes; have a negative impact on the
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copyrighted work's market, then the use a. Selling, letting for hire, or by way of trade A. Remedies infringing copies of the work even in the event
is deemed unfair. (ABS-CBN Corp. v. offering or exposing for sale, or hire, the of acquittal in a criminal case.
Gozon, G.R. No. 195956, 2015) article Any person infringing a right protected under the
b. Distributing the article for purpose of IP Code shall be liable: Statutory Damages
Note: That a work is unpublished shall not by trade, or for any other purpose to an a. To an injunction restraining such The copyright owner may elect, at any time before
extent that will prejudice the rights of the infringement. final judgment is rendered, to recover instead of
itself bar a finding of fair use if such finding is
copyright owner in the work; or actual damages and profits, an award of statutory
made upon consideration of all the above factors. c. Trade exhibit of the article in public. (Sec. damages for all infringements involved in an
The court may also order the defendant to
(Sec. 185.2, IP Code) 217.3, IP Code) desist from an infringement to prevent the action in a sum equivalent to the filing fee of the
entry into the channels of commerce of infringement action but not less than P50,000.00.
Doctrine of Fair Use Copyright Infringement imported goods that involve an infringement, In awarding statutory damages, the court may
Fair use is a privilege to use the copyrighted Infringement of a copyright is a trespass on a immediately after customs clearance of such consider the following factors:
material in a reasonable manner without the private domain owned and occupied by the owner goods. 1. The nature and purpose of the infringing
consent of the copyright owner or as copying the of the copyright, and, therefore, protected by law, act;
theme or ideas rather than their expression. Fair and infringement of copyright, or piracy, which is b. To pay to the copyright proprietor or his 2. The flagrancy of the infringement;
use is an exception to the copyright owner’s a synonymous term in this connection, consists in assigns or heirs such actual damages, 3. Whether the defendant acted in bad faith;
the doing by any person, without the consent of including legal costs and other expenses, as 4. The need for deterrence;
monopoly of the use of the work to avoid stifling
the owner of the copyright, of anything the sole he may have incurred due to the infringement 5. Any loss that the plaintiff has suffered or
the very creativity which that law is designed to right to do which is conferred by statute on the as well as the profits the infringer may have is likely to suffer by reason of the
foster. (ABS-CBN Corp. v. Gozon, G.R. No. owner of the copyright. (Columbia Pictures, Inc. made due to such infringement. infringement; and
195956, 2015) v. Court of Appeals, G.R. No. 110318, 1996) 6. Any benefit shown to have accrued to the
Note: In proving profits, the plaintiff shall be defendant by reason of the infringement.
No question of fair or unfair use arises, however, Gravamen of Copyright Infringement required to prove sales only and the (Sec. 216.1, IP Code)
if no copying is proved to begin with. This is in The gravamen of copyright infringement is not defendant shall be required to prove every
consonance with the principle that there can be merely the unauthorized “manufacturing” of element of cost which he claims or, in lieu of B. Criminal Penalties
no infringement if there was no copying. It is only intellectual works but rather the unauthorized actual damages and profits, such damages
performance of any of the acts covered by Sec. which, to the court, shall appear to be just and The copyright owner can file a criminal, civil or
where some form of copying has been shown that
177 (economic rights). Hence, any person who shall not be regarded as penalty. administrative action for copyright infringement.
it becomes necessary to determine whether it has
performs any of the acts thereunder without
been carried to an “unfair,” that is, illegal, extent. obtaining the copyright owner’s prior consent The amount of damages to be awarded shall Where Filed
(Habana v. Robles, G.R. No. 131522, 1999) renders himself civilly and criminally liable for be doubled against any person who: Filed in the court situated in
copyright infringement. (NBI - Microsoft Corp. v. 1. Circumvents effective technological Criminal Case the place where the violation
7. COPYRIGHT INFRINGEMENT Hwang, G.R. No. 147043, 2005) measures; or occurred
2. Having reasonable grounds to know that Filed at the Bureau of Legal
Any person infringes a right protected under the When Committed it will induce, enable, facilitate or conceal Administrative Affairs at the Intellectual
IP Code when one: By any person who shall use original literary or the infringement, remove or alter any Case Property Office of the
a. Directly commits an infringement (direct artistic works, or derivative works, without the electronic rights management Philippines
infringement); copyright owner’s consent in such a manner as to information from a copy of a work Filed in the appropriate court
b. Benefits from the infringing activity of violate the foregoing copy and economic rights. located at the place where
another person who commits an For a claim of copyright infringement to prevail, c. Deliver under oath, for impounding during the the defendant resides/is
Civil Case
infringement if the person benefiting has the evidence on record must demonstrate: pendency of the action, upon such terms and located, or where the
been given notice of the infringing activity a. Ownership of a validly copyrighted conditions as the court may prescribe, sales plaintiff resides/is located, at
and has the right and ability to control the material by the complainant; and invoices and other documents evidencing the option of the plaintiff
activities of the other person (vicarious b. Infringement of the copyright by the sales, all articles and their packaging alleged
infringement); or respondent. (Olano v. Eng Co, G.R. No. to infringe a copyright and implements for
c. With knowledge of infringing activity, 195835, 2016) making them.
induces, causes or materially contributes d. Deliver under oath for destruction without any
to the infringing conduct of another The Intellectual Property Code is malum compensation all infringing copies or devices,
(direct infringement). (Sec. 216, IP Code) prohibitum and prescribes a strict liability for as well as all plates, molds, or other means
copyright infringement. Good faith, lack of for making such infringing copies as the court
Also includes the act of any person who at the knowledge of the copyright, or lack of intent to may order.
time when copyright subsists in a work has in his infringe is not a defense against copyright e. Such other terms and conditions, including
possession an article which he known, or ought infringement. (ABS-CBN Corp. v. Gozon, G.R. the payment of moral and exemplary
to know, to be an infringing copy of the work for No. 195956, 2015) damages, which the court may deem proper,
the purpose of: wise and equitable and the destruction of
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ATENEO CENTRAL
Penalties
Imprisonment of between 1
to 3 years and a fine of
First Offense
between 50,000 to 150,000
pesos
Imprisonment of 3 years and
Second 1 day to six years plus a fine
Offense of between 150,000 to
500,000 pesos
Imprisonment of 6 years and
Third and
1 day to 9 years plus a fine
Subsequent
ranging from 500,000 to
Offenses
1,500,000 pesos
In all cases, subsidiary imprisonment in cases of

insolvency. (Sec. 217.1, IP Code)
SPECIAL LAWS
In Determining Number of Years of
Imprisonment and Amount of Fine
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the infringement:
Provided, That the respective maximum penalty
stated in Section 217.1. (a), (b) and (c) herein for
Commercial Law
the first, second, third and subsequent offense,
shall be imposed when the infringement is
committed by:
a. The circumvention of effective
technological measures;
b. The removal or alteration of any
electronic rights management
information from a copy of a work, sound
recording, or fixation of a performance,
by a person, knowingly and without
authority; or
c. The distribution, importation for
distribution, broadcast, or communication
to the public of works or copies of works,
by a person without authority, knowing
that electronic rights management
information has been removed or altered
without authority. (Sec. 217.2, IP Code)
————- end of topic ————-
Page 268 of 393

VIII. SPECIAL LAWS c. Obligations Secured A. SECURED TRANSACTIONS secured creditor with respect to the security,
d. Surety Distinguished From without further consent from the grantor
Standby Letter of Credit 1. PERSONAL PROPERTY SECURITIES
e. Surety Distinguished From ACT With respect to rights to deposit account
Guaranty It is an agreement in writing among the deposit-
VII. SPECIAL LAWS
f. Surety Distinguished From A. DEFINITIONS AND SCOPE taking institution, the grantor, and the secured
A. SECURED TRANSACTIONS
Joint and Solidary Obligations creditor where the deposit-taking institution
1. Personal Property Securities Act
5. Letters of Credit Note: the PPSA repealed the following laws: agrees to follow the instructions from the
a. Definitions and Scope
a. Definition and Purpose 1. The Chattel Mortgage Law
b. Asset-Specific Rules secured creditor with respect to the payment
b. Kinds of Letters of Credit 2. Articles 2085-2123 (pledge), 2127
i. Future Property of funds credited to the deposit account
c. Rule of Strict Compliance (mortgage extends to accessions), 2140-
ii. Rights to Proceeds and without further consent from the grantor.
d. Independence Principle 2141 (chattel mortgage), 2241, 2243,
Commingled Funds
iii. Tangible Assets and 2246-2247 (preference of credits for With respect to commodity contracts
Commingled in a Mass specific movable property) of the Civil It is an agreement in writing among the grantor,
iv. Accounts Receivables Code secured creditor, and intermediary, according
c. Perfection of Security 3. Sec. 13 of the Financing Company Act of to which the commodity intermediary will
Interests 1998 (Registry of Deeds shall maintain a apply any value distributed by the secured
d. Registration register of financial leases) creditor without further consent by the
e. Priority of Security Interests 4. Sec. 114-116 (recording and fees for commodity customer or grantor
f. Tangible Assets; Intangible recording of chattel mortgages), and
Assets partially Sec. 10 (general function of the c. Grantor
g. Enforcement of Security Register of Deeds; insofar as
Interests inconsistent with the PPSA) of the A grantor may be: (BuTTLGG)
h. Prior Interests and the Property Registration Decree (a) A Buyer or other Transferee of a collateral
Transitional Period that acquires it right subject to a security
5. Sec. 5(e) of the Land Transportation and
2. Real Estate Mortgage Law interest;
Traffic Code (encumbrances of motor
a. Definition and Characteristics (b) A Transferor in an outright transfer of an
vehicles)
i. Obligations Secured by
accounts receivable; or
Real Estate Mortgage
1. TERMS (c) A Lessee of Goods
ii. Object of Real Estate
(d) Grantor of security interest in collateral to
Mortgage a. Commodity Contact
iii. Right to Alienate secure its own obligation or of another
Mortgage Credit person;
iv. Right to Alienate A commodity futures contract, an option on a
Collateral commodity futures contract, a commodity d. Non-intermediated Securities
b. Essential Requisites option, or another contract if the option is:
3. Guaranty Such are:
1. Traded on or subject to the rules of a board
a. Nature and Extent of (a) securities other than those credited to a
of trade that has been designated as a
Guaranty securities account; and
contract market for such a contract; or
i. Obligation Secured by (b) rights in securities resulting from the
2. Traded on a foreign commodity board of
Guaranty credit of securities to a securities account
trade, exchange, or market, and is carried on
ii. Parties to a Guaranty
the books of a commodity intermediary for a
iii. Excussion e. Notice
commodity customer;
iv. Right to Protection
v. Right to Indemnification A statement of information that is registered in the
b. Control Agreement Registry relating to a security interest or lien.
vi. Right to Subrogation
vii. Rights of Co-Guarantors
With respect to securities The term “notice” includes:
b. Effects of Guaranty
It is an agreement in writing among the issuer or
c. Extinguishment of Guaranty (a) Initial notice;
d. Legal and Judicial Bonds
the intermediary, the grantor, and the secured
(b) amendment notice;
4. Surety creditor, according to which the intermediary
(c) termination notice;
a. Concept agrees to follow the instructions of the
b. Form of Surety
Page 270 of 393 Page 271 of 393

f. Proceeds also provide for the language to be used. (b) Where proceeds in the form of funds credited debtor of the receivable is required to make
Proceeds may be: (PPSA, Sec. 6) to a deposit account or money are commingled payment.
(a) any property received upon sale, lease with other funds or money:
or other disposition of collateral; or The security agreement may provide for the d. Accounts receivable
creation of a security interest in a future i. The security interest shall extend to the
(b) whatever is collected on or distributed commingled money or funds,
property, but the security interest in that future Section 3.08 Security Interest in Certain
with respect to collateral; notwithstanding that the proceeds have
property is created only when the grantor Accounts Receivable.
(c) claims arising out of the loss or damage acquires rights in it or the power to encumber ceased to be identifiable to the extent A security interest in an account receivable shall
to the collateral; it. (PPSA, Sec. 5(b)) they remain traceable; be effective notwithstanding any agreement
(d) as well as a right to insurance payment between the grantor and the account debtor or
or other compensation for loss or ii. The security interest in the commingled
A description of the collateral is sufficient if it any secured creditor limiting in any way the
damage of the collateral funds or money shall be limited to the
reasonably identifies the collateral; a description grantor's right to create a security interest;
amount of the proceeds immediately
such as “all personal property”, “all equipment”, Provided: Nothing in this section affects the right
before they were commingled; and
g. Purchase Money Security Interest “all inventory”, or “all personal property within a of a buyer to create a security interest over the
A security interest in goods taken by the seller to generic category” of the grantor shall be sufficient iii. If at any time after the commingling, the account receivable. Provided, further: that any
secure the price or by a person who gives value balance credited to the deposit account release of information is subject to agreements
to enable the grantor to acquire the goods to the k. Writing or the amount of the commingled money on confidentiality.
extent that the credit is used for that purpose For purposes of this act, “writing” includes is less than the amount of the proceeds
Nothing in this section shall affect any obligation
electronic records immediately before they were
or liability of the grantor for breach of the
h. Registry commingled, the security interest against
agreement in subsection (a).
The centralized and nationwide electronic registry 2. SCOPE the commingled funds or money shall be
established in the Land Registration Authority limited to the lowest amount of the Any stipulation limiting the grantor's right to create
(LRA) where notice of a security interest and a GR: Applies to all transactions that secure an commingled funds or money between the a security interest shall be void.
lien in personal property may be registered obligation with a movable collateral time when the proceeds were
commingled and the time the security This section shall apply only to accounts
EXC: interest in the proceeds is claimed. receivable arising from:
i. Secured Creditor
(a) interests in aircrafts subject to the Civil i. A contract for the supply or lease of
A person that has a security interest. Aviation Authority Act of 2008; and c. Tangible assets commingled in a mass goods or services other than
For the purposes of registration and priority only: (b) interests in ships subject the Ship financial services;
(a) includes a buyer of account receivable and a Mortgage Decree of 1978(Sec. 4) Section 3.07 of the IRR. Security Interest Over ii. A construction contract or contract
lessor of goods under an operating lease for Tangible Assets Commingled in a Mass for the sale or lease of real property;
not less than one (1) year A security interest in a tangible asset that is and
B. ASSET-SPECIFIC RULES commingled in a mass extends to the mass. iii. A contract for the sale, lease or
license of intellectual property.
j. Security Interest a. Future Property A security interest that extends to a mass is
A property right in collateral that secures limited to the same proportion of the mass as the C. PERFECTION OF SECURITY
payment or other performance of an obligation, As to the creation of a security interest quantity of the encumbered asset bore to the INTERESTS
regardless of whether the parties have A security agreement may provide for the quantity of the entire mass immediately after the
denominated it as a security interest, and creation of a security interest in a future property, commingling. SECTION 11. PERFECTION OF SECURITY
regardless of the type of asset, the status of the but the security interest in that property is created INTEREST.
grantor or secured creditor, or the nature of the only when the grantor acquires rights in it or Section 3.09 of the IRR. Protection of Account
secured obligation; including the right of a buyer the power to encumber it.(Sec. 5b) Debtor A security interest shall be perfected when it has
of accounts receivable and a lessor under an Except as otherwise provided in the PPSA and been created and the secured creditor has taken
operating lease for not less than one (1) year b. Rights to proceeds and comingled funds these Rules, the creation of a security interest in one of the actions in accordance with Section 12.
a receivable does not, without the consent of the
These are the rules to be followed (Sec. 8): debtor of the receivable, affect its rights and
A security interest is created by a security Hence, to perfect a security interest, it must be
(a) A security interest in personal property shall obligations, including the payment terms created then accompanied by either registration,
agreement. (PPSA, Sec. 5(a))
extend to its identifiable or traceable proceeds. contained in the contract giving rise to the possession, or control; depending on the
A security agreement should be contained in a receivable. A payment instruction may change collateral.
the person, address or account to which the
written contract signedby the parties. It should
Page 272 of 393 Page 273 of 393

On perfection, a security interest becomes so requests. A deposit-taking institution or an The Registry shall provide electronic means for SECTION 29. ONE NOTICE SUFFICIENT
effective against third parties. intermediary that has entered into such an registration and searching of notices. FOR SECURITY INTERESTS UNDER
agreement shall not be required to confirm the MULTIPLE SECURITY AGREEMENTS
existence of the agreement to another person
SECTION 12. MEANS OF PERFECTION. unless requested to do so by the grantor. SECTION 27. PUBLIC RECORD The registration of a single notice may relate to
A SECURITY INTEREST MAY BE security interests under one or more security
PERFECTED THROUGH THE FOLLOWING SECTION 14. PERFECTION IN PROCEEDS Information contained in a registered notice shall agreements.
MEANS: (RPC) be considered as a public record.
(a) Registration of a notice with the Registry; Upon disposition of collateral, a security SECTION 30. EFFECTIVENESS OF NOTICE
(b) Possession (actual or constructive) of the interest shall extend to proceeds of the Any person may search notices registered in the
collateral by the secured creditor; and collateral without further act and be Registry. As to the time of effectivity
(c) Control of investment property and deposit continuously perfected, if the proceeds are in the A notice shall be effective at the time it is
account. form of money, accounts receivable, SECTION 28. SUFFICIENCY OF NOTICE
discoverable on the records of the Registry.
negotiable instruments or deposit accounts.
A security interest in any tangible asset may be An initial notice of security interest shall not be
As to its duration
perfected by registration or possession. A Upon disposition, if the proceeds are in a form rejected:
It is effective for the duration of the term indicated
security interest in investment property and different from money, accounts receivable, (a) If it identifies the grantor by an
in the notice unless a continuation notice is
deposit account may be perfected by registration negotiable instruments or deposit accounts, the identification number, as further prescribed in
registered before the term lapses.
or control. security interest in the proceeds must be the regulations;
perfected by one of the means applicable to the (b) If it identifies the secured creditor or an
As to substantial compliance
Perfection in Tangible v. Intangible Assets relevant type of collateral within fifteen (15) days agent of the secured creditor by name;
A notice substantially complying with the
TANGIBLE ASSETS INTANGIBLE after the grantor receives such proceeds; (c) If it provides an address for the grantor
requirements of the PPSA shall be effective
ASSETS otherwise, the security interest in such proceeds and secured creditor or its agent;
unless it is seriously misleading.
May be perfected May be perfected shall not be effective against third parties. (d) If it describes the collateral: and
through registration through registration (e) If the prescribed fee has been tendered, or
A notice that may not be retrieved in a search of
or possession or control. an arrangement has been made for payment
SECTION 15. CHANGE IN MEANS OF the Registry against the correct identifier of the
(Please refer to of fees by other means.
PERFECTION grantor shall be ineffective with respect to that
different modes of
grantor.
perfection for specific If the Registry rejects to register a notice, it shall
intangible assets) A security interest shall remain perfected despite promptly communicate the fact of and reason for
a change in the means for achieving perfection: SECTION 31. SERIOUSLY MISLEADING
its rejection to the person who submitted the
provided, that there was no time when the NOTICE
notice.
SECTION 13. PERFECTION BY CONTROL security interest was not perfected.
A seriously misleading notice is one that doesn’t
Each grantor must authorize the registration of an
provide the grantor’s identification number.
A security interest in a deposit account or initial notice by signing a security agreement or
SECTION 16. ASSIGNMENT OF SECURITY
investment property may be perfected by control otherwise in writing. SECTION 32. AMENDMENT OF NOTICE
through: INTEREST
(a) The creation of the security interest in favor A notice may be registered before a security A notice may be amended by the registration of
If a secured creditor assigns a perfected security
of the deposit-taking institution or the agreement is concluded. Once a security an amendment notice that:
interest, an amendment notice may be registered
intermediary; agreement is concluded, the date of registration (a) Identifies the initial notice by its
to reflect the assignment.
(b) The conclusion of a control agreement; or of the notice shall be reckoned from the date the registration number; and
(c) For an investment property that is an notice was registered. (b) Provides the new information.
electronic security not held with an D. REGISTRATION
intermediary, the notation of the security A notice of lien may be registered by a lien holder Rules on amendment of the notice:
interest in the books maintained by or on SECTION 26. ESTABLISHMENT OF without the consent of the person against whom (a) Adding collateral that is not proceeds
behalf of the issuer for the purpose of ELECTRONIC REGISTRY the lien is sought to be enforced. must be authorized by the grantor in
recording the name of the holder of the writing.
securities. The Registry shall be established in and (b) Adding a grantor must be authorized
(d) Nothing in this Act shall require a deposit- administered by the LRA. by the added grantor in writing.
taking institution or an intermediary to enter
into a control agreement, even if the grantor
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Instances when a notice must be amended: (c) When the secured creditor has agreed (b) The registration number, and the date in a case of mistake or that was never a
a) To continue the effectiveness of the to release part of the collateral and time of registration of each collateral under a security agreement
notice by filing an amendment notice that described in the notice notice; and between the secured creditor and the
identifies the original by its registration (d) None Existence. When there is no (c) All of the information contained in grantor
number. existing security agreement between the each notice.
b) When there is mistake; when the collateral secured creditor and the grantor. SECTION 41. PROCEDURE FOR
described in the notice includes an item or If requested, the Registry shall issue a certified NONCOMPLIANCE WITH DEMAND
property which is not under the security SECTION 35. REGISTRY DUTIES report of the results of a search that is an official
agreement. (Sec. 39) record of the Registry and shall be admissible into If the secured creditor fails to comply with the
c) When the secured creditor assigns a The following are the duties of the registry: evidence in judicial proceedings without extrinsic demand within fifteen working days after its
perfected security interest. (Sec. 16) (a) Assign a unique registration number; evidence of its authenticity. receipt, the person giving the demand under
(b) Create a record that bears the number Section 39 may ask the proper court to issue an
Other Rules assigned to the initial notice and the date SECTION 37. DISCLOSURE OF order terminating or amending the notice as
An amendment notice shall be effective only as and time of registration; and INFORMATION. appropriate.
to each secured creditor who authorizes it. (c) Maintain the record for public inspection.
(d) Index notices by the identification The secured creditor must provide to the grantor SECTION 42. COMPULSORY AMENDMENT
An amendment notice that adds collateral or a number of the grantor and, for notices at its request: OR TERMINATION BY COURT ORDER
grantor shall be effective as to the added containing a serial number of a motor (a) The current amount of the unpaid
collateral or grantor from the date of its vehicle, by serial number. secured obligation; and The court may, on application by the grantor,
registration. (e) Provide a copy of the electronic record of (b) A list of assets currently subject to a issue an order that the notice be terminated or
the notice, including the registration security interest. amended in accordance with the demand, which
SECTION 33. CONTINUATION OF NOTICE number and the date and time of order shall be conclusive and binding-on the
registration to the person who submitted The secured creditor may require payment of a LRA
Continuation of notice may be registered only it. fee for each request made by the grantor in
within six (6) months before the expiration of the (f) Maintain the capability to retrieve a subsection (a) in this section, but the grantor is Provided, That the secured creditor who
effective period of the notice. record by the identification number of the entitled to a reply without charge once every disagrees with the order of the court may appeal
grantor, and by serial number of a motor six (6) months. the order.
SECTION 34. TERMINATION OF vehicle.
EFFECTIVENESS OF A NOTICE (g) Maintain records of lapsed notices for a A security interest in a deposit account shall The court may make any other order it deems
period of ten (10) years after the lapse. not: proper for the purpose of giving effect to an order
The effectiveness of a notice may be terminated (a) Affect the rights and obligations of the under the previous paragraph.
by registering a termination notice that: The duties of the Registry shall be merely deposit-taking institution without its
(a) Identifies the initial notice by its administrative in nature. By registering a notice consent; or The LRA shall amend or terminate a notice in
registration number; and or refusing to register a notice, the Registry does (b) Require the deposit-taking institution to accordance with a court order as soon as
(b) Identifies each secured creditor who not determine the sufficiency, correctness, provide any information about the reasonably practicable after receiving the such.
authorizes the registration of the authenticity, or validity of any information deposit account to third parties.
termination notice. contained in the notice. SECTION 43. NO FEE FOR COMPLIANCE
SECTION 40. MATTERS THAT MAY BE OF DEMAND
A termination notice terminates effectiveness of SECTION 36. SEARCH OF REGISTRY REQUIRED BY DEMAND
the notice as to each authorizing secured RECORDS AND CERTIFIED REPORT. A secured creditor shall not charge any fee for
creditor. Upon receipt of the demand for termination or compliance with a demand received under
The Registry shall communicate the following amendment notice under Section 39, the secured section 39.
Instances when a notice may be terminated information to any person who requests it: creditor must register such within fifteen working
(Sec. 39): (a) Whether there are any unlapsed days: SECTION 44. WHEN REGISTRATION AND
(a) When the obligation has been paid and notices in the Registry that indicate (a) Terminating the registration in case of SEARCH CONSTITUTES INTERFERENCE
there is no drag net clause the grantor's identification number or performance of obligation, non-existence WITH PRIVACY OF INDIVIDUAL
(b) When the security interest is vehicle serial number that exactly of the security agreement, or
extinguished in accordance with this matches the relevant criterion extinguishment of the security interest A person who submitted a notice for registration
act provided by the searcher; under Section 39; or carried out a search of the Registry with a
(b) Amending the registration to release frivolous, malicious or criminal purpose or
some property that is no longer collateral
Page 276 of 393 Page 277 of 393

intent shall be subject to civil and criminal F. TANGIBLE ASSETS; INTANGIBLE Preferred over: Security interests perfected G. ENFORCEMENT OF SECURITY
penalties according to the relevant laws. ASSETS through registration and control agreements INTERESTS
concluded at a later time. (Sec. 13 of PPSA; Sec.
E. PRIORITY OF SECURITY INTERESTS PRIORITY RULES FOR TANGIBLE ASSETS 6.02 (b) of IRR) SECTION 45. RIGHT OF REDEMPTION.
Priority of interest is based on the date of SECTION 6.03 OF THE IRR - PRIORITY The order of priority among competing security Any person who is entitled to receive a notification
perfection and not the date of creation. FOR TANGIBLE ASSETS EMBODIED IN interests in a deposit account or investment of disposition under Sec. 51 is entitled to redeem
INSTRUMENTS. property that were perfected by the conclusion of the collateral by:
PRIORITY OF INTEREST WITH RESPECT
control agreements shall be determined on the (a) Paying; or
TO SPECIFIC COLLATERAL Security Certificates basis of the time of conclusion of the control (b) Performing the secured obligation in full,
Goods Secured Creditor: Anyone agreements. (Sec. 6.02(c) of IRR) including the reasonable cost of enforcement.
Secured Creditor: Person who provides services Mode of Perfection: Registration or Possession
or materials in the ordinary course of business Preference: Possession over Registration (Sec. Any rights to set-off that the deposit-taking The right of redemption may be exercised,
Mode of Perfection: Possession 18(e) of PPSA; Sec. 6.03(a) of IRR) institution may have against a grantor's right to unless:
Preferred over: ALL until payment (Sec. 20)
payment of funds credited to a deposit account (a) The person entitled to redeem has, after the
Instruments or Negotiable Documents shall have priority over a security interest in the default, waived in writing the right to redeem
Purchase Money Security Interest (PMSI) in Secured Creditor: Anyone deposit account. (Sec. 6.02(d) of IRR) (waiver);
Equipment or its Proceeds Mode of Perfection: Registration or Possession (b) The collateral is sold or otherwise disposed of,
Secured Creditor: Unpaid seller Preference: Possession over Registration (Sec. Electronic Securities not held by acquired or collected by the secured creditor
Mode of Perfection: Registration of notice within 19 of PPSA; Sec. 6.03(b) of IRR) intermediaries or until the conclusion of an agreement by the
three business days after grantor obtains
Secured Creditor: Anyone secured creditor for that purpose
possession Livestock Mode of Perfection: Notation in the books (disposition); and
Preferred over: ALL (Sec. 23(a)) Secured Creditor: Persons who provide food or maintained by or on behalf of the issuer (c) The secured creditor has retained the
medicine for the livestock (ex. Vet) Preferred over: ALL (Sec. 6.02(e) of IRR) collateral (retention).
PMSI in Consumer Goods
Secured Creditor: Unpaid seller Mode of Perfection: Registration or Possession SECTION 46. RIGHT OF HIGHER-RANKING
Electronic Securities not held by
Mode of Perfection: Registration of notice within PLUS written notice to holders of conflicting SECURED. CREDITOR TO TAKE OVER
intermediaries
three business days after grantor obtains interest before grantor obtains possession ENFORCEMENT.
Secured Creditor: Anyone
possession Preferred over: ALL EXCEPT perfected PMSI Mode of Perfection: Control
Preferred over: ALL (Sec. 23 (b)) over the livestock. (Sec. 24 of PPSA; Sec. 6.03(c) Even if another secured creditor or a lien holder
Preferred over: Security interests perfected
of IRR) through registration and control agreements has commenced enforcement, a secured
PMSI in Livestock, Inventory, and Intellectual creditor whose security-interest has priority
concluded at a later time. (Sec. 6.02(f) of IRR)
Property PRIORITY RULES FOR INTANGIBLE over that of the enforcing secured creditor or
Secured Creditor: Unpaid seller ASSETS lien holder shall be entitled to take over the
Electronic Securities held by intermediaries
Mode of Perfection: enforcement process.
Secured Creditor: Anyone
a. When the grantor receives possession of SECTION 6.02 PRIORITY FOR Mode of Perfection: Control
the inventory or livestock, or acquires the INVESTMENT PROPERTY AND DEPOSIT This right may be invoked before the collateral is
Preferred over: Security interests in the same
rights in the intellectual property ACCOUNTS. sold or otherwise disposed of, or retained by the
securities perfected by any other (Sec. 6.02(g) of
b. Registration or Control PLUS written secured creditor or until the conclusion of an
IRR)
notice to holders of conflicting interest Deposit Account agreement by the secured creditor for that
before grantor obtains possession Secured Creditor: Deposit-taking Institution purpose.
The order of priority among competing security
Preferred over: ALL (Secs. 23(c); 24) (bank) interests in electronic securities not held with an
Mode of Perfection: Control or Possession intermediary perfected by the conclusion of The right of the higher-ranking secured creditor to
Preferred over: ALL(Sec. 13 of PPSA; Sec. control agreements is determined on the basis of take over shall include the right to enforce the
6.02(a) of IRR) the time of conclusion of the control agreements. rights by any method available to a secured
(Sec. 6.02(h) of IRR) creditor under this Act.
Deposit Account/Investment Account
Secured Creditor: Anyone, except deposit-taking
institution or intermediary
Mode of Perfection: Control
Page 278 of 393 Page 279 of 393

SECTION 47. EXPEDITED REPOSSESSION 4. Breach of the peace shall include SECTION 50. COMMERCIAL SECTION 52. APPLICATION OF
OF THE COLLATERAL. entering the private residence of the REASONABLENESS REQUIRED. PROCEEDS.
grantor without permission, resorting
The secured creditor may take possession of the to physical violence or intimidation, or In disposing of collateral, the secured creditor The proceeds of disposition shall be applied in the
collateral without judicial process if the security being accompanied by a law shall act in a commercially reasonable manner. following order:
agreement so stipulates: Provided, That enforcement officer when taking
possession can be taken without a breach of the possession or confronting the It is commercially reasonable if collateral is (a) The reasonable expenses of taking,
peace. grantor. disposed in conformity with commercial holding, preparing for disposition, and
practices among dealers in that type of property. disposing of the collateral, including
(a) If the collateral is a fixture, the secured SECTION 48. RECOVERY IN SPECIAL reasonable attorneys’ fees and legal
creditor, if it has priority over all owners and CASES. A disposition is not commercially unreasonable expenses incurred by the secured creditor;
mortgagees, may remove the fixture from the merely because a better price could have been (b) The satisfaction of the obligation secured
real property to which it is affixed, while Upon default, the secured creditor, without obtained at a different time or by a different by the interest of the enforcing secured
exercising due care. judicial process may: method. creditor; and
(b) If, upon default, the secured creditor cannot (a) Instruct the account debtor to make payment (c) The satisfaction of obligations secured by
take possession of collateral without breach of to the secured creditor, and apply such to If a method of disposition has been approved in any subordinate security interest in the
the peace, the secured creditor may proceed satisfy the obligation secured by the security any legal proceeding, it is conclusively collateral if a written demand and proof of the
as follows: interest after deducting the secured creditor’s commercially reasonable. interest are received before distribution of the
1. An expedited hearing upon reasonable collection expenses. proceeds is completed.
application for an order granting him SECTION 51. NOTIFICATION OF
possession of the collateral. On request of the account debtor, the secured DISPOSITION. The secured creditor shall account any surplus to
creditor shall provide evidence of its security the grantor. Unless otherwise agreed, the debtor
The application shall include a interest to the account debtor when it delivers Not later than ten days before disposition, the is liable for any deficiency.
statement by the secured creditor, the instruction to the account debtor; secured creditor shall notify:
under oath, verifying the existence of (a) The grantor; SECTION 53. RIGHTS OF BUYERS AND
the security agreement and (b) In a negotiable document that is perfected by (b) Any other secured creditor or lien holder OTHER THIRD PARTIES.
identifying at least one event of possession, proceed as to the negotiable who, five days before the notification is sent
default by the debtor under the document or goods covered; to the grantor, held a security interest or lien If a secured creditor sells the collateral, the buyer
security agreement; in the collateral that was perfected by shall acquire the grantor’s right in the asset, free
(c) In a deposit account maintained by the registration; and of the rights of any secured creditor or lien holder.
2. The secured creditor shall provide the secured creditor, apply the balance of the deposit (c) Any other person from whom the secured
debtor, grantor, and, if the collateral is account to the obligation secured; and creditor received notification of a claim in the If a secured creditor leases or licenses the
a fixture, any real estate mortgagee, collateral if the notification was received collateral, the lessee or licensee shall be entitled
a copy of the application, including all (d) In other cases of security interest in a deposit before the secured creditor gave notification to the benefit of the lease or license during its
supporting documents and evidence account perfected by control, instruct the deposit- to the grantor. term.
for the order granting the secured taking institution to pay the balance of the deposit
creditor possession; and account to the secured creditor’s account. The grantor may waive the right to be notified. If a secured creditor sells, leases or licenses the
collateral in violationof this Chapter, the one who
3. He will be entitled to an order granting SECTION 49. RIGHT TO DISPOSE OF A notification of disposition is sufficient if it acquires the collateral is entitled to the rights or
possession of the collateral upon the COLLATERAL. identifies the grantor and the secured creditor, benefits in the two previous paragraphs:Provided,
court finding that a default has describes the collateral, states the method of that it had no knowledge of a violation of this
occurred and that the secured After default, a secured creditor may sell or intended disposition, and the time and place of a Chapter.
creditor has a right to take possession otherwise dispose of the collateral, publicly or public disposition or the time after which other
of the collateral. privately, in its present condition or following any disposition is to be made. SECTION 54. RETENTION OF
commercially reasonable preparation or COLLATERAL BY SECURED CREDITOR.
The court may direct the grantor to processing. Sending a notification is not required if:
take such action as the court deems (a) the collateral is perishable; or After default, the secured creditor may propose to
necessary and appropriate so that the The secured creditor may buy the collateral but (b) threatens to decline speedily in value; or the debtor and grantor to take all or part of the
secured creditor may take only if the collateral is of a kind that is customarily (c) is of a type customarily sold on a recognized collateral in total or partial satisfaction of the
possession of the collateral: sold on a recognized market or the subject of market. secured obligation, and shall send a proposal to:
widely distributed standard price quotations.
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(a) The debtor and the grantor; Transitional period notice under prior law, the time of registration 2. REAL ESTATE MORTGAGE LAW
(b) Any other secured creditor or lien holder who the period from the date of effectivity of the PPSA under the prior law shall be the time to be used
perfected its security interest or lien by until the date when the Registry has been for purposes of applying the priority rules of the A. Definition and Characteristics
registration, five days before the proposal is established and operational. PPSA.
sent to the debtor and the grantor; and Real [Estate] Mortgage is a contract whereby
(c) Any other person with an interest who has SECTION 56. CREATION OF PRIOR SECTION 58. PRIORITY OF PRIOR the debtor secures to the creditor the fulfillment of
given a written notification to the secured INTEREST. INTEREST. a principal obligation, specially subjecting to such
creditor before the proposal is sent to the security immovable property or real rights over
debtor and the grantor. Creation of prior interest shall be determined by The priority of a prior interest as against the rights immovable property in case the principal
prior laws. of a competing claimant is determined by the obligation is not complied with at the time
The secured creditor may retain the collateral in prior law if: stipulated. (Arts. 2124-2131)
the case of: A prior interest remains effective between the (a) The security interest and the rights of all
(a) A proposal for the acquisition of the collateral parties notwithstanding its creation did not competing claimant arose before the Kinds of Mortgage:
in full satisfaction of the obligation, unless comply with the creation requirements of the effectivity of the PPSA; and 1. Voluntary
the secured creditor receives an objection in PPSA. (b) The priority status of these rights has 2. Legal
writing from any person entitled to receive not changed since the effectivity of the 3. Equitable – one which, although it lacks
such a proposal within twenty (20) days after SECTION 57. PERFECTION OF PRIOR PPSA. the proper formalities of a mortgage
the proposal is sent; or INTEREST. shows the intention of the parties to make
(b) A proposal for the acquisition of the collateral The priority status of a prior interest has changed the property as a security for a debt
in partial satisfaction of the secured A prior interest that was perfected under prior law only if: (governed by Civil Code, Arts. 1365,
obligation, only if the secured creditor continues to be perfected under the PPSA until (a) It was perfected when the PPSA took 1450, 1454, 1602, 1603, 1604 and 1607).
receives the affirmative consent of each the earlier of: effect, but subsequently ceased to be
addressee of the proposal in writing within (a) The time the prior interest would cease to perfected; i. Obligations Secured by Real Estate
twenty (20) days after the proposal is sent. be perfected under prior law; and (b) It was not perfected under prior law, and Mortgage
(b) The beginning of full implementation of the was only perfected under the PPSA.
H. PRIOR INTEREST AND THE PPSA, which, under Section 10.03 of the Necessity of a valid Principal Obligation
TRANSITIONAL PERIOD IRR, is conditioned upon the Registry being SECTION 59. ENFORCEMENT OF PRIOR A Mortgage, a purely accessory contract, like a
established and operational. INTEREST. guarantee. They cannot exist without a valid
SECTION 55. INTERPRETATION OF obligation. (Art. 2052 & 2086; Manila Surety &
TRANSITIONAL PROVISIONS. If the requirements for perfection under the PPSA If any step has been taken to enforce a prior Fidelity Co. v. Velayo, G.R. No. L-21069)
are satisfied before the time when theprior interest before the effectivity of the PPSA,
Existing secured creditor interest ceases to be perfected under prior law, enforcement may continue under prior law or Voidable, Unenforceable, Natural Obligations
a secured creditor with a prior security interest; the prior interest continues to be perfected under may proceed under the PPSA. A mortgage may secure the performance of a:
the PPSA from the time when it was perfected 1. Valid Obligation
Prior law under the prior law. Subject to previous paragraph, prior law shall 2. Voidable Contract inasmuch as it is
any law that existed or was in force before the apply to a matter that is the subject of binding, unless it is annulled by a proper
effectivity of the PPSA If the requirements for perfection under the PPSA proceedings before a court before the effectivity action in court
are not satisfied before the time when the prior of the PPSA. 3. Unenforceable Contract, as such
Prior interest interest ceases to be perfected under prior law, contract is not void
an interest created by an agreement or the prior interest is perfected only from the time it 4. Civil Obligations
transaction that was made or entered into before is perfected under the PPSA . 5. Pure and Conditional Obligations
the effectivity of the PPSA and that had not been (whether suspensive or resolutory)
terminated before such time. A written agreement between a grantor and a 6. Payment and Performance Obligations
secured creditor creating a prior interest is 7. Natural Obligation so that the creditor
It excludes a security interest that is renewed or sufficient to constitute authorization by the may proceed against the guarantor
extended by a security agreement or other grantor of the registration of a notice covering although he has no right of action against
transaction made or entered into on or after the assets described in that agreement under the the principal debtor for the reason that
effectivity of the PPSA ; PPSA. the latter’s obligation is not civilly
enforceable.
If a prior interest referred to in subsection (b) of a. When the debtor himself offers a
this section was perfected by the registration of a guaranty for his natural
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obligation, he impliedly General rule: Future property cannot be object of The law considers void any stipulation past obligation. (Panacan Lumber Co. v.
recognizes his liability, thereby mortgage. (Dilag v. Heirs of Resurreccion, G.R. forbidding the owner from alienating the Solidbank Corp., G.R. No. 226272, 2020)
transforming the obligation from No. 48941) immovable mortgaged. (Art. 2130)
natural into a civil one.  The mortgagor’s default does not General rule: There must be a stipulation for the
In order to bring future property within the operate to vest in the mortgagee the inclusion of future advancements.
Effect of Invalidity of Mortgage on Principal coverage of the mortgage, the mortgagor must ownership of the encumbered
Obligation execute a mortgage supplement after the property. Mortgage with a dragnet clause enables the
1. Principal obligation remains valid. mortgagor acquires ownership of the properties  His failure to redeem the property parties to provide continuous dealings, the nature
2. Mortgage deed remains as evidence of a or after those properties come into existence. does not automatically vest or extent of which may not be known or
personal obligation. They must be registered with the relevant ownership of the property to the anticipated at the time. This allows them to avoid
Register of Deeds. mortgagee. the expense and inconvenience of executing a
When a bank relied on a forged SPA, it has the new security on each new transaction.
burden to prove its authenticity and due execution Exception: (After-Acquired Properties) A Extent of Mortgage (I-GRAPE)
as when there is a defect in the notarization of a stipulation subjecting to the mortgage lien, A real estate mortgage constituted on immovable A mortgage given to secure future advancements
document, the clear and convincing evidentiary improvements which the mortgagor may property is not limited to the property itself but is a continuing security and is not discharged
standard normally attached to a duly-notarized subsequently acquire, install, or use in also extends to its: by the repayment of the amount named in the
document is dispensed with, and the measure to connection with the real property already 1. Accessions mortgage, until the full amount of the all the loans
test the validity of such document is mortgaged belonging to the mortgagor is valid. 2. Improvements or advancements is paid.
preponderance of evidence. (People’s Bank and Trust Co. v. Dahican Lumber 3. Growing fruits
Co., G.R. No. L-17500, 1967) 4. Rents or income NOTE: A “blanket mortgage clause”, also
However, where a mortgage is not valid due to a 5. Proceeds of insurance should the known as a “dragnet clause” in American
forged SPA, the principal obligation which it Example: X owns a factory. In that factory, he property be destroyed. jurisprudence, is one which is specifically
guarantees is not thereby rendered null and void. installed a machine and subsequently mortgaged 6. Expropriation value of the property phrased to subsume all debts of past or future
What is lost is merely the right to foreclose the it. The parties may validly stipulate that if the should it be expropriated. (Art. 2127) origins. A mortgage which provides a dragnet
mortgage as a special remedy for satisfying or original machine is replaced, the replacement clause is in the nature of a continuing guaranty
settling the indebtedness which is the principal shall be subject to the mortgage. The reason for To exclude them, it is necessary that there be an and constitutes an exception to the rule that an
obligation. In case of nullity, the mortgage deed this is that after-acquired properties are express stipulation to that effect. But if the action to foreclose a mortgage must be limited to
remains as evidence or proof of a personal understood to be replacements, as the original mortgaged estate passes into the hands of a the amount mentioned in the mortgage contract.
obligation of the debtor and the amount due to the machine may be subject to wear and tear. third person, the mortgage does not extend to (PCSO vs. New Dagupan Metro Gas Corp., G.R.
creditor may be enforced in an ordinary action. any machinery, object, chattel or construction No. 173171, 2012)
The partial invalidity of the subject real estate Important Points which he may have brought or placed there and
mortgage brought about by the forged status of 1. As a general rule, the mortgagor retains which such third person may remove whenever it As a general rule, a mortgage liability is usually
the subject SPA would not, therefore, result into possession of the property. He may is convenient for him to do so. limited to the amount mentioned in the contract.
the partial invalidation of the loan obligation deliver said property to the mortgagee However, the amounts named as consideration in
principally entered into by the parties; thus, without altering the nature of the contract Mortgage to Secure Future Advancements a contract of mortgage do not limit the amount for
absent any cogent reason to hold otherwise, the of mortgage. Blanket/Dragnet Clause - one which is which the mortgage may stand as security if from
need for the recomputation of said loan obligation 2. It is not an essential requisite that the specifically phrased to subsume all debts of past the four corners of the instrument the intent to
should be dispensed with. (Rural Bank of principal of the mortgage credit bears or future origin. It generally covers only future secure future and other indebtedness can be
Cabadbaran, Inc. v. Melecio-Yap, G.R. No. interest, or that the interest as obligations, unless the parties expressly provide gathered.(Ramos vs. PNB, G.R. No. 178218,
178451, 2014) compensation for the use of the principal that past obligations are likewise covered. 2011)
and the enjoyment of its fruits be in the  In a case where a Foreign Letter of Credit
ii. Object of Real Estate Mortgage form of a certain percent thereof. (FLC) was executed prior to the In the absence of clear and supportive evidence
execution of a Promissory Note (PN) of a contrary intention, a mortgage containing a
Objects of Real Estate Mortgage: Effect of Mortgage secured by a Real Estate Mortgage dragnet clause will not be extended to cover
1. Immovables; and 1. Creates right in rem or real rights. (REM), which covers the said PN and all future advances, unless the document evidencing
2. Alienable real rights in accordance with A lien inseparable from the property other loans or credit accommodations the subsequent advance refers to the mortgage
the laws, imposed upon immovables. mortgaged, enforceable against the that may be granted to the debtor, such as providing security therefor.
(Art. 2124) whole world as long as it is registered. REM with a dragnet clause cannot be
If not registered, the third party must understood to cover the FLC, as no Reliance on the Security Test: Applies when
know of the mortgage. reference was made to it or to any other there is a dragnet clause in a mortgage contract
2. Creates merely an encumbrance. but there is a mortgage constituted on another
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property to secure a subsequent loan. When the iii. Right to Alienate Mortgage Credit
mortgagor takes another loan for which another NOTE: A foreclosure sale retroacts to the date of In order that the debtor may be in default, it is
security was given it could not be inferred that Alienation or Assignment of Mortgage Credit registration of the mortgage and that a person necessary that: (a) the obligation be demandable
such loan was made in reliance solely on the The mortgage credit is a real right which may be who takes a mortgage in good faith and for and already liquidated; (b) the debtor delays
original security with the "dragnet clause," but alienated by the mortgagee without need to valuable consideration, the record showing clear performance; and (c) the creditor requires the
rather, on the new security given. (See Prudential title to the mortgagor, will be protected against performance judicially or extrajudicially, unless
obtain the consent of the debtor (except if there is
demand is not necessary. Thus, it is only when
Bank v. Alviar, G.R. No. 150197, 2005) a stipulation against alienation). Alienation of the equitable claims on the title in favor of third
demand to pay is unnecessary , or when required,
mortgage credit is valid even if it is not registered. persons of which he had no actual or constructive such demand is made and subsequently refused
Scenario 1: Prudential Bank v. Alviar, G.R. No. Registration is necessary only to affect third notice. (St. Dominic Corp., vs. IAC, G.R. Nos. that the mortgagor can be considered in default
150197, 2005 persons.(Art. 2128) 70623 & L-48630, 1987) and the mortgagee obtains the right to file an
3 Promissory Notes were executed in the action to collect the debt or foreclose the
following order: NOTE: The sale or transfer of the mortgaged NOTE: In the case of Phil. Veterans Bank v. mortgage. (Maybank Philippines., Inc. v. Spouses
1. PN 1 – secured by Real Estate Mortgage property cannot affect or release the mortgage; Monillas, the Supreme Court said that a Tarrosa, G.R. No. 213014, 2015)
(REM) with a dragnet clause thus, the purchaser or transferee is necessarily mortgagee-bank who receives titles in their favor
2. PN 2 – secured by a foreign currency bound to acknowledge and respect the as mortgagee, which titles showed neither vice The family home is exempt from execution,
deposit account encumbrance. (Garcia vs. Villar, G.R. No. nor infirmity, does not need to make any further forced sale or attachment, except for debts
3. PN 3 – (not relevant, since this was not 158891, 2012) investigation and may entirely rely on what is secured by mortgages on the premises before or
the petitioners’ obligation) secured by stated on said titles (Phil. Veterans Bank v. after such constitution. (Art. 155, Family Code;
“Clean Phase out TOD 3923” and Laws Governing Mortgage Monillas, G.R. No. 167098, 2008). However, in Fortaleza vs. Lapitan, G.R. No. 178288, 2012;
entered into on behalf of a different 1. New Civil Code the later case of Homeowner Savings and Loan Parcon-Song v Parcon, G.R. No. 199582. July 7,
Corporation 2. P.D. 1529 or The Property Registration Bank v. Felonia, the Supreme Court held that a 2020)
Decree mortgagee-bank who was previously in good faith
The REM should be construed to cover PN 1 and 3. Revised Administrative Code at the time the mortgage was constituted Under the Rural Banks Act, the foreclosure of
any other obligation incurred by the debtor not 4. R.A. 4882, as regards aliens becoming (because at that point in time, there was no mortgages covering loans granted by rural banks
covered by the security for PN 2. Hence, a mortgagee annotated notice of lis pendens on the title) may and executions of judgments thereon involving
foreclosure is improper on the ground of non- 5. R.A. 8791 General Banking Law not be a buyer in good faith by the time it real properties levied upon by a sheriff shall be
payment of PNs 2 and 3. It is, however, proper to forecloses the property (because by then, a exempt from publication where the total amount
be seek foreclosure for non-payment of PN 1. iv. Right to Alienate Collateral notice of lis pendens had already been of the loan, including interests due and unpaid,
The law considers void any stipulation forbidding annotated) (Homeowners Savings and Loan does not exceed P10,000.00. (Menzon v. Rural
Scenario 2: Philippine National Bank v. Heirs of the owner from alienating the immovable Bank v. Felonia, G.R. No. 189477, 2014) Bank of Buenavista, Inc., G.R. 178031, 2013)
Spouses Alonday, G.R. No. 171865, 2016 mortgaged. (Art. 2130)
2 Obligations with similarly worded Dragnet Mere inadequacy of the price obtained at the Judicial Foreclosure (J-PACE-AC) (Rule 68,
clauses were entered into in the following order: Stipulation requiring mortgagee’s consent sheriff’s sale will not be sufficient to set aside the Rules of Court):
1. Agricultural loan – secured by parcel of before alienation of Property vs. Right of First sale unless “the price is so inadequate as to 1. Judicial action for the purpose in the proper
land in Davao del Sur Refusal. shock the conscience of the court” taking into court which has jurisdiction over the area
2. Commercial loan – secured by parcel of A stipulation prohibiting the mortgagor from consideration the peculiar circumstances wherein the real property involved or a
land in Davao City (no reference was selling his mortgage property without the consent attendant thereto. (Sulit vs. CA, G.R. No. 119247, portion thereof is situated.
made to the prior Agricultural loan) of the mortgagee violates Art. 2130 of the New 1997). 2. Court order to mortgagor to Pay mortgage
Civil Code, since the mortgagee can simply debt with interest and other charges within a
Security used for Commercial loan showed the withhold its consent and thereby, prevent the Absent an adverse claimant or any evidence to period of not less than 90 days nor more than
intention to treat these loans as distinct from one mortgagor from selling the property. the contrary, all accessories and accessions 120 days from the entry of judgment; and
another. The non-payment of the Agricultural loan accruing or attached to the mortgaged property Sale to the highest bidder at public Auction,
cannot be used as a ground to foreclose on both On the other hand, the right of first refusal has are included in the mortgage contract and may should the mortgagor fail to pay at the time
the parcels of land, Since the land in Davao City long been recognized as valid in our jurisdiction. thus also be foreclosed with the principal property directed.
was only intended to secure the Commercial (Litonjua v. L & R Corporation, G.R. No. 130722) in the case of nonpayment of the debt secured. 3. Confirmation of sale, which operates to divest
loan. (PNB vs. Maranon, G.R. No. 189316, 2013) the rights of all parties in the action and to
Foreclosure of Mortgage is the remedy vest their rights to the purchase, subject to
available to the mortgagee by which he subjects The action to recover a deficiency after the right of redemption allowed by law.
the mortgaged property to the satisfaction of the foreclosure prescribes after 10 years from the 4. Execution of judgment
obligation to secure which the mortgage was time the right of action accrues (Arts.1142 & 5. Application of proceeds of sale to:
given. 1144) a. Costs of the sale;
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b. Amount due the mortgagee; A creditor is not precluded from recovering any 8. After the redemption period has Expired, the expiration of the said period. (Spouses Gatuslao
c. Claims of junior encumbrances or unpaid balance on the principal obligation if the Clerk of Court shall archive the records; and v. Yanson, G.R. No. 191540, 2015)
persons holding subsequent mortgages extrajudicial foreclosure sale of the property 9. Previously, the rule was that no auction sale
in the order of their priority; and subject of the real estate mortgage results in a shall be held unless there are at least Two Stipulation of Upset Price or “tipo”
d. The balance, if any shall be paid to the deficiency. (BPI vs. Reyes, G.R. No. 182769, participating bidders, otherwise the sale shall A stipulation of minimum price at which the
mortgagor. 2012) be postponed to another date. If on the new property shall be sold to become operative in the
6. Sheriff’s Certificate of sale is executed, date there shall not be at least 2 bidders, the event of a foreclosure sale at public auction is
acknowledged and recorded to complete the The mortgagee-bank has no right to include in the sale shall then proceed. The names of the null and void, for the property must be sold to
foreclosure. foreclosure of the land the portion of the loan bidders shall be reported by the Sheriff or the the highest bidder. (de Leon & de Leon, Jr, citing
separately secured by chattel mortgage. Where Notary Public who conducted the sale to the Banco Espanol Filipino v. Donaldson, 5 Phil. 418)
Nature of Judicial Foreclosure Proceedings the bank collected the entire amount of the loan Clerk of Court before the issuance of the
1. Quasi in rem action; from the proceeds of the foreclosure sale, certificate of sale. On January 30, 2001, the Effect of inadequacy of price in foreclosure
2. Foreclosure is only the result or incident of including the portion that was not covered by the Supreme Court issued a resolution sale
the failure to pay debt; and foreclosure of the real estate mortgage, it must amending paragraph 5 of A.M. 99-10-05-0 1. Where there is right to redeem.
3. Survives death of mortgagor. return the excess amount. (Rural Bank of Toboso explicitly dispensing with the "two-bidder General rule: Inadequacy of price is
vs. Agtoto, G.R. Nos. 175697 & 176103, 2011) rule." immaterial because the judgment debtor
Extra-judicial Foreclosure (governed by Act No. may redeem the property.
3135, as amended) Procedure for Extra-judicial Foreclosure of Right of mortgagee to recover deficiency Exception: The price is so inadequate as to
1. Express authority to sell is given to the Real Estate Mortgage (Act No. 3135)(Act No. 1. Mortgagee is entitled to recover deficiency. shock the conscience of the court taking into
mortgagee; 1508, A.M. N0. 99-10-05-0; January 15, 2. If the deficiency is embodied in a judgment, it consideration the peculiar circumstances.
2. Authority is not extinguished by death of 2000)(ARC-DIP-RET) is referred to as deficiency judgment. 2. Property may be sold for less than its fair
mortgagor or mortgagee; 1. Filing of Application before the Executive 3. Action for recovery of deficiency may be filed market value upon the theory that the lesser
3. Public sale should be made after proper Judge through the Clerk of Court; even during redemption period. the price the easier for the owner to redeem.
notice (posting and publication); 2. Clerk of Court will examine whether the 4. Action to recover prescribes after 10 years
4. Surplus proceeds of foreclosure sale belong Requirements of the law have been complied from the time the right of action accrues. The value of the mortgaged property has no
to the mortgagor or his assigns; with, that is, whether the notice of sale has bearing on the bid price at the public auction,
5. Debtor has the right to redeem the property been posted for not less than 20 days in at NOTE: It is settled that if the proceeds of the sale provided that the public auction was regularly and
sold within 1 year from and after the date of least 3 public places of the municipality or city are insufficient to cover the debt in an extrajudicial honestly conducted.
sale;one year period is to be reckoned from where the property is situated, and if the foreclosure of mortgage, the mortgagee is
the registration of the sheriff's certificate of same is worth more than P400.00, that such entitled to claim the deficiency from the debtor. Waiver of security by creditor
sale. notice has been published once a week for at While Act. No. 3135 does not discuss the 1. Mortgagee may waive right to foreclose his
6. Remedy of party aggrieved by foreclosure is least 3 consecutive weeks in a newspaper of mortgagee’s right to recover the deficiency, mortgage and maintain a personal action for
a petition to set aside sale and cancellation of general circulation in the city or municipality; neither does it contain any provision expressly or recovery of the indebtedness.
writ of possession; 3. The Certificate of sale must be approved by impliedly prohibiting recovery. (BPI vs. Avenido, 2. Remedies are alternative, not cumulative.
7. Republication is necessary for the validity of the Executive Judge; G.R. No. 175816, 2011) 3. Options of the mortgagee in case the debtor-
a postponed foreclosure sale (parties have 4. In extrajudicial foreclosure of real mortgages mortgagor dies:
no right to waive the publication requirement). in Different locations covering one Nature of power of foreclosure by a) To waive mortgage and claim entire debt
indebtedness, only one filing fee extrajudicial sale from the mortgagor’s estate as an
NOTE: Unless the parties stipulate, personal corresponding to such debt shall be 1. Conferred for mortgagee’s protection. ordinary claim;
notice to the mortgagor in extrajudicial collected; 2. An ancillary stipulation supported by the b) To judicially foreclose mortgage and
foreclosure proceedings is not necessary 5. The Clerk of Court shall Issue certificate of same cause or consideration for the prove any deficiency; or
because Section 31 of Act No. 3135 only requires payment indicating the amount of mortgage. c) To rely on the mortgage exclusively
posting of the notice of sale in three public places indebtedness, the filing fees collected, the 3. A prerogative of the mortgagee. without filing a claim for deficiency
and the publication of that notice in a newspaper mortgages sought to be foreclosed, the
of general circulation. (Ramirez v. TMBC, G.R. description of the real estates and their After the expiration of the redemption period Redemption is a transaction by which the
No. 198800, 2013) respective locations; without redemption having been made by mortgagor reacquires or buys back the property
6. The notice of sale shall be Published in a petitioner, respondent became the owner thereof which may have passed under the mortgage or
Extra-judicial foreclosure before a notary public is newspaper of general circulation; and consolidation of title becomes a right. Being divests the property of the lien which the
valid under Act No. 3135. (Tagunicar v. Lorna 7. The application shall be Raffled among all already then the owner, respondent became mortgage may have created.
Express,G.R. No. 138592, 2006). sheriffs; entitled to possession. Petitioner already lost his
possessory right over the property after the
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Kinds of Redemption The doctrine of indivisibility of mortgage does not b. Interest at the rate specified in
1. Equity of redemption: Right of the apply once the mortgage is extinguished by a 2. Judicial – before confirmation of the sale by mortgage;
mortgagor to redeem the mortgaged property complete foreclosure thereof. Nothing in the law the court c. Cost and expenses incurred by bank
after his default in the performance of the prohibits the piecemeal redemption of properties PERIODS OF JUDICIAL FORECLOSURE from sale and custody less income
conditions of the mortgage but before sold at one foreclosure proceedings.(Id). REDEMPTION Banks Non-Banks derived
confirmation of the sale. Individual 1 year from X [equity of
a. Applies to judicial foreclosure of real The general rule in redemption is that it is not debtors / registration redemption NOTE: Redemption price in this case is reduced
mortgage and chattel mortgage sufficient that a person offering to redeem mortgagors of sale only] by the income received from the property.
foreclosure. manifests his desire to do so; The statement of Juridical 1 year from X [equity of
b. A second mortgagee acquires only the intention must be accompanied by an actual and persons as registration redemption Junior Mortgagees
equity of redemption vested in the simultaneous tender of payment; In case of debtors / of sale only] 1. After the foreclosure sale, there remains in
mortgagor, and his rights are strictly disagreement over the redemption price, the mortgagors the second mortgagee a mere right of
subordinate to the superior lien of the first redemptioner may preserve his right of redemption. His remedy is limited to the right
mortgagee. redemption through judicial action, which in every NOTE: The registration of the sale is required to redeem by paying off the debt secured by
case, must be file within the one-year period of only in extra-judicial foreclosure sale because the first mortgage.
NOTE: Redemption of property where the redemption. (Torbela vs. Rosario, G.R. Nos. the date of the registration is the reckoning point 2. He is entitled to the payment of his credit the
mortgagee is a banking institution is allowed 140528 & 140553, 2011) for the exercise of the right of redemption. In excess of the proceeds of the auction sale.
within 1 year from the date of the registration contrast, the registration of the sale is 3. In case the credit of the first mortgagee has
of the confirmation of sale. The right of legal redemption must be exercised superfluous in judicial foreclosure because only absorbed the entire proceeds of the sale, the
within specified time limits. However, the the equity of redemption is granted to the second mortgage is extinguished, since the
2. Right of redemption: right of the mortgagor statutory period of redemption can be extended mortgagor, except in mortgages with banking mortgage cannot be enforced beyond the
to redeem the property within a certain by agreement of the parties. (Republic vs. institutions. (Robles v. Yapcinco, G.R. No. total value of the mortgaged property.
period after it was sold for the satisfaction Marawi-Marantao General Hospital, G.R. No. 169568, 2014)
of the debt. 158920, 2012) Mortgagee in Possession – one who has
a. Applies only to extrajudicial foreclosure NOTE: Allowing redemption after the lapse of the lawfully acquired actual or constructive
of real mortgage. Period of Redemption statutory period when the buyer at the foreclosure possession of the premises mortgaged to him,
b. EXC: The right of redemption is also 1. Extra-judicial (Act No. 3135) sale does not object but even consents to the standing upon his rights as mortgagee and not
available in judicial foreclosure, in a. Natural person – 1 year from redemption, will uphold the policy of the law which claiming under another title, for the purpose of
cases where the mortgagee is a bank. registration of the certificate of sale with is to aid rather than defeat the right of redemption enforcing his security upon such property or
(Section 47 of RA 8791 or the General Registry of Deeds. (Ramirez v. CA, G.R. No. 98147, 1993). making its income help to pay his debt.
Banking Law of 2000). b. Juridical person – same rule as natural
person As a rule, the period of redemption is not tolled by NOTE: The rights of the first mortgage creditor or
NOTE: The right of redemption, as long as within c. Juridical person (mortgagee is bank) – the filing of a complaint or petition for annulment mortgage over the mortgaged properties are
the period prescribed, may be exercised 3 months after foreclosure or before of the mortgage and the foreclosure sale superior to those of a subsequent attaching
irrespective of whether or not the mortgagee has registration of certificate of foreclosure conducted pursuant to the said mortgage. creditor and other junior mortgagees. (Lee vs.
subsequently conveyed the property to some whichever is earlier (General Banking Bangkok Bank Public Company, Ltd. G.R. No.
other party (Sta. Ignacia Rural Bank, Inc. v. CA, Law, Sec. 47) Amount of the Redemption Price 173349, 2011)
G.R. No. 97872, 1994) EXTRAJUDICIAL 1. Mortgagee is not a bank (Act No. 3135 in
PERIODS OF
FORECLOSURE relation to Sec. 28, Rule 39 of Rules of A mortgagor is allowed to take a second or
REDEMPTION
The tender of redemption money may be made to Banks Non-Banks Court) subsequent mortgage on a property already
the purchaser of the land or to the sheriff; If made Individual 1 year from 1 year from a. Purchase price of the property; mortgaged, subject to prior rights of the previous
to the sheriff, it is his duty to accept the tender debtors / registration registration b. 1% interest per month on the purchase mortgages. (Palada vs. Solidbank Corp., G.R.
and execute the certificate of redemption. (Yap mortgagors of sale of sale price; No. 172227, 2011)
vs. Dy, Sr., G.R. Nos. 171868 & 171991, 2011). Juridical Until 1 year from c. Taxes paid and amount of purchaser’s
persons as registration registration Rights and Obligations of Mortgagee in
prior lien, if any, with the same rate of
debtors / of certificate of sale Possession
interest computed from the date of
mortgagors of sale or 1. Similar to an antichresis creditor – entitled to
within 3 registration of sale, up to the time of
redemption. retain such possession until the
months from
sale 2. Mortgagee is a bank (Section 47, General indebtedness is satisfied and the property
whichever is Banking Act of 2000) redeemed.
earlier a. Amount due under the mortgage deed;
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2. Without right to reimbursement for useful consolidated in the purchaser’s name, a writ of  NOTE: Before partition of estate, each the mortgagor, only thereafter to learn that the
expenses possession can be demanded as a matter of right. heir only has an undivided interest in the latter’s title was defective, being thus an innocent
(PBCom v. Yeung, G.R. No. 179691, 2013) estate and in each specific piece of mortgagee for value, his or her right or lien upon
Right of Purchaser to Writ of Possession property in the estate. Any mortgage on the land mortgaged must be respected and
Writ of Possession – order whereby the sheriff “Purchaser at the auction sale concerned said property undertaken by an heir is protected. (Mahinay vs. Gako, Jr., G.R. Nos.
is commanded to place in possession of real or whether in a judicial or extrajudicial foreclosure valid, but only up the portion that may be 165338 & 179375, 2011)
personal property the person entitled thereto shall have the right to enter upon and take allotted in partition to the heir (Rural Bank
such as when a property is extrajudicially possession of such property immediately after the of Cabadbaran, Inc. v. Melencio-Yap, BUT: A bank whose business is impressed with
foreclosed. date of the confirmation of the auction sale and G.R. No. 178451, 2014, reiterated in public interest is expected to exercise more care
 The issuance of the writ of possession in an administer the same in accordance with law. Any Magsano v. Pangasinan Savings and and prudence in its dealings than a private
extrajudicial foreclosure is merely a petition in court to enjoin or restrain the conduct Loan Bank, G.R. No. 215038, 2016) individual, even in cases involving registered
ministerial function. of foreclosure proceedings instituted pursuant to 3. Mortgagor has Free disposal of the property, lands. A bank cannot assume that, simply
 The purchaser at the foreclosure sale is this provision shall be given due course only upon and in the absence thereof, that he be legally because the title offered as security is on its face
entitled as of right to a writ of possession. the filing by the petitioner of a bond in an amount authorized for the purpose; free of any encumbrances of lien, it is relieved of
fixed by the court conditioned that he will pay all  NOTE: If the property mortgaged was the responsibility of taking further steps to verify
Before lapse of redemption period – file an ex the damages which the bank may suffer by the subject to a conditional contract to sell at the title and inspect the properties to be
parte application and file a bond enjoining or the restraint of the foreclosure the time the mortgage was entered into, mortgaged.
proceeding.” (The General Banking Law of 2000, which was annotated, such restrictions
After lapse of redemption period – file an ex Section 47) do not divest the owner of his ownership In order for a mortgagee to invoke the doctrine of
parte application and no need for a bond right. At most, the restrictions merely mortgagee in good faith, the impostor must have
If a bank filed the Sheriff’s Provisional Certificate make the contract voidable by the person succeeded in obtaining a Torrens title in his name
NOTE: In an extrajudicial foreclosure of real of Sale before the Registry of Deeds, and entries in whose favor the restrictions were and thereafter in mortgaging the property. Where
property, when the foreclosed property is in the thereof were made in the Primary Entry Book, the made. (Vitug v. Abuda, G.R. No. 201264, the mortgagor is an impostor who only pretended
possession of a third party holding the same refusal of the Register to annotate said 2106) to be the registered owner, and acting on such
adversely to the judgment obligor, the issuance registration on the titles to the properties should 4. Cannot exist without a Valid obligation; pretense, mortgaged the property to another, the
by the trial court of a writ of possession in favor of not affect the bank’s right to possess the 5. When the principal obligation becomes due, mortgagor evidently did not succeed in having the
the purchaser of said real property ceases to be properties. (Spouses Limso, Davao Sunrise, et. the thing in which the mortgage consists may property titled in his or her name, and the
ministerial and may no longer be done ex parte, al. v. PNB, G.R. No. 158622, 2016) be Alienated for the payment to the creditor; mortgagee cannot rely on such pretense as what
but for the exception to apply, the property need and appears on the title is not the impostor's name but
not only be possessed by a third party, but also Redemption and repurchase distinguished 6. Appears in a Public document duly recorded that of the registered owner. (Ruiz v. Dimailig,
held by the third party adversely to the judgment The right to redeem becomes functus oficio at the in the Registry of Property to be [validly G.R. No. 204280, 2016)
debtor. (BPI vs. Golden Power Diesel Sales end of the redemption period, and its exercise constituted].
Center, G.R. No. 176019, 2011) after the period is not really one of redemption but  If the instrument is not recorded, the BUT: SC has held in a case that while the bank
a repurchase. Distinction must be made because mortgage is nevertheless binding failed to exercise greater care in conducting the
The implementation of a writ of possession redemption is by force of law; the purchaser at between the parties. ocular inspection of the properties offered for
issued pursuant to Act No. 3135 at the instance public auction is bound to accept redemption.  NOTE: Under the Doctrine of “Mortgagee mortgage, its omission did not prejudice any
of the purchaser at the foreclosure sale of the Repurchase however of foreclosed property, after in Good Faith”, even if the mortgagor is innocent third parties because the cause of the
mortgaged property in whose name the title has redemption period, imposes no such obligation. not the owner of the mortgaged property, mortgagors' defective title was the simulated sale
been meanwhile consolidated cannot be After expiry, the purchaser may or may not re-sell the mortgage contract and any between the buyer/mortgagor and seller (the
prevented by the injunctive writ. (UCPB v. the property but no law will compel him to do so. foreclosure sale arising therefrom are latter questioning the validity of the mortgage).
Spouses Lumbo, G.R. No. 162757, 2013) And, he is not bound by the bid price; it is entirely given effect by reason of public policy; Thus, no amount of diligence in the conduct of the
within his discretion to set a higher price, for after Even if the mortgagor is not the rightful ocular inspection could have led to the discovery
The purchaser can demand possession of the all, the property already belongs to him as owner. owner of, or does not have a valid title to, of the complicity between the ostensible
property even during the redemption period for as the mortgaged property, the mortgagee mortgagors/buyer and the true owners/seller. In
long as he files an ex parte motion under oath and B. Essential Requisites in good faith is, nonetheless, entitled to fine, the bank can hardly be deemed negligent.
post a bond in accordance with Section 7 of Act. protection. (Torbela vs. Rosario, G.R. Thus, the bank was considered as a mortgagee
Essential Requisites of Mortgage (FAVFAP): in good faith (Philippine Banking Corporation v.
No. 3135, as amended. Upon filing of the motion Nos. 140528 &140553, 2011)
1. Constituted to secure the Fulfillment of a Dy, G.R. No. 183774, 2012)
and the approval of the bond, the law also directs
principal obligation;
the court in express terms to issue the order of a When a mortgagee relies upon what appears on
2. Mortgagor be the Absolute owner of the thing ALSO: SC has held that a bank should not
writ of possession. When the redemption period the face of a Torrens title and lends money in all
pledged or mortgaged; necessarily be made liable if it did not investigate
has expired and title over the property has been good faith on the basis of the title in the name of
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or inspect the property. If the circumstances Essential Requisites Common to Contracts of 6. Thing mortgaged may be alienated by the
reveal that an investigation would still not yield a Mortgage: (FARVAS) mortgagor. Prohibition against Pactum Commissorium
discovery of any anomaly, or anything that would 1. Constituted to Secure the fulfillment of a [NOTE: Removal, Sale or Pledge of  Stipulation is null and void - stipulation
arouse suspicion, the bank should not be liable. principal obligation; Mortgaged Property. — The penalty or where thing mortgaged shall automatically
Such is the case when the TCT is clean, bearing 2. Mortgagor be the Absolute owner of the arresto mayor or a fine amounting to become the property of the creditor in the
no annotations evidencing any trust, lien, or thing mortgaged; twice the value of the property shall be event of nonpayment of the debt within the
encumbrance on the property, not forged or fake. 3. The persons constituting the mortgage imposed upon: term fixed.
There is also no showing that the bank was aware have the Free disposal of their property, i. Any person who shall knowingly  The essence of pactum commissorium is that
of any defect or any other conflicting right on the and in the absence thereof, that they be remove any personal property ownership of the security will pass to the
title when the property was mortgaged to it. In legally authorized for the purpose; mortgaged under the Chattel creditor by the mere default of the debtor.
fact, the investigation of the property would still 4. Cannot exist without a Valid obligation; Mortgage Law to any province or (Spouses Solitarios v. Spouses Jaque, G.R.
fail to bring any doubt as to the validity of the TCT 5. Debtor Retains the ownership of the thing city other than the one in which No. 199852, 2014)
(i.e., the title owners were in actual possession of given as a security; and it was located at the time of the
the property). (Parcon-Song v Parcon, G.R. No. 6. When the principal obligation becomes execution of the mortgage, Requisites of pactum commissorium:
199582. July 7, 2020) due, the thing in which the mortgage without the written consent of 1. There should be a mortgage; and
consists may be Alienated for the the mortgagee, or his executors, 2. There should be a stipulation for an automatic
An entrustee under a trust receipt does not have payment to the creditor. administrators or assigns. appropriation by the creditor of the property
a right to mortgage the property held in trust. This ii. Any mortgagor who shall sell or in the event of nonpayment.(Pen v. Julian,
is because the entrustor, not the entrustee, is the NOTE: Third persons who are not parties to pledge personal property G.R. No. 160208, January 11, 2016)
owner of the property in trust. A mortgage must the principal obligation may secure the latter already pledged, or any part
be executed by the absolute owner of the chattels by mortgaging their own property (Art. 2085; thereof, under the terms of the Effect on Security Contract: Nullity of the
to be valid (DBP vs. Prudential Bank, 2005;Art. Chinabank vs. QBRO Fishing Enterprises, Chattel Mortgage Law, without stipulation does not affect validity and efficacy of
2085 (2)). G.R. No. 184556, 2012) the consent of the mortgagee the principal contract.
written on the back of the
Real estate mortgage over a conjugal property is Important Points mortgage and noted on the There is no automatic appropriation of the object
void if the non-contracting spouse did not give 1. Future property cannot be mortgaged. record thereof in the office of the of the contract of mortgage, as it takes the
consent (PNB v. Venancio Reyes, Jr., G.R. No. 2. Mortgage executed by one who is not the register of deeds of the province intervention of the court to exact fulfillment of the
212483, 2016) owner of the property mortgaged is without where such property is located. obligation. If something more is to be done, like
legal existence and registration cannot (Revised Penal Code, Art. 319)] the execution of the deed of assignment, there is
Legal Mortgage: The persons in whose favor the validate it. 7. Creditor is not required to sue to enforce his no pactum commissorium (Uy Tong v. Court
law establishes a mortgage have no other right 3. Generally, mortgage of a conjugal credit. Appeals, G.R. No. 77465, 1988).
than to demand the execution and the recording property by one of the spouses without 8. Mortgagor may be third person (i.e., not the
the consent of the other spouse is valid The Memorandum of Agreement and the Dacion
of the document in which the mortgage is principal debtor).
only as to ½ of the entire property. in Payment Agreement contain no provisions for
formalized. 9. The liability of an accommodation
4. In case of property covered by Torrens foreclosure proceedings nor redemption. Under
mortgagor extends only to the property
title, a mortgagee has the right to rely the MOA, the failure by A to pay his debt within
Incidents of Registration of Mortgage pledged or mortgaged.
upon what appears in the certificate of the one-year period gives B the right to enforce
1. Mortgagee entitled to registration of 10. Mortgage may be constituted on
title and does not have to inquire further. the Dacion in Payment transferring to it
mortgage as a matter of right. immovables only (Art. 2124)
However, a bank whose business is ownership of A’s land. B, in effect, automatically
2. Proceedings for registration do not determine 11. Delivery is not necessary for mortgage
impressed with public interest is expected acquires ownership of the properties upon A’s
validity of mortgage or its effect. 12. The mortgage is not valid against 3rd
to exercise more care and prudence in its failure to pay his debt within the stipulated period
3. Registration is without prejudice to better persons in good faith if not registered
dealings than a private individual, even in (Sps. Ong v. Roban Lending Corporation, G.R.
right of third parties. (Art. 2125)
cases involving registered lands. A bank No.172592, July 9, 2008).
4. Mortgage deed once duly registered forms
part of the records for the registration of the cannot assume that, simply because the Right of Creditor Where Debtor Fails to
title offered as security is on its face free There is no automatic appropriation of the object
property mortgaged. Comply With His Obligation
of any encumbrances of lien, it is relieved of the pledge upon maturity of the loan. The
5. Mortgage by surviving spouse of his/her 1. Creditor is merely entitled to move for the sale
of the responsibility of taking further of the thing mortgaged with the formalities prohibition against pactum commissorium is
undivided share of conjugal property can be
steps to verify the title and inspect the required by law in order to collect. intended to protect the debtor, pledgor or
registered.
properties to be mortgaged. 2. Creditor cannot appropriate to himself the mortgagor against being over-reached by the
5. Mortgagor must have free disposal of thing nor can he dispose of the same as creditor who holds a piece of property, the value
property. owner. of which is more valuable than the amount of the
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debt. Furthermore, when the security of the debt misuse the thing, the owner may ask that it debtor may require the return of the thing.(Art. 3. GUARANTY
is also money deposited in a bank, the amount of be judicially or extra-judicially deposited. 2122)
which is less than the debt, it is not illegal for the c. May use the thing if it is necessary for the A. Nature and Extent of Guaranty
creditor to encash the time deposit certificate to preservation of the thing (e.g. car has to be CONVENTIONAL LEGAL PLEDGE
pay the debtor’s obligation (Yau Chu v. Court of driven once in a while). PLEDGE Guaranty – By guaranty, a person called the
Appeals, G.R. No. 78159,1989). d. May either claim another thing in pledge or guarantor, binds himself to the creditor, to fulfill
Created by agreement Created by operation of
demand immediate payment of the the obligation of the principal debtor in case the
of the parties law
Important Points principal obligation if he is deceived on the latter should fail to do so. It is a contract between
Debtor is not entitled to Debtor is entitled to the the guarantor and the creditor. (Art. 2047)
1. Mortgage is indivisible. substance or quality of the thing.
the excess of the excess of the proceeds
Exceptions:
proceeds of the sale of the sale i. Obligation Secured by Guaranty
a. Where each one of several Legal Pledges unless it is otherwise
things guarantee determinate agreed
1. Necessary expenses shall be refunded to Characteristics of the contract
portion of credit.
every possessor, but only possessor in good Creditor is not entitled to Creditor can recover the 1. Accessory – dependent for its existence
b. Where only portion of loan was
faith may retain the thing until he has been recover the deficiency in deficiency in the upon the principal obligation guaranteed
released.
reimbursed. the proceeds of the sale proceeds of the sale by it hence if principal contract is void,
Example: X borrowed 80k from the bank
2. Useful expenses shall be refunded only to the The parties agree on the There is no definite then guaranty is also void
and he mortgaged his 100 ha. property.
possessor in good faith with the same right of period for the payment period for the payment
Lender was only able to release 40k due
retention, the person who has defeated him of the principal of the principal 2. Subsidiary and Conditional – takes
to CB restrictions. The Court held that the
in the possession having the option of obligation. obligation. Thus, the effect only when the principal debtor fails
bank can only foreclose on 50% of the
refunding the amount of the expenses or of pledgee must make a in his obligation subject to limitation
mortgaged land (50 hectares) (Central
paying the increase in value which the thing demand for the payment 3. Unilateral –
Bank v. CA, G.R. No. L-45710, 1985). of the amount due him.
may have acquired and by reason thereof. a. It gives rise only to a duty on the part
c. Where there was failure of
(Art. 546) of the guarantor in relation to the
consideration.
3. He who has executed work upon a movable NOTE: In case of doubt as to whether a creditor and not vice versa
2. The rule that real property, consisting of
has a right to retain it by way of pledge until transaction is one of pledge or dacion en pago, b. It may be entered into even without
several lots which should be sold separately,
he is paid. (Art. 1731) the presumption is that it is a pledge as this the intervention of the principal
applies to sales in execution, and not to
4. The agent may retain the things which are the involved a lesser transmission of rights and debtor.
foreclosure of mortgages.
objects of agency until the principal effects interests. (Union Bank vs. Juniat, G.R. No.
3. [The mere embodiment of a real estate
the reimbursement and pays the indemnity. 171569, 2011)] 4. Distinct Person– a person cannot be the
mortgage and a chattel mortgage in one
(Art. 1914) personal guarantor of himself
document does not have the effect of fusing
5. The laborer’s wages shall be a lien on the  The liability of a guarantor is only
both securities into an indivisible whole.
goods manufactured or the work done. (Art. subsidiary, and all the properties of
(PBCOM v. Macadaeg, 109 Phil. 981 (1960))]
1707) the principal debtor must first be
4. Contract of mortgage may secure all kinds
6. Special Laws apply to pawnshops and exhausted before the guarantor may
of obligation, be they pure or subject to a
establishments which are engaged in making be held answerable for the debt.
suspensive or resolutory condition.
loans secured by pledges. Provisions of the Thus, the creditor may hold the
5. A promise to constitute mortgage gives rise
Civil Code shall apply subsidiarily. guarantor liable only after judgment
only to a personal right binding upon the
has been obtained against the
parties and creates no real right in the
After payment of the debt and expenses (after the principal debtor and the latter is
property. What exists is only a right of action
sale of the property subject of the legal pledge), unable to pay. (Aglibot vs. Santia,
to compel the fulfillment of the promise, but
the remainder of the price of the sale shall be G.R. No. 185945, 2012)
there is no mortgage yet.
delivered to the obligor. (Art. 2121)
Cause of Contract of Guaranty
Debtor
A thing under a pledge by operation of law may 1. Presence of cause which supports
Owner bears the risk of loss of the property.
be sold only after demand of the amount for which principal obligation: Cause of the
a. May bring the actions which pertain to the
the thing is retained. The public auction shall take contract is the same cause which
owner of the thing in order to recover it from
place within one month after such demand. If, supports the obligation as to the principal
or defend it against a 3rd person.
without just grounds, the creditor does not cause debtor. The consideration which supports
b. Cannot use the thing without the authority
the public sale to be held within such period, the the obligation as to the principal debtor is
of the owner, and if he should do so, or
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a sufficient consideration to support the Examples: Reason: Surety is made to pay, not by agreement should be resolved in favor of the
obligation of a guarantor or surety. a. To secure the payment of a loan at reason of the contract, but by reason of guarantor or surety.
maturity – guarantee of the punctual his failure to pay when demanded and 1. Liability for obligation stipulated –
2. Absence of direct consideration or payment of a loan at maturity and all for having compelled the creditor to guarantor is not liable for obligations
benefit to guarantor: Guaranty or surety other obligations of indebtedness resort to the courts to obtain payment. assumed previous to the execution of
agreement is regarded valid despite the b. To secure payment of any debt to be Interest runs from (demand): the guaranty unless an intent to be so
absence of any direct consideration subsequently incurred –construed as a. Filing of the complaint (upon judicial liable is clearly indicated.
received by the guarantor or surety, such continuing when it is evident from the demand); or 2. Liability of surety limited to a fixed
consideration need not pass directly to terms that the object is to give a standing b. The time demand was made upon period – the surety must only be bound
the guarantor or surety; a consideration credit to the principal debtor to be used the surety until the principal in the manner and to the extent, and
moving to the principal will suffice. from time to time either indefinitely or until obligation is fully paid (upon extra- under the circumstances which are set
a certain period, especially if the right to judicial demand) forth or which may be inferred from the
Guaranty of Voidable, Unenforceable, And recall the guaranty is expressly reserved. contract of guaranty or suretyship, and
Natural Obligations(Art. 2052(2)) 2. Penalty may be provided – surety may no further.
Guaranty of Conditional Obligations be held liable for the penalty provided for 3. Liability of surety to expire on
A guaranty may secure the performance of: A guaranty may secure all kinds of obligations, be in a bond for violation of the condition maturity of principal obligation – such
1. Voidable contract – such contract is they pure or subject to a suspensive or resolutory therein. stipulation is unfair and unreasonable for
binding, unless it is annulled by a proper condition. it practically nullifies the nature of the
court action 1. Principal obligation subject to a Principal’s Liability May Exceed Guarantor’s undertaking it had assumed.
2. Unenforceable contract – because suspensive condition – the guarantor is Obligations
such contract is not void liable only after the fulfillment of the The amount specified in a surety bond as the Remedy of surety: Foreclose the counter-bond
3. Natural obligation – the creditor may condition. surety’s obligation does not limit the extent of the put up by the principal debtor (if there is any)
proceed against the guarantor although 2. Principal obligation subject to a damages that may be recovered from the
he has no right of action against the resolutory condition – the happening of principal, the latter’s liability being governed by Securing non-performance In a case where a
principal debtor for the reason that the the condition extinguishes both the the obligations he assumed under his contract. performance bond, which includes the face
latter’s obligation is not civilly principal obligation and the guaranty amount to be paid in case of non-performance,
enforceable. Guaranty Not Presumed (Art. 2055) was entered into by the parties, such surety bond
 When the debtor himself offers a Guarantor’s Liability Cannot Exceed Principal The assumption of guaranty must be expressed. is determined strictly in accordance with the
guaranty for his natural obligation, he Obligation (Art. 2054) It cannot extend to more than what is stipulated particular terms and conditions set out in this
impliedly recognizes his liability, therein. bond. Hence, the face amount is not a maximum
thereby transforming the obligation General rule: Guaranty is a subsidiary and potential liability, which may cover actual
from a natural into a civil one. accessory contract – guarantor cannot bind Guaranty Covered by the Statute Of Frauds damages and costs for the non-completion of the
himself for more than the principal debtor, both as  Guaranty must not only be expressed but obligation. Rather, the entire face amount is
Guaranty of Future Debts(Art. 2053) regards the amount and the onerous nature of must so be reduced into writing. meant to be paid upon such non-performance.
contract  Hence, it shall be unenforceable by (FGU Insurance vs Roxas, G.R. No. 189526 and
Continuing Guaranty or Suretyship:  If he does, his liability shall be reduced to action, unless the same or some note or 189656, August 9, 2017)
1. Not limited to a single transaction but the limits of that of the debtor. memorandum thereof be in writing, and
which contemplates a future course of  But the guarantor may bind himself for subscribed by the party charged, or by ii. Parties to a Guaranty
dealings, covering a series of less than that of the principal. his agent; evidence, therefore, of the
transactions generally for an indefinite Parties:
agreement cannot be received without
time or until revoked. 1. Creditor
Exceptions: the writing, or a secondary evidence of its
2. Guarantor
2. It is prospective in its operation and is 1. Interest, judicial costs, and attorney’s contents. (Macondray& Co., Inc. v.
generally intended to provide security 3. Principal Debtor (sometimes)
fees as part of damages may be Piñon, G.R. No. L-13817, 1961)
with respect to future transactions. recovered – creditors may recover from  It need not appear in a public document.
3. Future debts, even if the amount is not Qualifications of an Individual Guarantor
the surety as part of their damages the
yet known, may be guaranteed but there (Arts.2056-2057) (CSI)
abovementioned fees even without Guaranty Strictly Construed
can be no claim against the guarantor 1. He possesses Integrity
stipulation and even if the surety would Strictly construed against the creditor in favor of
until the amount of the debt is 2. He has the Capacity to bind himself
thereby become liable to pay more than the guarantor and is not to be extended beyond
ascertained or fixed and demandable. 3. He has Sufficient property to answer for
the total amount stipulated in the bond. its terms or specified limits. Doubt in the terms
the obligation which he guarantees
and conditions of the guaranty or suretyship
Page 298 of 393 Page 299 of 393

Exception: When the creditor waives the because he considered the guarantor to 3. In case of Insolvency of the debtor – 7. If he is a Judicial bondsman and sub-
requirements. have the qualifications for the purpose. guarantor guarantees the solvency of the surety(Art. 2084)– because he is
debtor solidarily liable.
Effect of Subsequent Loss of Required iii.Excussion If the debtor becomes insolvent, the
Qualifications liability of the guarantor as the debtor 8. Where he has given a pledge or
The qualifications need only be present at the Right of Guarantor to Benefit Of Excussion Or cannot fulfill his obligation mortgage as a Special security.
time of the perfection of the contract. The Exhaustion(Art. 2058)
subsequent loss of the qualifications would not 1. Guarantor only secondarily liable – 4. When he (debtor) has Absconded, or NOTE: Article 2062 of the Civil Code provides
extinguish the liability of the guarantor, nor will it guarantor binds himself to pay only in cannot be sued within the Philippines – that in every action by the creditor, which must be
extinguish the contract of guaranty. case the principal debtor should fail to do the creditor is not required to go after a against the principal debtor alone, except in the
so. If the principal debtor fulfills the debtor who is hiding or cannot be sued in cases mentioned in article 2059, the former shall
Remedy of creditor: Demand another guarantor obligation guaranteed, the guarantor is our courts ask the court to notify the guarantor of the action.
with the proper qualifications. discharged from any responsibility. The guarantor may appear so that he may, if he
Exception: Debtor has left a so desire, set up such defenses as are granted
Exception: Creditor may waive it if he chooses 2. All legal remedies against the debtor manager or representative him by law. The benefit of excussion mentioned
and hold the guarantor to his bargain. to be first exhausted – to warrant in article 2058 shall always be unimpaired, even
recourse against the guarantor for 5. If it may be presumed that a judicial if judgment should be rendered against the
Guarantor Convicted of a Crime Involving payment, it may not be sufficient that the action including execution on the principal debtor and the guarantor in case of
Dishonesty or Became Insolvent (Art. 2057): debtor appears insolvent. Such property of the principal debtor would not appearance by the latter.
1. Requires conviction in the first instance insolvency may be simulated. result in the satisfaction of the obligation
of a crime involving dishonesty to have – if such is the case, the guarantor can Duty of Creditor to Make Prior Demand For
the right to demand another. NOTE: Art. 2058 is not applicable to a contract of no longer require the creditor to resort to Payment From Guarantor(Art. 2060)
2. Judicial declaration of insolvency is not suretyship. all such remedies against the debtor as 1. When demand to be made – only after
necessary in order for the creditor to have the same would be but a Useless judgment on the debt for obviously the
a right to demand another guarantor. Right of Creditor to secure Judgment against formality. It is not necessary that the exhaustion of the principal’s property
Guarantor prior to exhaustion debtor be judicially declared insolvent. cannot even begin to take place before
The supervening incapacity of a guarantor does General rule: An ordinary personal guarantor judgment has been obtained.
not terminate the guaranty for it merely gives the (NOT a pledgor or mortgagor), may demand 6. If he does Not comply with Art. 2060: In
creditor the option to demand another guarantor. exhaustion of all the property of the debtor before order that the guarantor may make use of 2. Actual demand to be made – joining the
He is not bound to substitute the guarantor. he can be compelled to pay. the benefit of excussion, he must: guarantor in the suit against the principal
(Estate of Hemady v. Luzon Surety, G.R. No. L- a. Set it up against the creditor upon the debtor is not the demand intended by
8437, 1956) Exception: The creditor may secure a judgment latter’s demand for payment from law. There must be an actual demand
against the guarantor, who shall be entitled to a him; and not judicial demand.
Selection of Guarantor deferment of the execution of said judgment b. Point out to the creditor:
1. Specified person stipulated as against him, until after the properties of the i. Available property of the debtor – Duty of The Guarantor To Set Up Benefit Of
guarantor: Substitution of guarantor may principal debtor shall have been exhausted, to the guarantor should facilitate Excussion (Art. 2060)
not be demanded satisfy the latter’s obligation. the realization of the excussion As soon as he is required to pay, guarantor must
Reason: The selection of the guarantor since he is the most interested in also point out to the creditor available property
is: Exceptions to the Benefit of Excussion(Art. its benefit. (not in litigation or encumbered) of the debtor
a. A term of the agreement; 2059) (JAWS-IS-FUN) ii. Within the Philippine territory – within the Philippines.
b. As a party, the creditor is, 1. If the guarantor has expressly Waived it. excussion of property located
therefore, bound thereby.  Waiver is valid but it must be made in abroad would be a lengthy and Duty of The Creditor To Resort To All Legal
express terms. extremely difficult proceeding Remedies (Art. 2061)
2. Guarantor selected by the principal and would not conform with the  After the guarantor has fulfilled the
debtor: Debtor answers for the integrity, 2. If he has bound himself Solidarily with the purpose of the guaranty to conditions required for making use of the
capacity, and solvency of the guarantor. debtor – liability assumed that of a surety provide the creditor with the benefit of exhaustion, it becomes the
Guarantor becomes primarily liable means of obtaining the fulfillment duty of the creditor to exhaust all the
3. Guarantor personally designated by as a solidary co-debtor. In effect, he of the obligation. property of the debtor pointed out by the
the creditor: Responsibility for the renounces in the contract itself the Sufficient to cover the amount of guarantor
selection should fall upon the creditor benefit of exhaustion. the debt.  If he fails to do so, he shall suffer the loss
but only to the extent of the value of the
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said property, for the insolvency of the 3. Extent of liability of several guarantors – Exception: The guarantor cannot demand
debtor. Effects of Compromise (Art. 2063) joint obligation for reimbursement for litigation expenses,
 Resort to all legal remedies includes when such expenses are due to its failure to
accion pauliana and accion subrogatoria, Compromise – a contract whereby the parties, General rule: The obligation to answer for the fulfill its obligation to pay upon demand.
among others. by making reciprocal concessions, avoid a debt is divided among all of them. The (Tuason v. Machuca, G.R. No. L-22177,
litigation or put an end to one already guarantors are not liable to the creditor beyond 1924)
Joinder of Guarantor and Principal As Parties commenced. the shares which they are respectively bound to
Defendant 1. Compromise between creditor and pay. 4. Damages, if they are due.
principal debtor benefits the guarantor
General rule: The guarantor, not being a joint but does not prejudice him. Exception: Solidarity has been expressly Exceptions to Right to Indemnity or
contractor with his principal, cannot be sued 2. Compromise between guarantor and the stipulated. Reimbursement
with his principal. creditor benefits but does not prejudice 1. Where the guaranty is constituted without
the principal debtor. Benefit of Division among Several the knowledge or against the will of the
Exception: Where it would serve merely to Guarantors: principal debtor, the guarantor can recover
delay the ultimate accounting of the guarantor or Reason: A compromise binds only the parties In order that the guarantor may be entitled to the only insofar as the payment had been
if no different result would be attained if the thereto and not third persons. Thus, it cannot benefit of division, it is not required that he point beneficial to the debtor
plaintiff were forced to institute separate actions prejudice the guarantor or debtor who was not out the property of his co-guarantors. 2. Payment by a third person who does not
against the principal and the guarantors. party to the compromise. But if it benefits a third intend to be reimbursed by the debtor is
person, then the compromise may bind that third Reason: Obligation of the guarantor with respect deemed to be a donation, which, however,
Procedure When Creditor Sues(Art. 2062) person. to his co-guarantors is not subsidiary but direct requires the debtor’s consent. But the
1. Sent against the principal – The and does not depend as to its origin on the payment is in any case valid as to the creditor
guarantor cannot be sued with his Sub-Guarantor’s Right To Excussion (Art. solvency or insolvency of the latter. who has accepted it (Art. 1238)
principal, much less alone, except in the 2064) 3. Waiver
cases mentioned in Art. 2059 where Sub-guarantor enjoys the benefit of excussion v. Right to Indemnification
the guarantor is not entitled to the benefit with respect to: ART. 2066 ART. 2071
of excussion. 1. Principal debtor; and Right to Indemnity or Reimbursement (Art.
(RIGHT OF (RIGHT OF
2. Guarantor 2066) (DELT)
GUARANTOR TO GUARANTOR TO
2. Notice to guarantor of the action – 1. Total amount of the debt - The guarantor has
REIMBURSEMENT PROCEED
guarantor must be notified so that he may Reason: He stands with respect to the guarantor no right to demand reimbursement until he AFTER PAYMENT) AGAINST DEBTOR
appear, if he so desires, and set up on the same footing as the latter does with has actually paid the debt, unless by the EVEN BEFORE
defenses he may want to offer respect to the principal debtor. terms of the contract, he is given the right PAYMENT)
a. Guarantor appears – voluntary before making payment.
Provides for the Provides for the
appearance does not constitute a Benefit of Division Among Several enforcement of the protection before he
renunciation of his right to excussion. Guarantors (Art. 2065) 2. Legal interest - It is immaterial that the debt rights of the has paid but after he
b. Guarantor does not appear – 1. In whose favor applicable - should there be did not earn interest for the creditor, because guarantor against the has become liable –
i. He cannot set up the defenses several guarantors of only one debtor and for the the guarantor’s right to legal interest is debtor after he has gives a protective
which, by appearing are allowed same debt, the obligation to answer for the same granted by law by virtue of the payment he paid the debt – gives remedy before
to him by law; and is divided among all. has made, and is independent of the a right of action after payment
ii. It may no longer be possible for creditor’s right to claim interest which was payment
him to question the validity of the 2. Cannot be availed of if there are: necessarily regulated by the stipulations Substantive right Preliminary remedy
judgment rendered against the a. Two or more debtors of one debt, even if between him and the debtor.
Gives a right of Remedy given seeks
debtor they be bound solidarily, each with
3. Expenses incurred by the guarantor - The action, which, without to obtain from the
iii. But he may still invoke the different guarantors; or
the provisions of the debtor “release from
benefit of excussion b. Two or more guarantors of the same expenses referred to are only those that the
other might be the guaranty or to
debtor but for different debts guarantor has to satisfy in accordance with
worthless demand a security
3. Hearing before execution can be c. If any of the circumstances enumerated law as a consequence of the guaranty. These that shall protect him
issued against the guarantor – a in Art. 2059 should take place, as would expenses are limited to those incurred by the from any proceedings
guarantor is entitled to be heard before the benefit of exhaustion of the debtor’s guarantor after having notified the debtor that by the creditor and
an execution can be issued against him property. payment has been demanded of him by the from the danger of
where he is not a party in the case creditor. insolvency of the
involving his principal. debtor.”
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vi. Right to Subrogation Effect of Payment by Guarantor before 2. In case of Insolvency of the principal vii. Rights of Co-Guarantors
maturity(Art. 2069) debtor;
Guarantor’s Right to Subrogation(Art. 2067) 3. When the debtor has bound himself to Between Co-Guarantors Right to Contribution
Subrogation transfers to the person subrogated, Debtor’s obligation with a period – relieve him from the guaranty within a of Guarantor Who Pays(Art. 2073)
the credit with all the rights thereto appertaining demandable only when the day fixed comes. specified period, and this Period has Presumption of joint liability of several
either against the debtor or against third persons, 1. The guarantor who pays before maturity expired; guarantors when there are:
be they guarantors or possessors of mortgages, is not entitled to reimbursement since 4. When the debt has become 1. Two or more guarantors
subject to stipulation in conventional subrogation. there is no necessity for accelerating Demandable, by reason of the expiration 2. Same debtor
payment. of the period for payment; 3. Same debt
1. Accrual, basis, and nature of right – 5. After the lapse of Ten (10) years, when
right of subrogation is necessary to 2. A contract of guaranty being subsidiary the principal obligation has no fixed Effect: Each is bound to pay only his
enable the guarantor to enforce the in character, the guarantor is not liable period for its maturity, unless it be of such proportionate share.
indemnity given in Art. 2066 for the debt before it becomes due. nature that it cannot be extinguished
a. Arises by operation of law upon Exception: The debtor will be liable if the except within a period longer than ten Art. 2073 is applicable:
payment by the guarantor payment was made: years; 1. When one guarantor has paid the debt to
b. It is not a contractual right a. With his consent; or 6. If there are reasonable grounds to fear the creditor;
c. The guarantor is subrogated, by b. Subsequently ratified (express or that the principal debtor intends to 2. Payment by such guarantor must have
virtue of the payment, to the right of implied) by him Abscond; been made:
the creditor, not those of the debtor. 7. If the principal debtor is in imminent a. By virtue of a judicial demand
Effect of Repeat Payment by the Debtor(Art. danger of becoming Insolvent. (benefit of division must have
2. When right not available – since 2070) ceased); or
subrogation is the means of effectuating Purpose: To enable the guarantor to take b. Because the principal debtor is
the right of the guarantor to be General rule: Before the guarantor pays the measures for the protection of his interest in view insolvent;
reimbursed, it cannot therefore be creditor, he must first notify the debtor. of the probability that he would be called upon to 3. Guarantor who paid is seeking
invoked in those cases where the  If he fails to give notice and the debtor pay the debt. reimbursement from each of his co-
guarantor has no right to be repeats payment, the guarantor’s remedy guarantors the share which is
reimbursed. is to collect from the creditor Remedies Available: proportionately owing him.
 No cause of action against the debtor for 1. To obtain release from the guaranty; or
Effect of Payment by Guarantor Without the return of the amount paid by him. 2. To demand security that shall protect Effect of Insolvency of any Guarantor
Notice to Debtor(Art. 2068) him from: Follow the rule on solidary obligations: The
 When the guarantor pays the creditor, Exception: The guarantor may still claim a. Any proceedings by the creditor; and share of the insolvent guarantor shall be borne by
but the debtor has already paid the latter, reimbursement from the debtor in spite of lack of b. Against the insolvency of the debtor. the others including the paying guarantor in the
then the debtor can set up against the notice if the following conditions are present: same joint proportion.
guarantor the defense of previous a. The creditor becomes insolvent NOTE: Guarantor’s remedies are alternative. He
extinguishments of the obligation by b. That guarantor was prevented by a has the right to choose which action to bring. Accrual and Basis of Right:
payment. fortuitous event to advise the debtor of The right of reimbursement is acquired ipso jure
 Hence, guarantor must notify the debtor the payment Suit by Guarantor against Creditor Before without need of any prior cession from the creditor
before making payment. c. The guaranty is gratuitous Payment by the guarantor.
The guarantor’s or surety’s action for release can
Reason: The guarantor cannot be allowed, Right of Guarantor to Proceed Against Debtor only be exercised against the principal debtor and Defenses Available to Co-Guarantors(Art.
through his own fault or negligence to prejudice Before Payment(Art. 2071) not against the creditor. 2074)
or impair the rights or interests of the debtor. General rule: All defenses which the debtor
General rule: Guarantor has no cause of action Reason: The creditor cannot be compelled to would have interposed against the creditor (i.e.
NOTE: In case of an unenforceable contract, if against the debtor until after the former has paid release the guarantor before payment of his fraud, prescription, remission, illegality, etc.).
the debtor consents to the guarantor paying, the the obligation. credit. Release of the guarantor imports an
guarantor can seek reimbursement from the extinction of his obligation to the creditor, Exception: Those which cannot be transmitted
debtor. If the debtor did not consent to the Exceptions: Art. 2071 enumerates instances connoting remission or a novation by subrogation for being purely personal to the debtor.
guarantor paying, the guarantor cannot seek when the guarantor may proceed against the which requires the creditor’s assent.
reimbursement from the guarantor. debtor even before the payment (ITS-PAID):
1. When he is Sued for the payment;
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Liability of Sub-Guarantor in case of 1. The person who requested him to be a The liabilities of an insurer under the surety bond Release by Extension of Term Granted by
Insolvency of Guarantor(Art. 2075) guarantor; are not extinguished when the modifications in Creditor to Debtor (Art. 2079)
Sub-guarantor is liable to the co-guarantors in the 2. The debtor the principal contract do not substantially or
Release Without Consent of Guarantor:
same manner as the guarantor whom he materially alter the principal's obligations. The
Creditor grants an extension of time to the debtor
guaranteed in case of the insolvency of the Rights of the Guarantor against The Debtor surety is jointly and severally liable with its
without the consent of the guarantor.
guarantor for whom he bound himself as sub- (SICS) principal when the latter defaults from its
guarantor. 1. Indemnification obligations under the principal contract (People's Effect: Guarantor is discharged from his
2. Benefit of Subrogation Trans-East Asia Insurance Corporation v. undertaking.
B. Effects of Guaranty 3. Benefit of Compromise Doctors of New Millennium Holdings, Inc., G.R.
Reason: To avoid prejudice to the guarantor. The
4. Right to obtain or demand a Security under No. 172404, 2014)
Married woman as Guarantor (Art. 2049) debtor may become insolvent during the
(Art. 2071)
extension, thus depriving the guarantor of his
General rule: Married woman binds only her When Alteration Material
right to reimbursement.
separate property C. Extinguishment of Guaranty
Where such change will have the effect of making
It doesn’t matter if the extension is:
Exceptions: Causes of Extinguishment of Guaranty (PaNo- the obligation more onerous.
CoCo-LoCo-FRAP) (Art. 2076) a. Prejudicial or not; or
1. With her husband’s consent, binds the 1. Imposes a new obligation or added burden
b. For a long or short period of time.
community or conjugal partnership General rule: Guaranty being accessory, it is on the party promising; or
property extinguished when principal obligation is 2. Takes away some obligation already
2. Without husband’s consent, in cases extinguished, the causes of which are: imposed, changing the legal effect of NOTE: Consent of the Guarantor is a must.
provided by law, such as when the the original contract and not merely the Extension must be based on some new
1. Payment or performance; form thereof.
guaranty has redounded to the benefit of agreement between the creditor and the principal
2. Loss of the thing due;
the family debtor by virtue of which the creditor deprives him
3. Condonation or remission of the debt; Release by Conveyance of Property (Art. 2077)
4. Confusion or merger of the rights of the of his claim.
Guaranty Undertaken Without Knowledge of General rule: Payment is made in money.
creditor and debtor; 1. Where obligation payable in installments:
Debtor (Art. 2050)
5. Compensation; and Exception: Any substitute paid in lieu of money Where a guarantor is liable for different
Rights of third persons who pay: 6. Novation which is accepted by the creditor extinguishes payments.
7. Other causes: the obligation and in consequence, the guaranty. General rule: An extension of time to one or
1. Payment without the knowledge or
a. Annulment; more will not affect the liability of the surety
against the will of the debtor:
b. Rescission;  If the creditor accepts property in payment of for the others.
a. Guarantor can recover only insofar as the
c. Fulfillment of a resolutory condition; a debt from the debtor, the guarantor is
payment has been beneficial to the Exception: When the unpaid balance has
d. Prescription relieved from responsibility. This is also true
debtor (Art. 1236) become automatically due by virtue of an
even in case the creditor is subsequently
b. Guarantor cannot compel the creditor to acceleration clause for failure to pay an
Exception: The guaranty itself may be directly evicted from the property.
subrogate him in his rights (Art. 1237) installment.
extinguished although the principal obligation still
2. Payment with knowledge or consent
remains such as in the case of the release of the In case of eviction: Eviction revives the principal Effect of exception: The act of the creditor
of the debtor: Subrogated to all the
guarantor made by the creditor. obligation but not the guaranty. extending the payment of said installment,
rights which the creditor had against the
debtor (Art. 2067) Material Alteration of Principal Contract Reason: The creditor’s action against the debtor without the guarantor’s consent, discharges
is for eviction and this is different from what the the guarantor.
Any agreement between the creditor and the guarantor guaranteed.
Double or Sub-Guaranty (Art. 2051(2)) Reason: The extension constitutes an
principal debtor which essentially varies the terms
One constituted to guarantee the obligation of a of the principal contract without the consent of the Release of Guarantor without Consent of extension of the payment of the whole
guarantor. It should not be confounded with surety, will release the surety from liability. Others (Art. 2078) amount of the indebtedness
guaranty wherein several guarantors concur. Effect: The release benefits all to the extent of 2. Where consent to an extension is waived
Such material alteration would constitute a
Guarantor of a Third Person at Request of novation or change of the principal contract, the share of the guarantor released. in advance by the guarantor or surety:
Another (Art. 2072) which is consequently extinguished. Upon such Such waiver is not contrary to law, nor to
Reason: A release made by the creditor in favor public policy
extinguishments, the accessory contract to of one of the guarantors without the consent of
The guarantor who guarantees the debt of an
guaranty is also terminated and the guarantor the others may prejudice the others should a
absentee at the request of another has a right to Effect: Amounts to the guarantor’s or
cannot be held liable on the new contract to which guarantor become insolvent.
claim reimbursement, after satisfying the debt surety’s consent to all the extensions
he has not given his consent.
from: granted.
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NOTE: The mere failure or neglect on the part of Release when Guarantor cannot be 4. SURETY – such agreement is enforceable and not
the creditor to enforce payment or to bring an Subrogated (Art. 2080) violative of any public policy
action upon a credit, as soon as the same or any A. Concept a. Indemnity against loss – indemnitor will
 If there can be no subrogation because of the
part of it matures, does not constitute an not be liable until the person to be
fault of the creditor, the guarantors are A relation which exists where one person
extension of the term of the obligation, and indemnified makes payment or sustains
thereby released, even if the guarantors are (principal or obligor) has undertaken an
therefore, the liability of the guarantor is not loss
solidary. obligation and another person (surety) is also
extinguished b. Indemnity against liability –
 If the creditor has acquired a lien upon the under a direct and primary obligation or other
duty to a third person (obligee), who is entitled indemnitor’s liability arises as soon as the
property of a principal debtor, the creditor
In order to constitute an extension discharging to but one performance, and as between the two liability of the person to be indemnified
at once becomes charged with the duty of
a surety, it should appear that the extension was: who are bound, the one rather than the other has arisen without regard to whether or
retaining such security, or maintaining such
(DEW) should perform (De Leon, 2016, citing Agro not he has suffered actual loss
lien in the interest of the surety, and any Conglomerates v. CA, 348 SCRA 450 (2000))
1. For a Definite period c. Such agreement valid - A stipulation in
release or impairment of this security as a
2. Pursuant to an Enforceable agreement an indemnity agreement providing that
primary resource of payment of a debt, will
between the principal and the creditor It is a contractual relation resulting from an the indemnitor shall pay the surety as
discharge the surety to the extent of the value
3. Made Without the consent of the surety or agreement whereby one person (the surety) soon as the latter becomes liable to make
of the property or lien released for there
with a reservation of rights with respect to engages to be answerable to a third person (the payment to the creditor under the terms
immediately arises a trust relation between
him. obligee/creditor) for the debt, default, or of the bond, regardless of whether the
the parties, and the creditor as trustee is
 The contract must be one which precludes miscarriage of another (the principal or surety has made payment actually or
bound to account to the surety for the value obligor/debtor). It involves 2 relationships; the
the creditor from, or at least hinders him in, not, is valid and enforceable, and in
of the security in his hands. principal relationship between the obligee and
enforcing the principal contract within the accordance therewith, the surety may
the obligor, and the accessory relationship demand from the indemnitor even before
period during which he could otherwise have
Reason: The act of one cannot prejudice between the principal (obligor) and the surety
enforced it, and precludes the surety from the creditor has paid.
another. It also avoids collusion between the (De Leon, 2016, citing Garcia v. CA, 191 SCRA
paying the debt. 493 (1990) and Visayan Surety v. CA, 364
creditor and the debtor or a third person.
 The law does not even grant the surety the SCRA 631 (2001)) Where the principal debtors are
right to sue the creditor for delay, as Defenses Available to Guarantor against
simultaneously the same persons who
protection against the risks of possible Creditor (Art. 2081) B. Form of Surety
executed the indemnity agreement, the
insolvency of the debtor; but in view of the position occupied by them is that of a
General rule: All defenses, which pertain to the A contract of guaranty must be in writing to be
efficacy of the action on the contract against principal debtor and indemnitor at the
principal debtor and are inherent in the debt. enforceable, since it is a “special promise to
the surety, beginning with the date the same, and their liability being joint and
obligation becomes due, his vigilance must Exception: Those which are purely personal to answer for the debt, default or miscarriage of
another.” (De Leon, 2016, at 320) several.
be exercised rather against the principal the debtor.
debtor.
D. Legal and Judicial Bonds If the obligation is collateral to another If a corporation is being rehabilitated and a
That an extension granted to the debtor by the agreement, and therefore the obligor is a surety, judicial stay order is issued enjoining the filing of
A judicial bondsman is a surety offered in virtue the promise must be in writing. (Sta. Maria, claims against the corporation, the corporation’s
creditor without the consent of the guarantor
of a provision of law or a judicial order, and he Obligations and Contracts, 2017 ed., at 651, creditors can proceed against the sureties. The
extinguishes the guaranty, also applies to
must have the qualifications of a guarantor. (Art. citing Reiss v. Memije) judicial stay order does not cover claims against
suretyship. The theory behind Art. 2079 is that an
2082). sureties who are solidarily liable with the
extension of time given to the debtor by the
creditor without the surety’s consent would However, a contract of guaranty (or surety) does corporation under rehabilitation. Actions against
deprive the surety of his right to pay the creditor If a person required to give a bond or surety is not need to appear in a public document to be the sureties may proceed independently. (JAPRL
and to be immediately subrogated to the unable to do so, he may give a mortgage valid and enforceable. (De Leon, 2016, at 320) v. SBC,G.R. No. 190107, 2011)
creditor’s remedies against the debtor upon the instead. (Art. 2083)
C. Obligations Secured D. Surety Distinguished From Standby
maturity date. The surety is entitled to protect
himself against the debtor’s insolvency during the Letter of Credit
Note that a bondsman is a surety and cannot Recovery of Surety Against Indemnitor (i.e.,
extension. However, it must be stressed that Art. principal debtor) Even Before Payment
avail of the benefit of excussion. (Art. 2084) Standby letters of credit (SBLCs) are primary and
2079 will apply only if the extension is granted by
1. Indemnity agreement is for the benefit not accessory obligations, while sureties are
the creditor in favor of the debtor without the
of surety – not for the benefit of the accessory obligations that require a valid
guarantor’s/surety’s consent. (TIDC v. APC,
creditor principal obligation. In a situation involving a
2014)
2. Indemnity agreement may be against SBLC, the payments made by the “principal
actual loss as well as potential liability debtor” cannot act to discharge the issuer of the
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SBLC from its own obligation to pay, even if the creditor proceeds 5. LETTERS OF CREDIT whether the main contract is actually
total payments would amount to more than the against him. accomplished or not. (Annotation, 228 SCRA
principal obligation. (Insular Bank of Asia & A. Definition and Purpose 378 (1993))
Not bound to take Held to know every
America v. IAC, 167 SCRA 450) notice of the non- default of the
A letter from a merchant or a bank or banker in
performance of the principal. Purpose of Letters of credit:
E. Surety Distinguished From Guaranty one place, addressed to another, in another place
principle
or country, requesting the other bank to pay a. As to the SELLER
GUARANTY SURETYSHIP money or deliver goods to a third party named  Insures to a seller payment of a
F. Surety Distinguished From Joint and therein, the opening bank under taking to provide
definite amount upon
Liability depends Assumes liability as a Solidary Obligations him the money for the goods or to repay him.
upon an independent regular party to the presentation of documents
agreement to pay the undertaking In the case of joint and solidary debtors, Article  Enables the seller to release his
It is a letter requesting one person to make
obligation if the 1217 makes plain that the solidary debtor who inventory or stock in trade
principal debtor fails advances to a third person on the credit of the
effected the payment to the creditor “may claim without seeking credit facilities
to do so writer who assumes responsibility for payment of
from his co-debtors only the share which from his own bank for the buyer
the debt therefor to the addressee
Engagement is a Charged as an corresponds to each, with the interest for the
collateral undertaking original promisor b. As to the BUYER
payment already made.” Such solidary debtor will
“A letter of credit is a financial device developed Gives the buyer the opportunity
Secondarily liable – Primarily liable – not be able to recover from the co-debtors the full
by merchants as a convenient and relatively to levy goods even without
he contracts to pay if, undertakes directly for amount already paid to the creditor, because the
safe mode of dealing with sales of goods to money but on his credit
by the use of due the payment without right to recovery extends only to the proportionate standing with the opening bank
satisfy the seemingly irreconcilable interests of
diligence, the debt reference to the share of the other co-debtors, and not as to the
a seller, who refuses to part with his goods
cannot be paid solvency of the particular proportional share of the solidary
principal, and is so before he is paid, and a buyer, who wants to Parties to a Letter of Credit
debtor who has already paid. In contrast, even as
responsible at once have control of the goods before paying.”
the surety is solidarily bound with the principal Buyer (Applicant)
the latter makes (Annotation, 228 SCRA 378 (1993), citing Bank
debtor to the creditor, the surety who does pay Procures the letter of credit and obliges
default, without any of America v. CA, 228 SCRA 357)
the creditor has the right to recover the full himself to reimburse the issuing bank
demand by the
creditor upon the amount paid, and not just any proportional share, upon receipt of the document of title.
principal whatsoever from the principal debtor or debtors. Such right to The buyer contacts a bank to issue a letter of
or any notice of full reimbursement falls within the other rights, credit (LC) in favor of the seller so that, by virtue Issuing Bank
default actions, and benefits which pertain to the surety of the LC, the bank authorizes the seller to draw Undertakes to pay the seller upon receipt
by reason of the subsidiary obligation assumed drafts and engages to pay them upon of the draft and proper documents of titles
Only binds himself to Undertakes to pay if
by the surety. (Escaño v. Ortigas, Jr., 526 SCRA presentment with simultaneous tender of and to surrender the documents to the
pay if the principal the principal does not
cannot or is unable to pay, without regard to 26, G.R. No. 151953, 29 June 2007) documents required by the LC. Once the LC is buyer upon reimbursement. Issuing
pay his ability to do so established, the seller ships the goods to the bank’s obligation is solidary with that of
buyer and in the process secures shipping the buyer (Insular Bank v. IAC, G.R. No.
Insurer of the Insurer of the debt documents. To get paid, the seller executes a 74834, 1988).
solvency of the draft and presents it together with the shipping
debtor
documents to the issuing bank. The issuing Note: Usually the issuing bank merely
Does not contract Pay the creditor bank redeems the draft and pays the seller if it substitutes its own promise to pay for that
that the principal will without qualification finds that the documents submitted by the seller of its customer, who in turn promises to
pay, but simply that if the principal debtor conform with the LC. The bank then obtains pay the bank the amount of the credit and
he is able to do so does not pay. Hence, possession of the documents. The transaction the fees mutually agreed upon. “Once the
the responsibility or
is completed when the buyer reimburses the issuing bank shall have paid the
obligation assumed
by the surety is
bank and acquires the documents entitling him beneficiary after the latter’s compliance
greater or more to the goods. The bank engages to pay the with the terms of the letters of credit, the
onerous than that of a seller once the draft and appropriate shipping issuing bank is entitled to reimbursement
guarantor documents are presented; this arrangement for the amount it paid under the letter of
assures the seller of being paid, independently credit.” (Galvez and Guy v. CA and Asia
Guarantor can avail of Surety cannot avail
of any breach of the main sales contract. By United Bank, G.R. No. 187919, 2012).
the benefit of the benefit of
excussion and excussion and this, the bank determines compliance with the
division in case the division. LC only by examining the shipping documents Seller (Beneficiary)
presented; it is precluded from determining Who in compliance with the contract of
Page 310 of 393 Page 311 of 393

sale ships the goods to the buyer and paid (Code of Commerce, Art. or consummated contract. It is not the date of opening of the letter of credit and the
delivers the documents of title and draft 569, par. 1) payment by the debtor to the bank in his country beneficiary must be obtained before
to the issuing bank to recover payment.  In case of revocation, he must of the amount of foreign exchange sold that it may be revoked. This gives the
inform the bearer and the makes the contract executed or consummated, seller certainty of payment.
The Number of Parties May Include: person to whom it is because the bank may grant the debtor extension
1. Advising (Notifying) Bank addressed (Code of of time to pay such debt (BelmanCompania v. CB Issuing bank may not, without the
May be utilized to convey to the Commerce, Art. 570) of the Philippines, G.R. No. L-10195, 1958). consent of the beneficiary (seller)
seller the existence of the credit, but 2. BEARER of letter of credit and the applicant (buyer), revoke his
does not assure that the issuing  Pay the amount received B. Kinds of Letters of Credit undertaking under the letter
bank will pay and may refuse to without delay (Code of
accept the drafts without being Commercial Letter of Credit 3. According to Obligation
Commerce, Art. 571, par. 1)
liable (Bank of America v. CA, G.R. An instrument by which a bank, for the account of b) Unconfirmed Letter of Credit
3. NOTIFYING BANK
the buyer, gives formal evidence to a seller, of its
No. 105395, 1993)  To notify and/or transmit the The notifying bank is requested
2. Confirming Bank willingness to permit him, the seller, to draw bills merely to act as the medium through
documentary of credit to the
Which will lend credence to the against it, on certain terms, and stipulates in legal which the opening bank’s obligation
seller-beneficiary
form that all such bills will be honored.
letter of credit issued by a lesser  Assumes no liability is transmitted to the beneficiary. Its
known issuing bank; the confirming 4. NEGOTIATING BANK letter of advice shall guarantee the
bank is directly liable to pay the 1. According to Methods of Transmission authenticity of the message it is
 Buys/discounts a draft under a) Circular Letter of Credit
seller-beneficiary the letter of credit transmitting on behalf of the opening
3. Paying Bank It is addressed to persons in general bank.
 Liability depends upon the in which the opening bank
Which undertakes to encash the negotiation
drafts drawn by the exporter/seller undertakes to honor the beneficiary’s c) Confirmed Letter of Credit
o Before negotiation, it has no drafts under certain stipulated
4. Negotiating Bank liability with respect to the The notifying bank gives an absolute
Instead of going to the place of the conditions. This may either be mailed assurance that the opening bank’s
seller or by the issuing bank to the
issuing bank to claim payment, the o After negotiation, there is a obligation will be performed.
buyer may approach the negotiating beneficiary or delivered by the
contractual relationship issuing bank to the accredited buyer,
bank to have the draft discounted; prevailing between the Irrevocable v. Confirmed Letters of Credit
Its liability is dependent upon the to be mailed by him to the
negotiating and the seller IRREVOCABLE CONFIRMED
stage of the negotiation – if before beneficiary.
5. CONFIRMING BANK LETTERS OF LETTERS OF
negotiation, no liability (Charles Lee  Assumes a direct obligation to CREDIT CREDIT
v. CA, G.R. No. 117913, 2002). b) Specially Advised Letter of Credit
the seller Refers to the duration Refers to the kind of
It is transmitted to the beneficiary by of the letter of credit obligation assumed by
Rights and Obligations of the Parties the opening bank through the the correspondent
Nature or Legal Relations Arising From medium of its correspondent in the bank
Letters of Credit: vicinity of the beneficiary. The issuing bank The correspondent
Rights of the Parties
It may be made conditional, but for purposes of made no reservation bank gives an
 The person paying shall have the
protecting the banking and mercantile 2. According to Duration of his right to revoke. absolute assurance
right to demand proof of identity of
community, all conditions must be complied with, a) Revocable Letter of Credit Hence, it cannot do that it will undertake
the person in whose favor the letter so without the the issuing bank’s
however onerous. It is unaffected by any breach The opening bank leaves the
of credit was issued (Code of consent of the obligation as its own
of contract on the part of the seller or the buyer or duration of the credit open for
Commerce, Art. 569(3)) beneficiary. according to the terms
by any controversy which may arise between the subsequent consideration and thus
 In case of non-payment, person to and conditions of the
buyer and seller or by any other transactions reserves the right to withdraw from
whom the letter of credit is credit
between the buyer and the seller (NAMARCO v. the transaction by stating that it is
addressed may institute an action
Atlas Trading, G.R. No. 21911, 1967). “good as cancelled” or good until a 4. According to Method of Payment
involving execution (Code of
stipulated date “unless sooner a) Negotiation
Commerce, Art. 571(2)).
When Letter of Credit Considered revoked”. The beneficiary is to draw his drafts
Obligations of the Parties Consummated Contract: in a foreign currency either in the
It is the date of payment if the amount of the c) Irrevocable Letter of Credit opening foreign bank or in another
1. DRAWER of the letter of credit
foreign currency to the creditor in his country by The issuing bank does not reserve its
 Liable to the person on whom opening foreign bank, which drafts so
the agent or correspondent bank in the country of right to revoke the credit. The drawn the beneficiary may sell to the
it was issued for the amount
the debtor that turns from executory to executed consent of the party who sought the notifying bank or any other bank in
Page 312 of 393 Page 313 of 393

his locality. The beneficiary b) Reimbursement undetermined amounts, but within a

negotiates his foreign currency drafts Occasionally, the opening bank a) Foreign Currency maximum of limits of which has to be
drawn under the credit to the bank in doesn’t have an account with the A credit which stipulates that drafts stated exactly
his locality offering him the best rate. correspondent it chooses as a paying are to be drawn in a foreign currency,
bank or, having an account, may whether that of the accredited buyer Contents of Letters of Credit (SAINTS-SCOE)
b) Straight prefer not to have it debited. In the or not. a. Signature of the writer
The beneficiary is paid by a bank latter case, the paying bank will draw b. Name of the individual or concern for
local to him and designated by the a draft for the amount of its payment, Commercial v. Standby Letters of Credit whose account it is issued
opening bank. The drafts are usually with commission and interest for the COMMERCIAL STANDBY LETTERS c. The approximate value of the goods
drawn in the currency of the period elapsing until reimbursement, LETTERS OF CREDIT OF CREDIT to be shipped and the general nature
beneficiary. either on the opening bank or the NATURE of the goods
correspondent with which the A payment mechanism A security mechanism d. The issuance of the drafts which the
Sight and Acceptance Letter of opening bank carries an account. – payable upon – it is payable to seller seller must draw and the name of the
Credit presentation by seller- upon certification of a bank on which the drafts are to be
Under a sight credit, the 6. According to Provision for Renewal beneficiary of party’s non- drawn
beneficiary’s drafts are drawn a) Revolving Credits documents showing performance of an e. The terms of sale
that he has complied agreement.
payable at sight. Once paid, the The opening bank who may be f. A statement as to whether the drafts
with sales agreement.
drafts serve simply as receipts for willing to finance aggregate are to be drawn for 100% of the cost
DOCUMENTATION
payment and are without value for shipments which will exceed the Seller-beneficiary must Seller-beneficiary must of the merchandise or for a lesser
any other purpose. amount of credit is willing to have show documents that show that applicant has percentage
outstanding at one time for the he has performed his NOT performed his g. The shipping route
In an acceptance credit, it is accredited buyer. contract contract. h. The exact shipping and other
stipulated that the drafts be drawn at CERTIFICATION documents which must be attached
time, for acceptance, upon some A single commercial letter of credit Seller-beneficiary need Seller-beneficiary must to the drafts of the seller
well-reputed bank in a center of may be given a life sufficient to cover not make any certify obligor has not i. The outside date of the shipment and
international finance. This is used if the period of time necessary to certification. performed his contract. the outside date by which the seller
the accredited buyer and the opening complete the transaction, with the is to negotiate his drafts to which the
bank want to use the drafts as a restriction that the amount shall not Traveler’s Letter of Credit specified documents are attached
means by which to obtain funds for exceed the limit set. A letter from a bank addressed to one or more j. Clear indication upon the part of the
financing the transaction in a of its correspondents stating that drafts up to issuing bank that the seller’s drafts
discount market. The draft is There should be a proviso that, upon a certain sum drawn by the beneficiary will be will be duly honored
discounted after acceptance and the notice from the opening bank that honored by the bank.
beneficiary is placed in funds. The any draft which the beneficiary has C. Rule of Strict Compliance
accredited buyer need not furnish drawn within that limit has been paid Note:
 The purpose of a traveler’s letter of credit “It is a settled rule in commercial transactions
funds to pay the draft until its and retired by the accredited buyer,
is to provide the traveler with funds en involving letters of credit that the documents
maturity. the like sum becomes available to
route tendered must strictly conform to the terms of
the beneficiary.
the letter of credit. The tender of documents by
5. According to Method of Reimbursement  OR just bring a credit card.
the beneficiary (seller) must include all documents
a) Simple b) Cumulative required by the letter. A correspondent bank which
A letter of credit where an opening Amounts not used in one month are Specially Advised Letter of Credit
departs from what has been stipulated under the
bank instructing a correspondent to available in succeeding months. It is addressed to only one bank. letter of credit, as when it accept a faulty tender,
act as the paying bank carries an acts on its own risks and it may not thereafter be
account in the currency to be paid c) Non-Cumulative Circular Letter of Credit able to recover from the buyer or the issuing bank,
with the paying bank. The amount of Amounts unused during the month It is addressed to a number of as the case may be, the money thus paid to the
payment made to the beneficiary and lapses. correspondents. beneficiary. Thus the rule of strict compliance…
the paying bank’s commission for the Under the foregoing provisions of the U.C.P., the
service performed is debited to his 7. According to Source of Payment Essential Conditions (Art. 568) bank may only negotiate, accept or pay, if the
account. a) Local Currency a. To be issued in favor of a definite documents tendered to it are on their face in
A credit that stipulates that drafts are person accordance with the terms and conditions of the
to be drawn in the currency of the b. To be limited to a fixed and specified documentary credit. And since a correspondent
domicile of the beneficiary. amount, or to one or more bank, like the petitioner, principally deals only with
Page 314 of 393 Page 315 of 393

documents, the absence of any document Independent Nature of a Letter of Credit May VII. SPECIAL LAWS B. TRUTH IN LENDING ACT
required in the documentary credit justifies the Be: B. TRUTH IN LENDING ACT
refusal by the correspondent bank to negotiate, a. In toto where the credit is independent 1. Purpose 1. PURPOSE
accept or pay the beneficiary, as it is not its from the justification aspect and is a 2. Obligation of Creditors to Person to
obligation to look beyond the documents. It merely separate obligation from the underlying Whom Credit is Extended “It is hereby declared to be the policy of the State
has to rely on the completeness of the documents agreement like for instance a typical 3. Covered and Excluded Transactions to protect the citizens from a lack of awareness of
tendered by the beneficiary.” (Feati Bank v. CA, standby; or 4. Consequences of Non-Compliance the cost of credit to the user by assuring a full
196 SCRA 576 (1991)) With Obligation disclosure of such costs with a view of preventing
b. Only as to the justification aspect like in
commercial letter of credit or repayment the uninformed cost of credit to the detriment of
D. Independence Principle the national economy.” (Sec. 2, RA 3765)
standby, which is identical with the
In a letter of credit, transaction means that a bank, obligations under the underlying
agreement (Transfield Philippines v. In short, protect citizens from uninformed use of
in determining compliance with the terms of a
Luzon Hydro Corp., GR No. 146717, credit by requiring disclosure by the lenders of all
letter of credit, is required to examine only the
2004). finance charges in relation to said credit
shipping documents presented by the seller and
(including not only interest, but also fees, service
is precluded from determining whether or not the
charges, discounts, and other charges as may be
main contract is actually accomplished or not. In letters of credit transactions, fraud is an
prescribed by the Monetary Board).
exception to the independent Principle. Fraud
“What characterizes letters of credit, as can also justify the issuance of an injunction
distinguished from other accessory contracts, is against payment. 2.OBLIGATION OF CREDITORS TO
the engagement of the issuing bank to pay the PERSON TO WHOM CREDIT IS EXTENDED
seller once the draft and the required shipping The requirements for such injunction to the
Prior to the consummation of the transaction,
documents are presented to it. In turn, this issue are the following: (PAI)
arrangement assures the seller of prompt the creditor must furnish a disclosure statement
1. there is clear Proof of fraud;
payment, independent of any breach of the main to the person to whom credit is extended, which
2. the fraud constitutes fraudulent Abuse of
sales contract. By this so-called “independence contains the following information:
the independent purpose of the letter of
principle,” the bank determines compliance with 1. The cash price or delivered price to the
credit and not only fraud under the main
the letter of credit only by examining the shipping property or service to be acquired;
agreement; and
documents presented; it is precluded from
3. Irreparable Injury might follow if 2. The amounts, if any, to be credited as
determining whether the main contract is actually
injunction is not granted or the recovery down payment and/or trade-in;
accomplished or not.” (Bank of America v. CA, 228
SCRA 357 (1993)) of damages would be seriously damaged 3. The difference between the amounts
(Transfield Philippines v. Luzon Hydro set forth under clauses (1) and (2);
Corp., G.R. No. 146717, 2004). 4. The charges, individually itemized,
The independence principle is for the benefit of
both the issuing bank and the beneficiary. Upon which are paid or to be paid by such
--------end of topic -------- person in connection with the
submission of the required documents for the
drawing down of the letter of credit, it is transaction but which are not incident to
“ministerial” on the bank to honor the credit. the extension of credit;
(Transfield Phils. v. Luzon Hydro, 443 SCRA 307 5. The total amount to be financed;
(2004)
6. The finance charge expressed in terms of
pesos and centavos; and
Three Distinct and Independent Contracts in a 7. The percentage that the finance bears to
Letter of Credit the total amount to be financed
a. Sale between the seller and the buyer; expressed as a simple annual rate on the
b. Contract of buyer with issuing bank; and outstanding unpaid balance of the
c. The letter of credit itself, wherein the obligation (Sec. 2, RA 3765)
bank promises to pay pursuant to the
terms and conditions of the letters of
credit. This assures seller of prompt
payment, independent of any breach of
the main sales contract.
Page 316 of 393 Page 317 of 393

3. COVERED AND EXCLUDED installment buyer.” (International VIII. SPECIAL LAWS C. ANTI-MONEY LAUNDERING ACT
TRANSACTIONS Harvester Macleod, Inc. v. Medina, Jr., 183 C. ANTI-MONEY LAUNDERING ACT
SCRA 485 (1990)) 1. Policy 1. POLICY
Covered transactions: 2. Covered institutions and their
1. Any loan, mortgage, deed of trust, obligations The law declares that it is the policy of the State
Banks and non-bank financial 3. Covered and suspicious transactions to:
advance, or discount; intermediaries authorized to engage in 4. Money laundering; how committed; 1. Protect and preserve the integrity and
2. Any conditional sales contract; quasi-banking functions are required to unlawful practices or predicate crimes confidentiality of bank accounts;
3. Any contract to sell, or sale or contract of strictly adhere to the Truth in Lending Act. 5. Anti-Money Laundering Council; 2. Ensure that the Philippines shall not be used
sale of property or services, either for (Consolidated Bank v. CA, 246 SCRA 193 functions as a money laundering site for the proceeds
present or future delivery, under which (1995)) 6. Safe harbor provision of any unlawful activity; and
part or all of the price is payable 7. Application for freeze orders 3. Extent cooperation in transnational
subsequent to the making of such sale or a. Who may apply
4. CONSEQUENCES OF NON- investigations and prosecutions of persons
contract; b. Effectivity
COMPLIANCE WITH OBLIGATION involved in money laundering acts wherever
c. Duties of covered institutions
4. Any rental-purchase contract; committed. (R.A. No. 9160, Section 2)
8. Authority to inquire into bank deposits
5. Any contract or arrangement for the hire, Civil liability: P100 or an amount equal to twice a. Forfeiture provisions
bailment, or leasing of property; the finance charge required by the creditor, b. Mutual assistance among states
2. COVERED INSTITUTIONS AND
whichever is higher, except that the liability OBLIGATIONS
6. Any option, demand, lien, pledge, or
should not exceed P2,000. The action to
other claim against, or for the delivery of, COVERED INSTITUTIONS
recover this penalty may be brought within 1
property or money;
year from the transaction. The creditor shall
7. Any purchase, or other acquisition of, or also be liable for reasonable attorney’s fees 1. Supervised or regulated by the Bangko
any credit upon the security of, any and court costs, as determined by the court Sentral ng Pilipinas Banks, non-banks,
obligation of claim arising out of any of quasi-banks, trust entities, foreign exchange
the foregoing; dealers, pawnshops, money changers,
Criminal liability: fine of P1,000 to P5,000, or
8. Any transaction or series of transactions remittance, and transfer companies and
imprisonment of 6 months to 1 year, or both.
having a similar purpose or effect (Sec. other similar entities and all other persons
3(2), RA 3765) (Sec. 6, RA 3765) and their subsidiaries and affiliates
2. Supervised or regulated by the Insurance
Done by: Commission: Insurance companies, pre-
--------end of topic -------- need companies, and all other person (e.g.,
Any person engaged in the business of
insurance agents and brokers, professional
extending credit (including any person
reinsurers, reinsurance brokers, holding
who as a regular business practice makes
loans or sells or rents property or services companies and systems, mutual benefit
on a time, credit, or instalment basis, either associations and their subsidiaries and
as principal or as agent) who requires as affiliates);
an incident to the extension of credit, the 3. Supervised or regulated by the Securities
payment of a finance charge (Sec. 3(3), and Exchange Commission
RA 3765) a. Securities dealers, brokers,
salesmen, investment houses, and
other similar persons managing
“In a financing transaction under RA 3765,
securities or rendering services as
there are 3 parties involved, namely: (1)
investment agent, advisor, or
the installment buyer, (2) the seller, and (3)
consultant;
the financing company. The buyer
executes a note or notes for the unpaid b. Mutual funds, close-end investment
balance of the price of the thing purchased companies, common trust funds, and
by him on installment. The seller assigns other similar persons; and
the notes or discounts them with a c. Other entities administering or
financing company which is subrogated in otherwise dealing in currency,
the place of the seller, as creditor of the commodities, or other financial
Page 318 of 393 Page 319 of 393

derivatives based thereon, valuable a. They are acting as independent The BSP may conduct annual testing solely ● For closed accounts, covered
objects, cash substitutes, and other legal professionals limited to the determination of the existence and institutions and persons shall
similar monetary instruments or b. Authorized to practice in the true identity of the owners of such accounts. (R.A. preserve and store the records on
No. 9160, Section 9[a])
property Philippines; and customer identification, account files,
4. Jewelry dealers who deal with precious c. They are subject to the b. Reporting of Covered and Suspicious and business correspondence for at
metals, and precious stones for transactions provisions of their respective Transactions least five (5) years from the dates
in excess of One Million Pesos codes of conduct and/or ● Covered institutions and persons when they were closed. (R.A. No.
(P1,000,000.00); professional responsibility or any shall report to the Anti-Money 9160, Section 9[b])
5. Company service providers which, as a of its amendments. (R.A. No. Laundering Council (AMLC) all
business, provide any of the following 9160, Section 3[a], as amended 3. COVERED AND SUSPICIOUS
covered transactions and
services to third parties: by R.A. No. 10365) TRANSACTIONS
suspicious transactions within five
a. Acting as a formation agent of (5) working days from occurrence
They shall be excluded from the coverage of the “Transaction” Refers to any act establishing any
juridical persons; thereof, unless the AMLC prescribes
Anti-Money Laundering Act in relation to right or obligation or giving rise to any contractual
b. Acting as (or arranging for another a different period not exceeding or legal relationship between the parties. It also
information concerning their clients or where the
person to act as) a director or fifteen (15) working days (R.A. No. includes any movement of funds by any means
disclosure of information would compromise
corporate secretary of a company, a client confidences or the attorney-client 9160, Section 9[c], as amended by with a covered person.
partner of a partnership, or a similar relationship. R.A. No. 10365);
position in relation to other juridical “Covered Transactions” are transactions in
● A transaction should be reported as cash or other equivalent monetary instrument
persons; 7. Casinos, including internet and ship-based
a suspicious transaction if the involving a total amount in excess of Five
c. Providing a registered office, casinos with respect to their casino cash
transaction in question is determined Hundred Thousand Pesos (P500,000.00) within
business address or transactions related to their gaming one (1) banking day. (R.A. No. 9160, Section 3[b],
to be both a covered and suspicious
accommodation, correspondence or operations. (Sec. 3[a][8], RA No. 9160, as as amended by R.A. No. 9194)
transaction (R.A. No. 9160, Section 9
administrative address for a amended)
[c], as amended by R.A. No. 9194);
company, a partnership or any other “Suspicious Transactions” are transactions
legal person or arrangement; and OBLIGATIONS OF COVERED PERSONS with covered institutions, regardless of the
Confidentiality and liability
amount involved, where any of the following
d. Acting as (or arranging for another When reporting covered or suspicious
Persons and institutions covered by the Anti- circumstances exist:
person to act as) a nominee transactions, covered institutions and persons
Money Laundering Act are subject to the 1. There is no underlying legal or trade
shareholder for another person; and are prohibited from communicating, directly or
following obligations: indirectly, in any manner or by any other means, obligation;
6. Persons who provide for any of the following 2. The client is not properly identified;
to any person or entity, or the media, the fact that
services: a. Customer Identification (“Know Your a covered or suspicious transaction report has 3. The amount involved is not commensurate
a. Managing of client money, securities, Client”) - covered and institutions shall: been or about to be reported, the contents with the business or financial capacity of the
or other assets; ● Establish and record the true identity thereof, or any other information in relation client;
b. Management of bank, savings, or of its clients based on official thereto. (R.A. No. 9160, Section 9 [c], as
4. Taking into account all known circumstances,
securities account; documents; amended by R.A. No. 9194)
it may be perceived that the client’s
c. Organization or contribution for the ● Maintain a system of verifying the transaction is structured in order to avoid
Neither may such reporting be published or aired
creation, operation, or management true identity of their clients being the subject of reporting requirements
in any manner or form by the mass media,
of companies; and ● For corporate clients, require a electronic mail, or other similar devices. (R.A. No. under the Anti-Money Laundering Act;
d. Creation, operation or management system of verifying their legal 9160, Section 9[c], as amended by R.A. No. 5. Any circumstance relating to the transaction
of juridical persons or arrangements, existence and organizational 10365) which is observed to deviate from the profile
and buying and selling business structure, as well as authority and of the client and/or the client’s past
entities. (R.A. No. 9160, Section 3[a], identification of all persons In case of violation, the concerned officer and
employee and media shall be held criminally transactions with the covered institution;
as amended by R.A. No. 10365) purporting to act on their behalf; 6. The transaction is in any way related to an
liable. (R.A. No. 9160, Section 9 [c], as amended
● Absolutely prohibit anonymous by R.A. No. 9194 and R.A. No. 10365) unlawful activity or offense under the Anti-
Lawyers and accountants are not considered as accounts, accounts under fictitious Money Laundering Act that is about to be, is
covered persons if they render services under names, and all other similar c. Record Keeping
item 6 provided the following requisites are being, or has been committed; or
present.
accounts; ● Covered institutions and persons 7. Any transaction that is similar or analogous to
● Allow peso and foreign currency shall maintain and safely store all any of the foregoing. (R.A. No. 9160, Section
non-checking numbered records of transactions for five (5) 3[b-1], as amended by R.A. No. 9194)
accounts. years from the dates of transactions;
Page 320 of 393 Page 321 of 393

Failing to file a report as a Money Laundering 14. Financing of Terrorism and offenses 5. ANTI-MONEY LAUNDERING COUNCIL;
4. MONEY LAUNDERING; HOW Offense. punishable under the Terrorism Financing FUNCTIONS
Any covered institution or person who, knowing Prevention and Suppression Act;
COMMITTED; UNLAWFUL PRACTICES OR
that a covered or suspicious transaction is The Anti-Money Laundering Act created the entity
PREDICATE CRIMES 15. Bribery and Corruption of Public Officers;
required under the Anti-Money Laundering Act to known as the Anti-Money Laundering Council
be reported to the Anti-Money Laundering 16. Frauds and Illegal Exactions and
(AMLC). The AMLC is composed of:
Money Laundering is a crime whereby the Council, fails to do so. (R.A. No. 9160, Section 4, Transactions; 1. Governor of Bangko Sentral ng Pilipinas as
proceeds of an unlawful activity are transacted, as amended by R.A. No. 9194 and R.A. No. 17. Malversation of Public Funds and Property;
thereby making them appear to have originated its Chairman;
10365) 18. Forgeries and Counterfeiting;
from legitimate sources. (R.A. No. 9160, Section 2. The Commissioner of the Insurance
19. Violations of the Anti-Trafficking in Persons Commission as a member;
4) “Monetary Instrument” refers to proceeds of, or Act; 3. The Chairman of the Securities and
instruments related to an unlawful activity. This
Persons liable for Money Laundering: 20. Violations of the Revised Forestry Code of Exchange Commission as a member. (R.A.
may refer to any of the following:
1. Any person; or 1. Coins or currency of legal tender of the the Philippines; No. 9160, Section 7, as amended by R.A. No.
2. Any person employed with a covered Philippines, or of any other country; 21. Violations of the Philippine Fisheries Code; 9194 and R.A. No. 10365)
institution 2. Drafts, checks, and notes; 22. Violations of the Philippine Mining Act;
3. Securities or negotiable instruments, bonds, 23. Violations of the Wildlife Resources The AMLC has the following functions:
Elements: Conservation and Protection Act; 1. Require and receive covered or suspicious
commercial papers, deposit certificates, trust
1. The monetary instrument or property 24. Violations of the National Caves and Cave transaction reports from covered institutions
certificates, custodial receipts, or deposit
represents, involves or relates to the Resources Management Protection Act; and persons (R.A. No. 9160, Section 7, as
substitute instruments, trading orders,
proceeds of any unlawful activity; 25. Violations of the Anti-Carnapping Act; amended by R.A. No. 9194);
transaction tickets and confirmations of sale
2. Knowledge of the offender that the 26. Violations of the Decree Codifying the Laws 2. Issue orders addressed to the appropriate
or investments and money market
monetary instrument or property on Illegal/Unlawful Possession, Manufacture, Supervising Authority or the covered
instruments; and
represents, involves or relates to the Dealing in, Acquisition or Disposition of institution to determine the true identity of the
4. Other similar instruments where title thereto
proceeds of the unlawful activity; Firearms, Ammunition or Explosives; owner of any monetary instrument or property
passes to another by endorsement,
3. The offender commits any of the 27. Violations of the Anti-Fencing Law; subject to a covered transaction or suspicious
assignment, or delivery. (R.A. No. 9160,
following: 28. Violations of the Migrant and Overseas transaction report or request for assistance
Section 3[c])
Workers Filipinos Act; from a foreign State, or believed by the
(a) Transacts said monetary instrument or
“Unlawful Activity” refers to any act, omission, 29. Violations of the Intellectual Property Code; AMLC, on the basis of substantial evidence,
property;
or series or combination thereof involving or 30. Violations of the Anti-Photo and Video to be, in whole or in part, wherever located,
(b) Converts, transfers, disposes of, moves, having any direct relation to the following: Voyeurism Act; representing, involving, or related to, directly
acquires, possesses or uses said 1. Kidnapping under ransom; 31. Violations of the Anti-Child Pornography Act; or indirectly, in any manner or by any means,
monetary instrument or property; 2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 32. Violations of the Special Protection of the proceeds from an unlawful activity R.A.
(c) Conceals or disguises the true nature, 16 of the Comprehensive Dangerous Drugs Children Against Abuse, Exploitation, and No. 9160, Section 7, as amended by R.A. No.
source, location, disposition, movement, Act; Discrimination; 9194;
or ownership of or rights with respect to 3. Section 3, paragraphs B, C, E, G, H, and I of 33. Fraudulent practices and other violations of 3. Institute civil forfeiture proceedings and all
said monetary instrument or property; the Anti-Graft and Corrupt Practices Act; the Securities Regulation Code; other remedial proceedings through the
(d) Attempts or conspires to commit money 4. Plunder; 34. Felonies and offenses of a similar nature that Office of the Solicitor General (R.A. No. 9160,
laundering offenses referred to in 5. Robbery and Extortion; are punishable under the penal laws of other Section 7);
paragraphs (a), (b), and (c); 6. Jueteng and Masiao punished as Illegal countries. (R.A. No. 9160, Section 3[i], as 4. Cause the filing of complaints with the
(e) Aids, abets, assists in or counsels the Gambling; amended by R.A. No. 9194 and R.A. No. Department of Justice or the Ombudsman for
commission of the money laundering 7. Piracy on the high seas; 10365) the prosecution of money laundering
offenses referred to in paragraphs (a), 8. Qualified Theft; offenses;
(b), and (c) above; and 9. Swindling and Other Forms of Swindling; 5. Investigate suspicious transactions and
(f) Performs or fails to perform any act as a 10. Smuggling; covered transactions deemed suspicious
result of which he/she facilitates the 11. Violations of the Electronic Commerce Act; after an investigation by the AMLC, money
offense of money laundering referred to 12. Hijacking and other violations of the Anti- laundering activities, and other violations of
in paragraphs (a), (b), and (c) above. Hijacking Law and Destructive Arson and the AMLA (R.A. No. 9160, Section 7, as
(R.A. No. 9160, Section 4, as amended Murder; amended by R.A. No. 9194);
by R.A. No. 9194 and R.A. No. 10365) 13. Terrorism and Conspiracy to Commit 6. Apply before the Court of Appeals, ex parte
Terrorism for the freezing of any monetary instrument or
Page 322 of 393 Page 323 of 393

property alleged to be laundered, proceeds 6. SAFE HARBOR PROVISION 2. Determination that probable cause exists that c. Duties of covered institutions
from, or instrumentalities used or intended to any monetary instrument or property is in any
be used in any unlawful activity (R.A. No. No administrative, criminal, or civil proceedings way related to an unlawful activity. (R.A. No. In relation to Freeze Orders, the covered
shall lie against any person for having made a institutions and persons have the following duties:
9160, Section 7, as amended by R.A. No. 9160, Section 10, as amended by R.A. No.
covered transaction report or suspicious 1. Implement freeze order. Upon receipt the
10365); transaction report in the regular performance of 9194, R.A. No. 10167, and R.A. No. 10365).
covered institution shall immediately freeze
7. Implement such measures as may be his/her duties in good faith, whether or not such ⮚ Probable cause is the sufficiency of the
the monetary instrument or property and
necessary and justified under the AMLA to reporting results in any criminal prosecution relation between the unlawful activity and
desist from and not allow any transaction,
counteract money laundering (R.A. No. 9160, under the Anti-Money Laundering Act or any the property or monetary instrument
other law. (Revised IRR of R.A. No. 9194, Rule withdrawal, transfer, removal, conversion,
Section 7); (Subido Law Offices vs. Court of
9.c.5) other movement, or concealment thereof.
8. Receive and take action in respect of, any Appeals, GR 216914, December 6,
2. Freeze and report related accounts.
request from foreign states for assistance in 2016) It's different from the probable
Exemption from Bank Secrecy Laws. When 3. Furnish copy of freeze order to owner or
their own anti-money laundering operations reporting covered or suspicious transactions to cause for the institution of criminal action.
holder.
(R.A. No. 9160, Section 7); the AMLC, covered persons and their officers and ⮚ No prior criminal charge, pendency of a
4. Submit the written detailed return. To the
9. Develop educational programs on the employees shall not be deemed to have violated case, or conviction for an unlawful activity
Court of Appeals and AMLC, within twenty-
pernicious effects of money laundering, the RA No. 1405 (Secrecy of Bank Deposits), as is necessary for the commencement or
amended, RA No. 6426 (Foreign Currency four (24) hours from receipt of the freeze
methods and techniques used in money the resolution of a petition for freeze
Deposits Act) and RA No. 8791 (General Banking order, a detailed written return which shall
laundering, the viable means of preventing order. (Rule 10 [Section 1(2), 2018 AMLA
Law), and other similar laws, provided that include:
money laundering and the effective ways of IRR)
confidentiality is observed. (Sec. 9[c], RA No. a. Account numbers and/or description
prosecuting and punishing offenders (R.A. 9160, as amended) of the monetary instruments,
No. 9160, Section 7); b. Effectivity
property or proceeds involved;
10. Enlist the assistance of any branch, 7. APPLICATION FOR FREEZE ORDERS
● The Freeze Order shall be effective b. Names of the account owners or
department, bureau, office, agency, or
immediately for a period of 20 days. The CA holders;
instrumentality of the government, including Definition and Purpose. A freeze order is an
extra-ordinary and interim relief issued by the shall conduct a summary hearing within the c. The value of the monetary
government-owned and controlled
Court of Appeals to prevent the dissipation, period to determine whether to modify, lift or instrument, property, or related
corporations, in undertaking any and all anti-
removal, or disposal of properties that are extend the period. The total period of the accounts as of the time they were
money laundering operations, which may
suspected to be the proceeds of, or related to, Freeze Order shall not exceed six (6) months. frozen;
include the use of its personnel, facilities and unlawful activities as defined in the AMLA. Its ● Once the six months has lapsed, the freeze d. All relevant information as to the
resources for the more resolute prevention, primary purpose is to temporarily preserve
order is deemed ipso facto lifted. nature of the monetary instrument,
detection, and investigation of money monetary instruments or money that are in any
property or instruments;
laundering offenses and prosecution of way related to an unlawful activity or money
laundering, by preventing the owner from using Exceptions: e. Any information on the related
offenders (R.A. No. 9160, Section 7); ⮚ When a money laundering complaint has
them during the duration of the freeze order. The accounts pertaining to the monetary
11. Impose administrative sanctions for the already been filed against the person whose
relief is preemptive in character, meant to instrument or property subject of the
violation of laws, rules, regulations and prevent the owner from disposing his property monetary instrument or property was frozen, freeze order; and
orders, and resolutions issued pursuant and thwarting the State’s effort in building its case or f. The date and the time when the
thereto R.A. No. 9160, Section 7, as and eventually filing civil forfeiture proceedings ⮚ A petition for civil forfeiture against the frozen freeze order was served;
amended by R.A. No. 9194); and/or prosecuting the owner (Ret. Lt. Gen. monetary instrument or property was filed
Jacinto C. Ligot et. Al. vs. Republic of the 5. Freeze all related accounts upon the receipt
12. Require the Land Registration Authority and (Rule 10, Sec. 2.10[a], 2018 AMLA IRR).
Philippines, GR No. 176944, March 6, 2013). of the freeze orders and upon the verification
all its Registries of Deeds to submit to the ⮚ If an asset preservation order is issued by
Exception. The AMLC has authority to issue an of the covered institution that these are
AMLC reports on all real estate transactions the RTC having jurisdiction over these cases,
ex parte freeze order, either under its own accounts related to the monetary instrument
involving an amount in excess of Five initiative or of the Anti-Terrorism Council, property the freeze order shall remain effective until or property subject of the freeze order. (Rule
Hundred Thousand Pesos (P500,000.00) or funds related to financing of terrorism or the money laundering case is terminated or 10, Sec. 4, 2018 AMLA IRR).
within fifteen (15) days from the date of the terrorist acts or property or funds of any person, an asset preservation order is issued,
registration of the transaction, in a form to be terrorist organization or association of group of
respectively (R.A. No. 9160, Section 10, as
prescribed by the AMLC. The AMLC may persons. (Sec. 11, RA No. 10168 [2012])
amended by R.A. No. 9194, R.A. No. 10167,
also require the Land Registration Authority and R.A. No. 10365)
a. Requisites
and all its Registries of Deeds to submit
copies of relevant documents of all real 1. Upon a verified ex parte petition filed by the
estate transactions. (R.A. No. 9160, Section AMLC with the CA; and
7, as amended by R.A. No. 10365)
Page 324 of 393 Page 325 of 393

8. AUTHORITY TO INQUIRE INTO BANK To ensure compliance with the AMLA, the
DEPOSITS Bangko Sentral ng Pilipinas may, in the course of (b) Claim on Forfeited Assets The principles of mutuality and reciprocity shall,
a periodic or special examination, check the for this purpose, be at all times recognized. (R.A.
The Anti-Money Laundering Council may inquire compliance of a covered institution with the When the court has issued an order of forfeiture No. 9160, Section 13[a])
into or examine any particular deposit or requirements of the AMLA and its implementing of the monetary instrument or property in a
investment, including related accounts, with any rules and regulations. (R.A. No. 9160, Section 11, criminal prosecution for any money laundering (b) Powers of the AMLC to Act on a Request for
banking institution or non-bank financial as amended by R.A. No. 9194 and R.A. No. offense, the offender or any other interested Assistance from a Foreign State
institution upon order of any competent court. 10167) person may apply for a declaration that the
(R.A. No. 9160, Section 11, as amended by R.A. instrument or property legitimately belongs to The AMLC may execute a request for assistance
No. 9194 and R.A. No. 10167) a. Forfeiture Provisions him/her and for the segregation or exclusion of from a foreign State by:
the instrument or property. The claim on forfeited 1. Tracking down, freezing, restraining and
The term “related accounts” shall refer to (a) Civil Forfeiture assets should be: seizing assets alleged to be proceeds of any
accounts, the funds and sources of which 1. Instituted through a verified petition;
unlawful activity under the procedures laid
originated from and/or materially linked to the Any monetary instrument or property can be the 2. Filed with the court which rendered the
monetary instrument(s) or property(ies) subject of subject of a civil forfeiture. This forfeiture can only down by the Anti-Money Laundering Act;
judgement of forfeiture;
the freeze order(s). (R.A. No. 9160, Section 11, be availed upon: 2. Giving information needed by the foreign
3. Filed within fifteen (15) days from the date of
as amended by R.A. No. 9194 and R.A. No. 1. The determination by the Anti-Money State within the procedures laid down in Anti-
10167) the finality of the order of forfeiture.
Laundering Council that probable cause Money Laundering Act; and
exists that any monetary instrument or 3. Apply for an order of forfeiture of any
The order of the competent court must be based The order of forfeiture shall become final and
property is in any way related to an unlawful executory if a petition for the claim of forfeited monetary instrument or property in the court.
on:
1. An ex parte application in cases of violations activity or a money laundering offense; and assets is not filed within fifteen days.
2. A verified ex parte petition for forfeiture filed The court shall not issue an order of forfeiture
of the Anti-Money Laundering Act; and unless the application is accompanied by:
through the Office of the Solicitor General. This rule shall apply in both civil and criminal
2. Probable cause that the deposits or forfeitures. (R.A. No. 9160, Section 12[b], as 1. An authenticated copy of the order in the
investments, including related accounts amended by R.A. No. 10365) court of the requesting State ordering the
The Rules of Court on Civil Forfeiture shall apply.
involved, are related to an unlawful activity. forfeiture of said monetary instrument or
(R.A. No. 9160, Section 11, as amended by The forfeiture shall include those monetary (c) Payment in Lieu of Forfeiture property of a person who has been convicted
R.A. No. 9194 and R.A. No. 10167) instrument or property having an equivalent value of a money laundering offense in the
to that of the monetary instrument or property If the court has issued an order of forfeiture of the requesting State; and
No court order shall be required in the following found to be related in any way to the unlawful monetary instrument or property subject to a
2. A certification or affidavit of a competent
cases: activity or money laundering offense, when the money laundering offense AND said order cannot
be enforced due to the same circumstances that officer of the requesting State stating that the
1. Kidnapping for ransom; latter:
1. Cannot be located despite the exercise of allow the forfeiture of related monetary conviction and the order of forfeiture are final
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
due diligence; instruments and property, the court may order the and that no further appeal lies in respect of
16 of the Comprehensive Dangerous Drugs
convicted offender to pay an amount equal to the either. (R.A. No. 9160, Section 13[b])
Act; 2. Has been substantially altered, destroyed,
value of the said monetary instrument or property.
3. Hijacking and other violations of the Anti- diminished in value, or otherwise rendered
(c) Obtaining Assistance from Foreign States
Hijacking Law and Destructive Arson and worthless by any act or omission; This also applies in both criminal and civil
Murder; 3. Has been concealed, removed, converted, or forfeitures. (R.A. No. 9160, Section 12[c], as The AMLC may make a request to any foreign
4. Felonies similar to those previously otherwise transferred; amended by R.A. No. 10365) State for assistance in:
mentioned which are punishable in other 4. Is located outside the Philippines or has been 1. Tracking down, freezing, restraining, and
placed or brought outside the jurisdiction of b. Mutual assistance among States
countries; seizing assets alleged to be proceeds of any
5. Terrorism and conspiracy to commit terrorism the court; unlawful activity;
(a) Request for assistance from a Foreign State
(R.A. No. 9160, Section 11, as amended by 5. Has been commingled with other monetary 2. Obtaining information that it needs relating to
R.A. No. 9194 and R.A. No. 10167) instrument or property belonging to either the Where a foreign State makes a request for any covered transaction, money laundering
offender himself or a third person or entity, assistance in the investigation and prosecution of offense, or any other matter directly or
The Court of Appeals shall act on the application thereby rendering the same difficult to identify a money laundering offense, the Anti-Money indirectly related thereto;
to inquire into or examine any depositor or or be segregated for purposes of forfeiture. Laundering Council may: 3. To the extent allowed by the law of the foreign
investment with any banking institution or non- (R.A. No. 9160, Section 12[a], as amended 1. May execute the request; or
State, applying with the proper court therein
bank financial institution within twenty-four (24) by R.A. No. 10365) 2. Refuse to execute the same and inform the
hours from the filing of the application. (R.A. No. for an order to enter any premises belonging
foreign State of any valid reason for not
9160, Section 11, as amended by R.A. No. 9194 to or in the possession or control of, any or all
executing the request or for delaying the
and R.A. No. 10167) of the persons named in said request, and/or
execution thereof.
search any or all such persons named therein
Page 326 of 393 Page 327 of 393

and/or remove any document, material, or information, document, material, or object VIII. SPECIAL LAWS D. FOREIGN INVESTMENTS ACT
object named in such request. The which may be of assistance to the D. FOREIGN INVESTMENTS ACT
documents accompanying the request in investigation or prosecution; 1. Policy of the law 1. POLICY OF THE LAW
support of the application have to be duly 5. Ask from the covered institution concerned 2. Definition of terms
a. Foreign investment It is the policy of the State to attract, promote and
authenticated in accordance with the any information, document, material, or
b. "Doing business" in the Philippines welcome productive investments from foreign
applicable law or regulation of the foreign object which may be of assistance to the individuals, partnerships, corporations and
c. Export enterprise
State; investigation or prosecution; governments, including their political subdivisions
d. Domestic market enterprise
4. Applying for an order of forfeiture of any 6. Specify the manner in which and to whom in activities which significantly contribute to
3. Registration of investments of non-
monetary instrument or property in the proper said information, document, material, or national industrialization and socioeconomic
Philippine nationals development to the extent that foreign investment
court in the foreign State. The application is object obtained pursuant to said request, is to
4. Foreign investments in export is allowed in such activity by the Constitution and
accompanied by an authenticated order of be produced;
enterprises relevant laws. (Sec. 1)9
the trial court ordering the forfeiture of said 7. Give all particulars necessary for the 5. Foreign investments in domestic
monetary instrument or property of a issuance by the court in the requested State market enterprises
convicted offender and an affidavit of a clerk of the writs, orders, and processes needed by
2. DEFINITION OF TERMS
6. Foreign Investment Negative List
of court stating that the conviction and the the requesting State; and A. Foreign Investment
order of forfeiture are final and that no further 8. Contain such other information as may assist
appeal lies in respect of either. (R.A. No. in the execution of the request. (R.A. No. "Foreign Investment" shall mean as equity
9160, Section 13[c]) 9160, Section 13[e]) investment made by a non- Philippine national in
the form of foreign exchange and/or other assets
(d) Limitations on Request for Mutual Assistance (f) Authentication of Documents actually transferred to the Philippines and duly
registered with the Central Bank which shall
The AMLC may refuse to comply with any request A document is authenticated if the same is: assess and appraise the value of such assets
for assistance where the action sought by the 1. Signed or certified by a judge, magistrate, or other than foreign exchange (Sec. 3[c])
contract: equivalent officer in or of, the requesting
1. Contravenes any provision of the Provided, however, that for purposes of
State; and
Constitution; or determining foreign ownership, peso investments
2. Authenticated by the oath of affirmation of a made by non-Philippine nationals shall be
2. The execution of a request is likely to witness or sealed with an official or public considered;
prejudice the national interest of the seal of a minister, Secretary of State, or
Philippines unless there is a treaty between officer in or of, the government of the Provided, further, that only foreign investments in
the Philippines and the requesting State requesting State, or of the person the form of foreign exchange and/or other assets
relating to the provision of assistance in actually transferred to the Philippines and duly
administering the government or a
relation to money laundering offenses. (R.A. registered with the Central Bank (CB) and profits
department of the requesting territory, derived therefrom can be repatriated;
No. 9160, Section 13[d]) protectorate, or colony. (Implementing Rules and Regulations of RA 7042
[as amended by RA 8179 July 9, 1996] Rule 1 §1
(e) Requirements for Requests for Mutual The certificate of authentication may also be [g])
Assistance from Foreign States made by the secretary of the embassy or legation,
consul general, consul, vice consul, consular “Foreign Corporation”
A request for mutual assistance from a foreign agent, or any officer in the foreign service of the 1. A corporation formed, organized or
State must: Philippines stationed in the foreign State in which existing under any law other than those
1. Confirm that an investigation or prosecution the record is kept, and authenticated by the seal of the Philippines, and
is being conducted in respect of a money of his office. (R.A. No. 9160, Section 13[f]) 2. whose laws allow Filipino citizens and
launderer named therein or he/she has been corporations to do business in its own
(g) Extradition country or state – reciprocity clause.
convicted of any money laundering offense;
2. State the grounds on which any person is (Revised Corporation Code, Sec. 140)
The Philippines shall negotiate for the inclusion of
being investigated or prosecuted for money money laundering offenses among extraditable Note: The Reciprocity clause does not affect the
laundering or the details of his/her conviction; offenses in all future treaties. (R.A. No. 9160, status of the foreign corporation. It merely
3. Give sufficient particulars as to the identity of Section 13[g]) emphasizes the policy of granting access to
said person;
4. Give particulars sufficient to identify any 9For purposes of this part of the reviewer, unless Investments Act of 1991 (RA 9042) as amended by RA
covered institution believed to have any otherwise specified, all references refer to the Foreign 8179 (hereinafter FIA)
Page 328 of 393 Page 329 of 393

foreign corporations whose home state also 5. Marketing control and sales a. trustee must be a Philippine longer necessary to conduct any
grants access to Filipino citizens and promotion; national and further inquiry as to the ownership of
corporations. 6. Training and personnel b. at least sixty percent (60%) of the shareholders of the investing
management; the fund will accrue to the corporation since the entire company
7. Logistics services; benefit of Philippine nationals. at least 60% Filipino owned is already
Branch office
8. Research and development (Sec. 3[a]) considered a Filipino entity.
- Carries out the business activities of the services, and product ● However, a Filipino entity (60% Filipino-
head office and derives income from the development; Three rules in Determining the Nationality of owned) is not qualified to invest in or
host country. (Implementing Rules and 9. Technical support and enter into a joint venture agreement with
Corporations with Foreign Equity:
Regulations of RA 7042, Rule 1 §1 [c]). maintenance; corporations or partnerships, the capital
Incorporation Test and Control Test:
Representative or liaison office 10. Data processing and or ownership of which, under the
communication; Incorporation Test – the nationality of a Constitution or special laws, are limited
- It deals directly with the clients of the 11. Business development. exclusively to Filipino citizens.
parent company but does not derive corporation depends on the state under which
laws it is incorporated. This is regardless of the ● The shares of former Filipino citizens
income from the host country and is fully Taxation of Income: General Rules who became citizens of foreign countries
subsidized by its head office. nationality of its stockholders
Domestic Branch Regional but who reacquired Philippine citizenship
- It undertakes activities such as but not under the RA 9225 (Citizenship
limited to information dissemination and Subsidiary Office HQ Control Test -– the nationality of the corporation
depends upon the nationality of the controlling Retention and Reacquisition Act of 2003”
promotion of the company’s products as Taxed on Only Philippine Not allowed are considered as Filipino Investments.
well as quality control of products. stockholders
worldwide source income to generate
(Implementing Rules and Regulations of income is taxed income
While the incorporation test serves as the primary In order to determine the nationality of a
RA 7042, Rule 1 §1 [c]).
Dividends Branch profit Not subject test under Philippine jurisdiction, the “control corporation, the following steps should apply:
paid are remittances to local test” and, in appropriate cases, the “grandfather
Regional or Area Headquarters (RHQ) taxed are taxed taxes and rule” is applied to determine compliance with 1st Step: The nationality of a corporation is
- An office whose purpose is to act as an VAT the Constitution and other laws on nationality determined by the country under whose laws it is
administrative branch of a multinational requirements. incorporated (Place of Incorporation Test).
company engaged in international trade “Philippine National” refers to:
which principally serves as a supervision, Grandfather Rule – the combined totals in the 2nd Step: If the corporation is applying for a (2nd)
communications and coordination center investing corporation and the investee franchise for public utility and etc. which requires
1. A citizen of the Philippines, or
for its subsidiaries, branches or affiliates corporation must be traced (i.e. “grandfathered”) a certain percentage of control of stock, the Test
2. A domestic partnership or association
in the Asia-Pacific Region and other to determine the total percentage of Filipino of Controlling Ownership would be applied.
wholly owned by citizens of the
foreign markets (R.A. 8756 §2 [2]) Philippines; or ownership.
- It does not earn or derive income in the 3rd step: If there is doubt as to the domestic
3. A corporation
Philippines; (R.A. 8756 §2 [2] ; National All covered corporations shall, at all times, control of the percentage of stock in a corporation
a. organized under the laws of
Internal Revenue Code, §22 [D]) observe the constitutional or statutory ownership with corporate stockholders, Grandfather test
the Philippines
requirement. For purposes of determining would be applied (Narra Nickel Mining and
b. of which at least sixty percent
Regional Operating Headquarters (ROHQ) compliance therewith, the required percentage of Development Corp. v. Redmont Consolidated
(60%) of the capital stock
- A foreign business entity which is allowed Filipino ownership shall be applied to BOTH (a) Mines Corp.,722 SCRA 382 [2014]).
outstanding and entitled to
to derive income in the Philippines by vote is owned and held by the total number of outstanding shares of stock
performing qualifying services to its citizens of the Philippines or entitled to vote in the election of directors AND (b) The issue in the case of Gamboa v. Teves is the
affiliates, subsidiaries or branches in the 4. A corporation the total number of outstanding shares of stock, proper interpretation of the word “capital” in
Philippines, in the Asia-Pacific Region whether or not entitled to vote in the election of Section 11, Article 12 of the 1987 Constitution.
a. organized abroad and
and in other foreign markets. (R.A. 8756 directors. (Section 2, SEC Memorandum Circular For a corporation to be granted authority to
b. registered as doing business
§2 [3]) No. 08-13 dated May 20, 2013) operate a public utility, at least sixty percent
in the Philippines under the
- ROHQs will be allowed to derive income (60%) of the capital must be Filipino. The Court
Corporation Code
by performing the following qualifying Basis of Computation of 60-40 percentage holds that the term capital must be interpreted to
c. of which one hundred percent
services: requirement refer to shares of stock entitled to vote in the
(100%) of the capital stock
1. General administration and election of directors. Sixty percent (60%) of
outstanding and entitled to
planning; ● Under existing laws, the basis is the total capital must assume a controlling interest over
vote is wholly owned by
2. Business planning and number of outstanding capital stock, the company.(Gamboa v. Finance Secretary
Filipinos (mere legal title is not
coordination; irrespective of the amount of the par Margarito Teves, 652 SCRA 690 [2011], .G.R.
enough, there should be
3. Sourcing/procurement of raw value of the shares. No. 176579, June 28, 2011)
beneficial ownership)
materials and components; 5. A trustee of funds for pension or other ● Under the Control Test, once it is
4. Corporate finance advisory established that the corporation is at The 60-40 ownership requirement applies not
employee retirement or separation
services; least 60% owned by Filipinos, it is no only to voting control, but also to beneficial control
benefits,
Page 330 of 393 Page 331 of 393

of the corporation. Both the Voting Control Test the Constitution. The right to the dividends, jus ownership of the facilities G.R. Nos. 89095 &
and the Beneficial Ownership Test must be fruendi—a right emanating from ownership of that thereof. Operation of public utility 89555 November 6,
applied to determine whether a corporation is “specific stock” necessary accrues to its Filipino must be granted only to 1989)
Filipino.(Gamboa v. Finance Secretary Margarito “beneficial owner.” (Roy III v. Herbosa, G.R. No. Philippine citizens but ownership
Teves 682 SCRA 397 [October 9,2012]) 207246 (Resolution), 18 April 2017.) of the structure may not B. Doing Business in the Philippines
necessarily be limited to Filipinos
All covered corporations shall, at all times, (Tatad v. Garcia, G.R. No. “Doing business” shall include:
observe the constitutional or statutory ownership The Anti-Dummy Law confines the number of 114222, April 6, 1995) 1. soliciting orders, service contracts,
foreign directors in the board in proportion to their ● Natural Resources - The exploration,
requirement. For purposes of determining opening offices, whether called “liaison”
compliance therewith, the required percentage of allowable participation or share in the capital. development, and utilization of natural offices or branches;
Filipino ownership shall be applied to BOTH (a) (SEC-OGC Opinion No. 24-18 dated December resources shall be under the full control 2. appointing representatives or distributors
the total number of outstanding shares of stock 20, 2018) and supervision of the State. The State who are:
entitled to vote in the election of directors; AND may directly undertake such activities, or a. domiciled in the Philippines or
(b) the total number of outstanding shares of 1987 Constitution it may enter into co-production, joint b. Staying in the country for a
stock, whether or not entitled to vote in the venture, or production-sharing period totaling 180 days or more
● Filipino First Policy - In the grant of rights
election of directors. (Section 2, SEC agreements with Filipino citizens, or in a calendar year
and concessions covering the national
Memorandum Circular No. 08-13 dated May 20, corporations or associations at least 60 3. participating in the management,
economy and patrimony, the State shall
2013) give preference to qualified Filipinos (Art. per centum of whose capital is owned by supervision or control of any domestic
XII, Sec 10, 1987 Constitution) such citizens. The foreign investor is business, firm, entity or corporation in the
limited to passive participation. Philippines; and
Petitioners in Roy v. Herbosa alleged that SEC- ● The control and administration of
o The President may enter into 4. any other act or acts that imply a
MC No. 8 is in violation of the Supreme Court’s educational institutions shall be vested in
agreements with foreign-owned
ruling in Gamboa v. Teves. The Court upheld the citizens of the Philippines. (Art. XIV. Sec. continuity of commercial dealings (Sec. 3
4, [2], 1987 Constitution) corporations involving either [d])
validity of SEC-MC No. 8. The Gamboa decision
● Educational institutions, shall be technical or financial assistance
held that what the Constitution requires is that full
for large-scale exploration,
and legal beneficial ownership of 60% of owned solely by citizens of the “Doing business” shall NOT include:
development, and utilization of
outstanding capital stock, coupled with 60% of Philippines or corporations or
minerals, petroleum, and other 1. Mere investment as a shareholder in
voting rights, must rest in the hands of Filipinos, associations at least sixty per centum of
mineral oils. Foreign investors, domestic corporations
which is precisely what SEC-MC No. 8 requires. the capital of which is owned by such
through (Financial/Technical 2. Exercise of rights of such investor
In constructing beneficial ownership, the IRR of citizens.
Assistance Agreements) FTAAs, (shareholder)
the FIA and the IRR of the Securities and o exce: those established by
are limited only to providing: 3. Having a nominee director or officer to
Regulation Code both provide that such requires religious groups and mission
▪ Technical assistance for represent the foreign investor's interest in
voting rights. If a Filipino has voting power, or boards,
highly technical the domestic corporation
investment power (can dispose), or both, he is o The Congress may, however,
enterprises 4. Appointing a distributor domiciled in the
considered the beneficial owner. (Roy III v. require increased Filipino equity
▪ Financial assistance for Philippines which transacts business in
Herbosa, G.R. No. 207246, November 22, 2016) participation in all educational
large-scale enterprises its own name and account
institutions. (Art. XIV. Sec. 4, [2],
(La Bugal Bl’aan Tribal 5. Publication of a general advertisement
1987 Constitution)
The definition of “beneficial owner or beneficial ● Mass Media - The ownership and
Association Inc. v. 6. Maintaining a stock of goods in the
ownership in the SRC-IRR, which is in Ramos, G.R. No. Philippines solely for the purpose of
management shall be limited to citizens
consonance with the concept of “full beneficial 127882, December 1, having the same processed by another
of the Philippines, or to corporations,
ownership” in the FIA-IRR, is relevant in resolving 2004) entity in the Philippines
cooperatives or associations, wholly-
only the question of who is the beneficial owner ● Practice of Professions - Foreigners 7. Consignment by a foreign entity of
owned and managed by such citizens.
practicing professions in the Philippines – equipment with a local company to be
or has beneficial ownership of each “specific (Article XVI Section 11 [1], 1987
a regulated activity. used in the processing of products for
stock” of the public utility whose stocks are under Constitution)
● Public utility- Any form of authorization o But mere investment in a export
review. If the Filipino has the voting power of the corporation (eg: foreign doctors 8. Collecting information in the Philippines
“specific stock”, i.e., he can vote the stock or for the operation of a shall be granted
investing in a domestic hospital 9. Performing services auxiliary to an
direct another to vote for him, or the Filipino has only to citizens of the Philippines or to
corporation) is not deemed to be existing isolated contract of sale which
the investment power over the “specific stock”, corporations or associations organized
a practice of profession. are NOT on a continuing basis
under the laws of the Philippines, at least
i.e., he can dispose of that “specific stock” or ▪ Nonetheless, public (Implementing Rules and Regulations of
sixty per centum of whose capital is
direct another to vote or dispose it for him, then hospitals are considered RA 7042, Rule 1 §1 [f]).
owned by such citizens. (Article XII,
such Filipino is the “beneficial owner” of that Section 11, 1987 Constitution) public utilities thus
“specific stock.” Being considered Filipino, that o The right to operate a public ownership is still
“specific stock” is then to be counted as part of regulated. (Crisostomo
utility may exist independently
the 60% Filipino ownership requirement under v. Securities and
and separately from the
Exchange Commission,
Page 332 of 393 Page 333 of 393

Test to determine if a corporation is doing business in the Philippines, it needs no Philippines without a license may sue in
business in the Philippines is expressed in the license to sue before Philippine courts Philippine courts a Philippine citizen or entity that
May Sue May be Sued
leading case of Mentholatum Co. v. Mangaliman including on an isolated transaction had contracted with and benefited from it.
which is sometimes referred to as the “Twin 3. If a foreign corporation does business in (European Resources and Technologies Inc. and Doing No No License:
Characterization Test” the Philippines without a license, a Delfin J. Wenceslao v. Ingenieuburo Birkhahn + Business License: YES
● Twin Characterization Test – doing Philippine citizen which has contracted Nolte, G.R. No. 159586, July 26, 2004) NO
business implies a continuity of with said corporation may be estopped With License:
commercial dealings and arrangements from challenging the foreign A foreign entity bringing an action to protect a With YES
and contemplates to that extent the corporation's capacity to sue. trademark right needs no license to do business License:
performance of acts or works or he NOTE: The estoppel doctrine is an in order to access the domestic courts because it YES
exercise of some of the functions exception to the general rule but is does not seek to enforce any contractual right Isolated YES GR: NO – no
normally incident to, and in progressive relevant only when a foreign corporation arising from any business transaction. (General Transaction jurisdiction
prosecution of, the purpose and object of is the plaintiff. Garments Corporation v. Director of Patents, over foreign
its organization. 4. If a foreign corporation does business in G.R. No. L-24295 September 30, 1971) corp.
● This test includes “Substance Test” and the Philippines with the required license,
“Continuity Test” it can sue before Philippine courts on any EXC: consent
transaction. Where a single act or transaction of a foreign through a
● GR: The acts of the foreign corporation
corporation is not merely incidental or casual but contractual
doing business should be distinguished
Note: Subsequent acquisition of the license will is of such character as distinctly to indicate a stipulation
from a single or isolated business
cure the lack of capacity at the time of the purpose on the part of the foreign corporation to
transactions or occasional, incidental,
execution of the contract. The requirement of a do other business in the state, such act will be C. Export enterprise
and casual transactions that do not come
license is not meant to put foreign corporations at considered as constituting doing business. (Litton
within the meaning of the law.
a disadvantage. Rather, the doctrine of lack of Mills v. Court of Appeals, G.R. No. 94980. May “Export enterprise” shall mean:
o XPN: Where a single transaction
capacity to sue is based on considerations of 15, 1996) 1. an enterprise wherein a manufacturer,
is NOT merely incidental or
casual but indicates the foreign sound public policy (Eriks PTE Ltd. v. Court of processor or service (including tourism)
corporation’s intent to do Appeals, G.R. No. 118843, February 6, 1997) Capacity to sue is a personal qualification, thus if enterprise exports sixty percent (60%) or
business in the Philippines, said successor in interest of the disqualified entity is more of its output, or
single transaction constitutes To constitute “doing business”, the activity to be qualified to sue, then the restriction does not 2. Wherein a trader purchases products
“doing” business in the undertaken is one that is for profit-making. apply (Lorenz Shipping v. Chubb & Sons, G.R. domestically and exports sixty percent
Philippines. (Agilent v. Integrated Silicon, G.R. No. 154618, No. 147724 June 8, 2004) (60%) or more of such purchases. (Sec.
● No general rule or governing principles April 14, 2004) 3[e], Implementing Rules and
can be laid down as to what constitutes Regulations of RA 7042 as amended]
“doing business” (case to case basis) For purposes of having summons served on a A letter of intent to enter a bid is not an act Rule 1 §1 (g)]
foreign corporation, it is sufficient that it be sufficient enough to constitute an intent to do
● A foreign corporation is “doing business”
alleged that the foreign corporation is doing business. A bidder must win the bid first before D. Domestic Market Enterprise
when it has entered the State by its
business in the Philippines. (Alfred Hahn v. Court acquiring a license. (Steelcase Inc v Design
agents and is there engaged in carrying
of Appeals, G.R. No. 113074 January 22, 1997) International Selections, G.R. No. 171995, April “Domestic Market Enterprise” shall mean:
on and transacting through them some
18, 2012) 1. an enterprise which produces goods for
substantial part of its ordinary or
customary business, usually continuous The mere act of exporting from one's own country sale, or renders services to the domestic
in the sense that it may be distinguished without doing any specific commercial acts within A foreign entity may bring an action in Philippine market entirely or
from merely casual, sporadic or the territory of the importing country cannot be courts to enforce an insurance policy, executed 2. if exporting a portion of its output fails to
occasional transactions and isolated deemed as doing business in the importing abroad, even if it has no license to do business consistently export at least sixty percent
acts. country (B Van Zuiden v GTVL Manufacturing since such insurance contract did not arise from (60%) thereof; (Sec 3[f])
● The element of continuity is important Industries. G.R. No. 147905, May 28, 2007) a business transaction done here in the
for a foreign corporation to be deemed Philippines. (Universal Shipping Lines, Inc. v A domestic market enterprise may change its
doing business in the Philippines. A series of separate deliveries for one single IAC ) status to export enterprise if over a three (3) year
● Actual Transaction of Business order is considered as an isolated transaction. period it consistently exports in each year thereof
Required. However, a series of commercial dealings sixty per cent (60%) or more of its output.
(unique and independent from one another)
License and Capacity to Sue signifies an intent to do business in the
1. If a foreign corporation does business in Philippines. A grant of a 90-day credit term is
the Philippines without a license, it proof of an intention to continue transacting with
cannot sue before Philippine courts and the domestic client. (Eriks PTE Ltd. v. Court of
administrative agencies. (Revised Appeals, G.R. No. 118843. February 6, 1997)
Corporation Code, Sec. 150)
2. If a foreign corporation is NOT doing A foreign corporation doing business in the
Page 334 of 393 Page 335 of 393

3. REGISTRATION OF INVESTMENTS OF b. Applications for clearances from Regulations of R.A. 7042, IRR of Regulations of RA 7042 (as amended by RA 8179
NON-PHILIPPINE NATIONALS the Department of National RA 7042, [1991]) July 9, 1996) Rule VI §1)
Defense (DND) or Philippine 3. Additional requirements to be submitted
A Non-Philippine national may do business or National Police (PNP) for to the : SEC STEPS IN THE REGISTRATION OF EXPORT
invest in a domestic enterprise up to one hundred defense-related activities, or the a. Clearance from the DND or PNP ENTERPRISES
percent (100%) of its capital, provided: DOST for investments involving (for enterprises wishing to
1. It is investing in a domestic market advanced technology shall be engage in defense-related STEP 1. Export enterprises which are non-
enterprise in areas outside the FINL; decided upon by said agencies activities) Philippine nationals shall register with BOI and
2. It is investing in an export enterprise within fifteen (15) working days. b. Certificate from the DOST that submit the reports that may be required to ensure
whose products and services do not fall (Implementing Rules and the investment involves continuing compliance of the export enterprise
within Lists A and B (except for defense- Regulations of R.A. 7042, IRR of advanced technology shall be with its export requirement. (Sec 6)
related activities, which may be approved RA 7042, [1991]) submitted (for small and
pursuant to Section 8(b)(1) of the Act) of 3. Approval. Within fifteen (15) working medium-sized domestic market
days from official acceptance of an STEP 2. BOI shall advise SEC or BTRCP, as the
the FINL. enterprises with paid-in equity
application, the SEC or BTRCP shall act case may be, of any export enterprise that fails to
3. As required by laws, the existing country capital less than the equivalent
on the same. Otherwise, the application meet the export ratio requirement. (Sec 6)
or state of the applicant must also allow of US$500,000) (Implementing
Filipino citizens and corporations to do shall be considered as automatically Rules and Regulations of R.A.
business therein. (Rule VI, Implementing approved if it is not acted upon within said 7042, IRR of RA 7042, [1991]) STEP 3. The SEC or BTRCP shall thereupon
Rules and Regulations of R.A. 7042, IRR period for a cause not attributable to the 4. Application Fee order the non-complying export enterprise to
of RA 7042, [1991]) applicant. (Implementing Rules and reduce its sales to the domestic market to not
Regulations of R.A. 7042, IRR of RA more than forty percent (40%) of its total
STEP 3. Registration with the BTRCP Bureau
7042, [1991]) production; failure to comply with such SEC or
STEPS IN THE REGISTRATION OF of Trade Regulation and Consumer Protection
BTRCP order, without justifiable reason, shall
INVESTMENTS OF NON-PHILIPPINE Department of Trade and Industry (BTRCP-
STEP 2. Registration with the SEC. subject the enterprise to cancellation of SEC or
NATIONALS DTI)
An application form together with the following BTRCP registration, and/or the penalties
1. As required by existing laws and provided in Section 14 hereof. (Sec 6)
documents shall be submitted to the SEC. regulations, BTRCP Form No. 17 and
STEP 1. Application
1. New domestic corporation or a accompanying documents shall be
1. Filing of Application.
partnership: submitted to BTRCP. 5. FOREIGN INVESTMENTS IN DOMESTIC
a. Foreign corporation, domestic
a. Articles of 2. All documents executed abroad should MARKET ENTERPRISES
corporations or partnerships
Incorporation/Partnership be authenticated by the Philippine
which are non-Philippine
b. Name Verification Slip Embassy or Consular Office.
nationals.- applications for Non-Philippine nationals may own up to one
c. Bank Certificate of Deposit 3. Application Fee. A reasonable
registration shall be filed with the hundred percent (100%) of domestic market
SEC. d. ACR/ICR, SIRV (Special application fee to be determined by enterprises unless foreign ownership therein is
Investors Resident Visa), Visa BTRCP shall be collected from each
b. Single proprietorships, prohibited or limited by existing law or the Foreign
#13 of the alien subscribers applicant. Investment Negative List under Section 8 hereof.
applications for Metro Manila
e. Proof of Inward Remittance (for 4. Upon fulfilment of all BTRCP-DTI
shall be filed with the BTRCP or
the DTI-National Capital non-resident aliens) requirements and favorable evaluation A domestic market enterprise may change its
Region. 2. Foreign corporation by DTI, the Certificate of Registration for status to export enterprise if over a three (3) year
c. In the provinces, applications a. Name verification slip Sole Proprietorship shall be issued by period it consistently exports in each year thereof
may be filed with the extension b. Board Resolution authorizing the DTI. In case of disapproval, DTI shall also sixty per cent (60%) or more of its output. (Sec.
offices of the SEC for establishment of an office in the inform the applicant in writing of the 7)
corporations/partnerships and Philippines; reasons for the disapproval of the
the provincial offices of the DTI c. Financial statements for the registration. (Implementing Rules and
immediately preceding year at Regulations of R.A. 7042, IRR of RA At its option, a domestic market enterprise may
for sole proprietorships.
the time of filing of the 7042, [1991]) change its status to an export enterprise if, over
2. Pre-Processing of Documents - Pre-
application, certified by an the last three (3) years, it consistently exported in
processing of documents shall be
independent Certified Public each year thereof sixty percent (60%) or more of
undertaken to assist the investor in 4. FOREIGN INVESTMENTS IN EXPORT its output. (Implementing Rules and Regulations
determining the completeness of his Accountant of the home country.
d. Certified copies of the Articles of ENTERPRISES of R.A. 7042, IRR of RA 7042, [1991])
documents.
a. All applications are considered Incorporation/Partnership with
an English translation thereof if Foreign equity participation in export
officially accepted only upon enterprises shall be allowed up to one hundred
submission of complete in a foreign language.
e. Proof of inward remittance such percent (100%) provided that the products and
documents to either the SEC or services of such enterprises do not fall within Lists
BTRCP. as bank certificate of inward
remittance or credit advices. A and B of the FINL. (Implementing Rules and
(Implementing Rules and
Page 336 of 393 Page 337 of 393

6. FOREIGN INVESTMENT NEGATIVE LIST the Department of Science and VII. SPECIAL LAWS E. INSOLVENCY LAWS
Technology; or E. INSOLVENCY LAWS
b. they employ at least fifty (50) 1. Concurrence and Preference of 1. CONCURRENCE AND PREFERENCE OF
“Foreign Investments Negative List” or
direct employees (Sec.8) Credits
“Negative List” shall mean a list of areas of CREDITS
a. Meaning of Concurrence and
economic activity whose foreign ownership is Preference
limited to a maximum of forty percent (40%) of the Advanced technology should be: A. Meaning of Concurrence and Preference
1. Necessary for the development b. Exempt Properties
equity capital of the enterprises engaged therein. c. Classification of Credits
(Sec 3[g]) of certain industries; Concurrence of Credit implies possession by
2. Subject to guidelines of the d. Order of Preference of
Credits two or more creditors of equal rights or privileges
Department of Science and
The Foreign Investment Negative List shall have 2. Financial Rehabilitation and over the same property or all of the property of a
Technology; and
two (2) components lists; A, and B. Insolvency Act of 2010 debtor.
3. Appropriate and adaptable to a. Definition of Insolvency
a) List A shall enumerate the areas of activities local conditions, such that it can
reserved to Philippine nationals by mandate of b. Suspension of Payments
be eventually be transferred and Preference of Credit is the right held by a
the Constitution and specific laws. c. Rehabilitation
applied to available indigenous i. Types creditor to be preferred in the payment of his
b) List B shall contain the areas of activities and technology. (Implementing Rules claim above others out of the debtor’s assets.
enterprises regulated pursuant to law: ii. Commencement
and Regulations of RA 7042 [as Order  Preference creates no interest or lien on the
1. Defense-related activities, requiring amended by RA 8179 July 9, iii. Stay or Suspension property, but merely a preference to the
prior clearance and authorization from 1996] Rule 1 §1 [o]) Order application of the proceeds.
iv. Rehabilitation
Department of National Defense (DND)  The right of preference can be made effective
to engage in such activity, such as the Steps to Amend List B [R-E-A-P]: Receiver
1.) Recommendation of the v. Management only by being asserted and maintained.
manufacture, repair, storage and/or Otherwise, it is lost.
- Secretary of National Defense, or the Committee
distribution of firearms, ammunition,
- Secretary of Health, or the vi. Rehabilitation Plan
lethal weapons, military ordinance,
- Secretary of Education, Culture and vii. Cram Down Effect General Provisions
explosives, pyrotechnics and similar d. Liquidation
materials; unless such manufacturing or Sports, 1. The debtor is liable with all his property,
2.) Endorsement by the NEDA, i. Types
repair activity is specifically authorized, present and future, for the fulfillment of his
3.) Approval by the President, and ii. Conversion of
with a substantial export component, to a Rehabilitation to obligations, subjects to exemptions provided
non-Philippine national by the Secretary 4.) Promulgation by a Presidential Proclamation. by law.
Liquidation
of National Defense; or (Sec.8)
Proceedings
iii. Liquidation Order B. Exempt Properties
2. Activities that have implications on Foreign Investment Negative Lists shall become iv. Rights of Secured
public health and morals, such as the: effective fifteen (15) days after publication in a Creditors 1. Types of Property
newspaper of general circulation in the v. Liquidator a. Present property
a. manufacture and distribution of Philippines: Provided, however, That each vi. Determination of i. Family home (Arts. 152, 153 & 155)
dangerous drugs; Foreign Investment Negative List shall be Claims
prospective in operation and shall in no way affect ii. Right to receive support as well as
b. all forms of gambling; nightclubs, vii. Liquidation of Plan
foreign investment existing on the date of its money or property obtained by such
bars, beerhouses, dance halls;
publication. (Sec.8) support shall not be levied upon on
c. sauna and steam bathhouses attachment or execution (Art. 205)
and massage clinics. iii. Sec. 13, Rule 39, Rules of Court
Amendments to List B after promulgation and (Ordinary tools, lettered
3. GR: Small and medium-sized publication of the first Regular Foreign
gravestones, necessary clothing,
domestic market enterprises, with Investment Negative List at the end of the
transitory period shall not be made more often etc.);
paid-in equity capital less than the
equivalent two hundred thousand US than once every two (2) years. (Sec.8) iv. Conveyance and encumbrance
dollars (US$200,000) are reserved to made by persons belonging to the
Philippine nationals. so-called “non-Christian tribes,”
Exception: A small and medium-sized ----end of topic---- when proper, shall not be valid
domestic market enterprise with paid-in unless duly approved by the Director
equity capital less than the equivalent of the Bureau of non-Christian tribes.
one hundred thousand US dollars (Sec. 118, the Public Land Act, (C.A.
(US$100,000) shall be allowed to non- No. 141, as amended))
Philippine nationals if:
a. it involves advanced
technology* as determined by
Page 338 of 393 Page 339 of 393

b. Property in custodia legis and of public upon the immovable own, when approved by them, upon the real (9) Taxes and 2. If there are 2 or more credits with respect to
domain. sold; the court; property thus divided; assessments due the the same specific movable property, they
national government, shall be satisfied pro rata, after the payment
2. Insolvency shall be governed by the Financial (3) Claims of laborers, (2) Credits for services (9) Claims of donors or other than those of duties, taxes and fees due the State or any
masons, mechanics rendered the insolvent by real property for mentioned in articles
Rehabilitation and Insolvency Act (RA No. subdivision thereof
and other workmen, as employees, laborers, or pecuniary charges or 2241, No. 1, and 2242,
10142). The FRIA repealed the Insolvency No. 1;
well as of architects, household helpers for one other conditions
Act (Section 148, FRIA)
engineers and year preceding the imposed upon the 3. Those credits which enjoy preference in
contractors, engaged commencement of the donee, upon the (10) Taxes and relation to specific real property or real
3. Exemption of conjugal property or absolute in the construction, proceedings in immovable donated; assessments due any rights, exclude all others to the extent of the
community or property provided that: reconstruction or insolvency; province, other than those value of the immovable or real right to which
a. Partnership or community subsists; repair of buildings, (10) Credits of referred to in articles
the preference refers.
b. Obligations of the insolvent spouse canals or other works, (3) Expenses during the insurers, upon the 2241, No. 1, and 2242,
have not redounded to the benefit of upon said buildings, last illness of the debtor or property insured, for No. 1;
the family; canals or other works; of his or her spouse and the insurance premium 4. If there are 2 or more credits with respect to
children under his or her for two years. (11) Taxes and the same specific real property or real
4. If there is co-ownership, and one of the co- (4) Claims of parental authority, if they assessments due any city rights, they shall be satisfied pro rata, after
owners is the insolvent debtor, his undivided furnishers of materials have no property of their or municipality, other than the payment of the taxes and assessment of
used in the own; those indicated in articles
share or interest in the property shall be the taxes and assessments upon the
construction, 2241, No. 1, and 2242,
possessed by the assignee in insolvency immovable property or real right.
reconstruction, or (4) Compensation due the No. 1;
proceedings because it is part of his assets. repair of buildings, laborers or their
canals or other works, dependents under laws (12) Damages for death or 5. The excess, if any, after the payment of the
5. Property held by the insolvent debtor as a upon said buildings, providing for indemnity for personal injuries caused credits which enjoy preference with respect to
trustee of an express or implied trust, shall be canals or other works; damages in cases of labor by a quasi-delict; specific property, real or personal, shall be
excluded from the insolvency proceedings. accident, or illness added to the free property which the debtor
(5) Mortgage credits resulting from the nature (13) Gifts due to public
C. Classification of Credits may have, for the payment of other credits.
recorded in the of the employment; and private institutions of
Registry of Property, charity or beneficence;
1. Special preferred credits (Arts. 2241 and upon the real estate (5) Credits and 6. Those credits which do not enjoy any
2242) mortgaged; advancements made to preference with respect to specific property,
(14) Credits, which,
a. Considered as mortgages or pledges of the debtor for support of without special privilege, and those which enjoy preference, as to the
real or personal property or liens within (6) Expenses for the himself or herself, and appear in (a) a public amount not paid, shall be satisfied according
the purview of legal provisions governing preservation or family, during the last year instrument; or (b) in a final to the following rules:
insolvency. improvement of real preceding the insolvency; judgment, if they have
property when the law  Order established by Art. 2244;
b. Taxes due to the State shall first be been the subject of
authorizes o Credits for services rendered by
satisfied. (6) Support during the litigation. These credits
reimbursement, upon insolvency proceedings, shall have preference employees or laborers to the debtor
the immovable and for three months among themselves in the shall enjoy first preference under
2. Ordinary preferred credits (Art. 2242) - preserved or thereafter; order of priority of the Article 2244. (FRIA, Section 133)
preferred in the order given by law improved; dates of the instruments  Common credits referred to in Art. 2245
(7) Fines and civil and of the judgments, shall be paid pro rata regardless of dates.
(7) Credits annotated indemnification arising respectively.
3. Common credits (Art. 2245) - credits of any in the Registry of from a criminal offense;
other kind or class, or by any other right or Property, in virtue of a NOTE: Preference of mortgage credits is
title not comprised in Arts. 2241-2244 shall judicial order, by determined by the priority of registration,
(8) Legal expenses, and
enjoy no preference attachments or
expenses incurred in the D. Order of Preference of Credits following the maxim “prior tempore potior jure”
executions, upon the (He who is first in time is preferred in right).
administration of the
ARTICLE 2242 ARTICLE 2244 property affected, and 1. Credits which enjoy preference with respect
insolvent's estate for the
(1) Taxes due upon the (1) Proper funeral only as to later credits; to specific movables, exclude all others to
common interest of the
land or building; expenses for the debtor, the extent of the value of the personal The preference under Article 110 of the Labor
creditors, when properly
or children under his or (8) Claims of co-heirs authorized and approved property to which the preference refers. Code when not falling under Articles 2241 and
(2) For the unpaid price her parental authority who for warranty in the by the court; 2242 of the Civil Code and not attached to any
of real property sold, have no property of their partition of an specific property is an ordinary preferred credit
immovable among although its impact is to move it from the second
Page 340 of 393 Page 341 of 393

priority to first priority in the order of preference 2. FINANCIAL REHABILITATION AND Coverage: Proceedings Covered By FRIA
established by Article 2244 (DBP v. NLRC, G.R. INSOLVENCY ACT OF 2010 Included: DEBTOR PROCEEDING
No. 86932 June 27, 1990). 1. Juridical and natural persons who are Sole Voluntary Rehabilitation
Nature of FRIA Proceedings: debtors (Sec. 4(k), RA 10142) Proprietorship (FRIA, Sec. 12);
The “complementary-contracts-construed 1. In Rem – Jurisdiction over all persons 2. Government FIs and GOCCs (last Partnership Involuntary Rehabilitation
together” doctrine means that an accessory affected by the proceedings shall be paragraph of Sec. 5, RA 10142) Corporation (FRIA, Sec. 13);
contract must be read together with the principal considered as acquired upon publication of Pre-Negotiated Rehabilitation
3. Foreign corporations undergoing rehab
agreement. (PBC vs. Lim,G.R. No. 158138, the notice of the commencement of the proceedings abroad but also doing (FRIA, Sec. 76);
2005) proceedings in any newspaper of general business in the country (Sec. 139-142, RA Voluntary Liquidation (FRIA,
circulation in the Philippines as prescribed 10142) Sec. 90);
Pertinent Rules under the FRIA
under the Supreme Court rules of Involuntary Liquidation (FRIA,
Under the FRIA, the assets of an insolvent debtor procedure Sec. 91)
Excluded (Sec. 5, RA 10142):
are divided among its creditors by following the Individual Suspension of Payment
2. Summary 1. Banks
following rules: Debtor (FRIA, Sec. 94)
3. Non-adversarial (Sec. 3, RA 10142) 2. Insurance companies
General Rule: The assets of the insolvent debtor Voluntary Liquidation (FRIA,
3. Pre-need companies Sec. 103)
shall be divided among the creditors in
Note: the principle of res judicata applies to 4. National and local government agencies Involuntary Liquidation (FRIA,
accordance with the Liquidation Plan submitted
rehabilitation proceedings. The element of and units Sec. 105)
by the Liquidator and approved by the Court. The
rules on concurrence and preference of credits identity of parties only requires substantial
identity of parties. Thus, if there was already a Creditors and Claims Covered By FRIA A. Definition of Insolvency
under the NCC and other relevant laws shall be
observed in the Liquidation Plan. previous decision involving one creditor and
one debtor which was decided with finality, and Insolvent shall refer to the financial condition of
Creditor
Exception: Unless a preferred creditor voluntarily there is another claim involving a different a debtor that is generally unable to pay its or his
A natural or juridical person which has a claim
waives his preferred right. (R.A. No. 10142, Sec. creditor litigating the same matter as the liabilities as they fall due in the ordinary course
against the debtor that arose on or before the
133). previous decision, the previous decision is res of business or has liabilities that are greater
commencement date (FRIA, Sec. 4[h])
judicata and should apply to the second claim. than its or his assets. (Sec. 4(p), RA 10142)
(Pryce Corp. v. Chinabank, G.R. No. 172302, Claim
18 Feb. 2014) All claims or demands of whatever nature or Ground: An individual debtor possesses
character against the debtor or its property, sufficient property to cover all his debts but
whether for money or otherwise, liquidated or foresees the impossibility of meeting them when
Debtors
unliquidated, fixed or contingent, matured or they respectively fall due (Sec. 94, RA 10142)
The term “debtor” shall refer to (PICS):
a. Partnership duly registered with the SEC; unmatured, disputed or undisputed, including,
B. Suspension of Payments
b. Individual debtor who has become insolvent; but not limited to:
c. Corporation duly organized and existing A Stay or Suspension Order has the following
under Philippine laws; or (1) All claims of the government, whether effects:
d. Sole Proprietorship registered with the DTI national or local, including taxes, tariffs and a. Suspend all actions or proceedings, in court
(FRIA, Sec. 4[k]) customs duties; and or otherwise, for the enforcement of claims
against the debtor;
Note: An individual debtor shall refer to a natural (2) Claims against directors and officers of the b. Suspend all actions to enforce any judgment,
person who is a resident and citizen of the debtor arising from acts done in the attachment or other provisional remedies
Philippines that has become insolvent (FRIA, discharge of their functions falling within the against the debtor;
Sec. 4[o]) scope of their authority. This inclusion does c. Prohibit the debtor from selling, encumbering,
not prohibit the creditors or third parties from transferring or disposing in any manner any
Note: A debtor may file for rehabilitation despite filing cases against the directors and officers of its properties except in the ordinary course
having already defaulted on its obligations to its acting in their personal capacities of business; and
creditor. If thepetition for rehabilitation is sufficient d. Prohibit the debtor from making any payment
and the rehabilitation plan feasible, rehabilitation of its liabilities outstanding as of the
should proceed. (Metrobank v. Liberty commencement date except as may be
Corrugated, G.R. No. 184317, 25 Jan. 2017) provided herein. (FR Rules, Rule 1, Sec. 5[r])
Page 342 of 393 Page 343 of 393

The issuance of the Commencement Order and meeting of the creditors, all the rights which the authorized, registered and/or recognized by St. Michael Medical Center, G.R. No. 205469,
the Suspension or Stay Order, and any other creditors had against the individual debtor before the appropriate regulatory agency like the 2015)
provision of the Act, shall not in any way diminish the agreement shall revest in them, and the Bangko Sentral ng Pilipinas (BSP) and the
or impair the security or lien of a secured creditor, individual debtor may be subject to insolvency SEC as well as any form of actions of such i. Types
or the value of his lien or security, except that his proceedings. (Sec. 102, RA 10142) agencies or entities to reimburse themselves
right to enforce the security or lien may be for any transactions settled for the debtor; 1. Court-supervised rehabilitation
suspended during the term of the Stay Order. The The Stay or Suspension Order does not apply and
a. Voluntary (aka debtor-initiated)
court may allow the enforcement of the security in the following cases: g. Any criminal action against individual debtor
(Sec. 12, RA 10142)
or lien if the property is not necessary for the a. Cases already pending appeal in the or owner, partner, director or officer of a
rehabilitation of the debtor. (FR Rules, Rule 2, Supreme Court as of commencement date debtor shall not be affected by any Filed by:
Sec. 59) Provided, That any final and executory proceeding commend under this Act. (FR  If sole proprietorship, owner
judgment arising from such appeal shall be Rules, Rule 2, Sec. 10)  If partnership, majority of
Procedure in suspension of payment: referred to the court for appropriate action; partners
An individual debtor who, possessing sufficient b. Subject to the discretion of the court, to cases Note: there is no need for a hearing before the  If corporation, majority of
property to cover all his debts but foreseeing the pending or filed at a specialized court or issuance of a stay order. The Interim Rules only directors/trustees, authorized by
impossibility of meeting them when they quasi-judicial agency which, upon require an initial hearing before the court will give 2/3 of stockholders/members
respectively fall due, may file a verified petition determination by the court is capable of due course to or dismiss a petition. Nevertheless,
that he be declared in the state of suspension of resolving the claim more quickly, fairly and neither do the Interim Rules prohibit the holding Ground: insolvent and may be
payments by the court of the province or city in efficiently than the court: Provided, That any of a hearing before the issuance of a stay order. rehabilitated
which he has resided for six (6) months prior to final and executory judgment of such court or Thus, the trial court has ample discretion to call a
Note: the venue for a petition for
the filing of his petition. He shall attach to his agency shall be referred to the court and shall hearing prior to the issuance of a stay order, so voluntary insolvency proceeding is
petition, as a minimum: be treated as a non-disputed claim; long as said hearing is held within the 5-day the CFI of the province or city where
a. a schedule of debts and liabilities; c. Enforcement of claims against sureties and period from the filing of the petition. (Pryce Corp. the insolvent debtor resides, as
b. an inventory of assets; and other persons solidarily liable with the debtor, v. Chinabank, G.R. No. 172302, 18 Feb. 2014) stated in the Articles of
c. a proposed agreement with his and third party or accommodation Incorporation. However, when it is
creditors. (Sec. 94, RA 10142) mortgagors as well as issuers of letters of C. Rehabilitation uncontroverted that the insolvent
credit, unless the property subject of the third corporation abandoned the old
The manner of approval of the proposed party or accommodation mortgage is Rehabilitation shall refer to the restoration of principal office, the corporation is
agreement is as follows: necessary for the rehabilitation of the debtor the debtor to a condition of successful considered a resident of the city
operation and solvency, if it is shown that its where its actual principal office is
1. The presence of creditors holding claims as determined by the court upon
continuance of operation is economically currently found. (Pilipinas Shell
amounting to at least three-fifths (3/5) of the recommendation by the rehabilitation Petroleum Corp. v. Royal Ferry
liabilities shall be necessary for holding a meeting receiver; feasible and its creditors can recover by way of
the present value of payments projected in the Services, Inc., G.R. No. 188146, 1
(Sec. 96, RA 10142). d. Any form of action of customers or clients of Feb. 2017)
2. To form a majority, it is necessary: a securities market participant to recover or plan, more if the debtor continues as a going
a. that two-thirds (2/3) of the creditors otherwise claim moneys and securities concern than if it is immediately liquidated.
Initiation of Voluntary Proceedings
voting unite upon the same proposition; entrusted to the latter in the ordinary course (Sec. 4(gg), RA 10142)
and of the latter's business as well as any action Who may Petition for Voluntary Rehabilitation
b. that the claims represented by said of such securities market participant or the Rehabilitation contemplates a continuance of 1. The owner in case of a sole proprietorship, or
majority vote amount to at least three- appropriate regulatory agency or self- corporate life and activities in an effort to restore 2. A majority of the partners in case of a
fifths (3/5) of the total liabilities of the regulatory organization to pay or settle such and reinstate the corporation to its former position partnership, or
debtor mentioned in the petition; (Sec. 97 claims or liabilities; of successful operation and solvency (Wonder 3. A majority vote of the board of directors or
(d), RA 10142). e. Actions of a licensed broker or dealer to sell Book Corporation v. Phil. Bank of trustees and authorized by the vote of the
pledged securities of a debtor pursuant to a Communications, G.R. No. 187316, 2012) stockholders representing at least two-thirds
The suspension order shall lapse when three (3) securities pledge or margin agreement for the (2/3) of the outstanding capital stock, in stock
months shall have passed without the proposed settlement of securities transactions in The basic issues in rehabilitation proceedings corporations, or of the members, in case of
agreement being accepted by the creditors or as accordance with the provisions of the concern the viability and desirability of continuing non-stock corporation
soon as such agreement is denied. (Sec. 96, RA Securities Regulation Code and its the business operations of distressed
10142) implementing rules and regulations; corporations, all with a view of effectively An insolvent debtor may initiate voluntary
f. Clearing and settlement of financial restoring to a state of solvency or to its former proceedings under this Act by filing a petition for
If the individual debtor fails, wholly or in part, to transactions through the facilities of a healthy financial condition through the adoption of rehabilitation with the court and on the grounds
perform the agreement decided upon at the clearing agency or similar entities duly a rehabilitation plan (BPI Family Savings Bank v. hereinafter specifically provided.
Page 344 of 393 Page 345 of 393

A group of debtors shall refer to: h. A Rehabilitation Plan; Circumstances Necessary to Start Involuntary the RTC having jurisdiction over the place in
(1) corporations that are financially related to one i. The names of at least 3 nominees to the Proceedings which the insolvent debtor resides or has its
another as parent corporations, subsidiaries position of rehabilitation receiver; and These proceedings may be initiated against the principal place of business (FR Rules, Rule 4,
or affiliates; j. Other documents required to be filed with debtor by filing a petition for rehabilitation with the Sec. 8)
(2) partnerships that are owned more than fifty the petition pursuant to this Act and the court if:
percent (50%) by the same person; and rules of procedure as may be a. There is no genuine issue of fact on law on Action on the Petition
(3) single proprietorships that are owned by the promulgated by the Supreme Court. the claim/s of the petitioner/s, and that the 1. If the court finds the petition to be substantial
same person. When the petition covers a due and demandable payments thereon have in form and substance, the commencement
group of debtors, all reference under these not been made for at least 60 days or that the order shall be issued within 5 working days
rules to debtor shall include and apply to the b. Involuntary (aka creditor-initiated) debtor has failed generally to meet its from its filing
group of debtors (FRIA, Sec. 4[n]) (Sec. 13 & 14, RA 10142) liabilities as they fall due; or
b. A creditor, other than the petitioner/s, has 2. If found deficient within the same period, the
Filed by: any creditor or group of
Grounds for Voluntary Rehabilitation initiated foreclosure proceedings against the court may give 5 working days from receipt of
creditors with a claim of at least
A group of debtors may jointly file for P1,000,000 or at least 25% of debtor that will prevent the debtor from the notice of order to satisfy the deficiency.
rehabilitation when: subscribed capital stock or paying its debts as they become due or will
a. One or more of its members foresee the partners’ contributions, whichever render it insolvent. (FR Rules, Rule 2, Sec. 5) 3. The court shall dismiss the petition if the
impossibility of meeting debts when they is higher deficiency is not complied within the extended
respectively fall due, and Petition for Involuntary Proceedings 5-day period (FR Rules, Rule 2, Sec. 7)
b. The financial distress would likely adversely Ground: The creditor/s' petition for rehabilitation shall be
affect the financial condition and/or  The creditors’ due and verified to establish the substantial likelihood that 2. Pre-negotiated rehabilitation (Sec. 76,
operations of the other members of the group demandable claims have not the debtor may be rehabilitated, and include: RA 10142)
and/or the participation of the other members been paid for at least 60 days or a. Identification of the debtor its principal
that the debtor has failed Filed by:
of the group is essential under the terms and activities and its address;
generally to meet its liabilities as  An insolvent debtor, by itself or jointly
conditions of the proposed Rehabilitation b. The circumstances sufficient to support a
they fall due; or with any of its creditors
Plan. (FR Rules, Rule 2, Sec. 1)  A creditor, other than the petition to initiate involuntary rehabilitation
petitioners, has initiated proceedings under Section 13 of this Act;
Note: must be approved/endorsed by:
Petition for Voluntary Proceedings foreclosure proceedings against c. The specific relief sought under this Act;
 Creditors holding at least 2/3 of total
The petition shall be verified to establish the the debtor that will prevent the d. A Rehabilitation Plan;
liabilities of the debtor;
insolvency of the debtor and the viability of its debtor from paying its debts as e. The names of at least 3 nominees to the
 Secured creditors holding more than
rehabilitation, and include, whether as an they become due or will render it position of rehabilitation receiver;
insolvent 50% of total secured claims; and
attachment or as part of the body of the petition, f. Other information that may be required under
 Note: the creditors must  Unsecured creditors holding more than
as a minimum the following: this Act depending on the form of relief
establish that the debtor may be 50% of total unsecured claims
a. Identification of the debtor, its principal requested; and
activities and its addresses; rehabilitated g. Other documents required to be filed with the
Pre-Negotiated Rehabilitation Plans, when
b. Statement of the fact of and the cause of petition pursuant to this Act and the rules of
Initiation of Involuntary Proceedings approved by the court, have the same legal effect
the debtor's insolvency or inability to pay procedure as may be promulgated by the
as confirmation of a judicially supervised plan.
its obligations as they become due; Supreme Court.
Who may petition for involuntary proceedings (Sec. 82, FRIA)
c. The specific relief sought pursuant to this
1. Any creditor or group of creditors with a claim
Act; Common Provisions to Voluntary and
of, or the aggregate of whose claims is, whichever Pre-Negotiated Rehabilitation Petition
d. The grounds upon which the petition is Involuntary Proceedings
of is higher of: An insolvent debtor, by itself or jointly with any of
based;
a. At least Php1,000,000.00; or its creditors, may file a verified petition with the
e. Other information that may be required Venue
b. At least 25% of the subscribed capital stock or court for the approval of a pre-negotiated
under this Act depending on the form of RTC having jurisdiction over the principal office of
partners' contributions (FR Rules, Rule 2, Sec. Rehabilitation Plan which has been endorsed or
relief requested; the debtor as specified in its articles of
4) approved by creditors holding at least two-thirds
f. Schedule of the debtor's debts and incorporation or partnership or in its registration
(2/3) of the total liabilities of the debtor, including
liabilities including a list of creditors with papers with the DTI in cases of sole
secured creditors holding more than 50% of the
their addresses, amounts of claims and proprietorship (FR Rules, Rule 1, Sec. 6)
total secured claims of the debtor and unsecured
collaterals, or securities, if any;
creditors holding more than 50% of the total
g. An inventory of all its assets including Note: The petition for court assistance to execute
unsecured claims of the debtor.
receivables and claims against third or implement either a standstill agreement or out
parties; of court restructuring agreement may be filed with
Page 346 of 393 Page 347 of 393

The petition shall include as a minimum: Approval of the Pre-Negotiated Plan Standstill period: (Sec. 85) d. State the legal effects of the Commencement
a. Schedule of the debtor's debts and liabilities; Within 10 days from the date of the second May be agreed upon by the Order;
b. Inventory of the debtor's assets; publication of the Order, the court shall approve parties pending negotiation and e. Declare that the debtor is under rehabilitation;
c. The pre-negotiated Rehabilitation Plan, the Rehabilitation Plan unless a creditor or other finalization of the plan; f. Direct the publication of the Commencement
including the names of at least 3 qualified interested party submits an objection to it in Shall cover not only the Order in a newspaper of general circulation in
negotiating parties but also all
nominees for rehabilitation receiver; and accordance with the next succeeding section. the Philippines once a week for at least 2
other creditors;
d. Summary of disputed claims against the (Sec. 78, FRIA) consecutive weeks, with the first publication
debtor and a report on the provisioning of Requirements: to be made within 7 days from the time of its
funds to account for appropriate payments Objections to the Pre-Negotiated Plan  Approved by creditors issuance;
should any such claims be ruled valid or their Any creditor or other interested party may submit representing more than g. If the petitioner is the debtor direct the service
amounts adjusted. (Sec. 76, FRIA) to the court a verified objection to the petition or 50% of total liabilities; by personal delivery of a copy of the petition
the Rehabilitation Plan not later than 8 days from  Notice is published in a on each creditor holding at least 10% of the
If Petition Deemed Sufficient the date of the second publication of the Order. newspaper of general total liabilities of the debtor as determined
Within five (5) working days, and after circulation in the Phils. once from the schedule attached to the petition
determination that the petition is sufficient in form The grounds for objection are limited to the a week for 2 consecutive within 5 days; if the petitioner/s is/are
and substance, the court shall issue an Order following: weeks; and creditor/s, direct the service by personal
which shall; a. Allegations in the petition or the Standstill period does not delivery of a copy of the petition on the debtor
a. Identify the debtor, its principal business of Rehabilitation Plan or the attachments exceed 120 days from date of within 5 days;
activity/ies and its principal place of business; thereto are materially false or misleading; effectivity h. Appoint a rehabilitation receiver who may or
b. Declare that the debtor is under rehabilitation; b. Majority of any class of creditors do not in fact not be from among the nominees of the
For an out-of-court or informal
c. Summarize the grounds for the filling of the support the Rehabilitation Plan; petitioner/s and who shall exercise such
restructuring/workout agreement or
petition; c. The Rehabilitation Plan fails to accurately powers and duties defined in this Act as well
Rehabilitation Plan to qualify, it must meet the
d. Direct the publication of the Order in a account for a claim against the debtor and the as the procedural rules that the Supreme
following minimum requirements:
newspaper of general circulation in the claim in not categorically declared as a Court will promulgate;
a. Debtor must agree to the out-of-court or
Philippines once a week for at least 2 contested claim; or i. Summarize the requirements and deadlines
informal restructuring/workout
consecutive weeks, with the first publication d. Support of the creditors, or any of them was for creditors to establish their claims against
agreement or Rehabilitation Plan;
to be made within 7 days from the time of its induced by fraud. the debtor and direct all creditors to their
b. Approved by creditors representing at
issuance; claims with the court at least 5 days before
least 67% of the secured obligations of
e. Direct the service by personal delivery of a Copies of any objection to the petition of the the initial hearing;
the debtor;
copy of the petition on each creditor who is Rehabilitation Plan shall be served on the debtor, j. Direct Bureau of internal Revenue (BIR) to
c. Approved by creditors represent at least
not a petitioner holding at least 10% of the the rehabilitation receiver (if applicable), the file and serve on the debtor its comment on
75% of the unsecured obligations of the
total liabilities of the debtor, as determined in secured creditor with the largest claim and who or opposition to the petition or its claim/s
debtor; and
the schedule attached to the petition, within 3 supports the Rehabilitation Plan, and the against the debtor under such procedures as
d. Approved by creditors holding at least
days; unsecured creditor with the largest claim and who the Supreme Court provide;
85% of the total liabilities, secured and
f. State that copies of the petition and the supports the Rehabilitation Plan. (Sec. 79, FRIA) k. Prohibit the debtor's suppliers of goods or
unsecured, of the debtor. (Sec. 84, FRIA)
Rehabilitation Plan are available for services from withholding the supply of goods
examination and copying by any interested 3. Out-of-Court or Informal Restructuring ii. Commencement Order and services in the ordinary course of
party; Agreements or Rehabilitation Plans business for as long as the debtor makes
g. State that creditors and other interested (Sec. 83-89, RA 10142) payments for the services or goods supplied
Rehabilitation proceedings commence upon the
parties opposing the petition or Rehabilitation after the issuance of the Commencement
Must be approved by creditors issuance of the Commencement Order. The
Plan may file their objections or comments representing at least: (Sec. 84) Order;
Commencement Order contains the following:
thereto within a period of not later than 20  85% of total liabilities, secured l. Authorize the payment of administrative
days from the second publication of the and unsecured, of the debtor; expenses as they become due;
a. Identify the debtor, its principal business or
Order;  67% of secured obligations of m. Set the case for initial hearing, which shall not
activity/ies and its principal place of business;
h. Appoint a rehabilitation receiver, if provided the debtor; and be more than 40 days from the date of filing
b. Summarize the ground/s for initiating the
for in the Plan; and of the petition for the purpose of determining
 75% of unsecured obligations proceedings;
i. Include a Suspension or Stay Order as whether there is substantial likelihood for the
of the debtor; and c. State the relief sought under this Act and any
described in this Act. (Sec. 77, FRIA) debtor to be rehabilitated;
Note: debtor must agree to the requirement or procedure particular to the
n. Make available copies of the petition and
plan relief sought;
rehabilitation plan for examination and
copying by any interested party;
Page 348 of 393 Page 349 of 393

o. Indicate the location or locations at which Effectivity and Duration of the - unless the property subject of To allow such other actions to continue would
documents regarding the debtor and the Commencement Order the third party or only add to the burden of the management
proceedings under Act may be reviewed and The Commencement Order shall be effective for accommodation mortgagor is committee or rehabilitation receiver, whose
copied; the duration of the rehabilitation proceedings, necessary for the rehabilitation time, effort and resources would be wasted in
p. State that any creditor or debtor who is not unless: of the debtor, as determined by defending claims against the corporation
the petitioner, may submit the name or 1. Earlier lifted by the court; the court upon instead of being directed toward its restructuring
nominate any other qualified person to the 2. The Rehabilitation Plan is seasonably recommendation of the and rehabilitation.”
position of rehabilitation receiver at least 5 confirmed or approved; or rehabilitation receiver
days before the initial hearing; 3. The Rehabilitation proceedings are ordered c. issuers of letters of credit
iv. Rehabilitation Receiver
q. Include a Stay or Suspension Order. (FRIA, terminated by the court FR Rules, Rule 2,
4. Any action of customers/clients of a Rehabilitation Receiver
Sec. 16) Sec. 11)
securities market participant to recover The person or persons, natural or juridical,
iii. Stay or Suspension Order money/securities entrusted to the latter appointed as such by the court pursuant to this
Effects of the Commencement Order
in the ordinary course of business, and Act and which shall be entrusted with such
a. Vest the rehabilitation with all the powers and
any action of such securities market powers and duties as set forth herein. (FR Rules,
functions provided for this Act, such as the Effects: (Sec. 16(q), RA 10142)
participant or the appropriate regulatory Rule 1, Sec. 5[p])
right to review and obtain records to which 1. Suspend all actions or proceedings, in agency/self-regulatory organization to
the debtor's management and directors have court or otherwise, for the enforcement pay or settle such claims or liabilities; Minimum Qualifications of a Rehabilitation
access, including bank accounts or whatever of claims against the debtor;
nature of the debtor subject to the approval 5. Actions of a licensed broker/dealer to Receiver
2. Suspend all actions to enforce any sell pledged securities of a debtor,
by the court of the performance bond filed by judgment, attachment or other
the rehabilitation receiver; pursuant to a securities pledge or If the rehabilitation receiver is a natural
provisional remedies against the margin agreement for the settlement of
b. Prohibit or otherwise serve as the legal basis person:
debtor; securities transactions;
rendering null and void the results of any a. Citizen of the Philippines or a resident of the
3. Prohibit the debtor from selling, 6. Clearing and settlement of financial Philippines in the 6 months prior to
extrajudicial activity or process to seize
encumbrancing, transferring or transactions through the facilities of a nomination;
property, sell encumbered property, or
otherwise attempt to collection or enforce a disposing in any manner any of its clearing agency or similar entity duly b. Not been earlier dismissed as a rehabilitation
properties (except in the ordinary authorized, registered and/or receiver;
claim against the debtor after
commencement date unless otherwise course of business); and recognized by the appropriate c. As far as practicable, has expertise and
allowed in this Act, subject to the provisions 4. Prohibit the debtor from making any regulatory agency (like BSP, SEC, etc.) acumen to manage and operate a business
of Section 50 hereof; payment of its liabilities outstanding as as well as any form of actions of such similar in size and complexity of that of the
c. Exempt the debtor from liability for taxes and of the commencement date (except as agencies to reimburse themselves for debtor;
fees, including penalties, interests, and may be provided in the order) any transactions settled by the debtor; d. Has a general familiarity with the rights of
charges due to the government; and creditors subject to suspension of payment or
d. Serve as the legal basis for rendering null and 7. Criminal actions against the individual rehabilitation and a general understanding of
Effect of violation: debtor shall be liable for
void any setoff after the commencement date double the value of the property sold, debtor or owner, partner, director, or the duties and obligations of a rehabilitation
of any debt owed to the debtor by any of the embezzled, or disposed of or double the officer of the debtor. receiver;
debtor's creditors; transaction involved (Sec. 10, RA 10142) e. Of good moral character and with
e. Serve as the legal basis for rendering null and acknowledged integrity, impartiality and
void the perfection of any lien against the What is the rationale of the Stay Order? (Bar independence;
Exceptions to stay order: (Sec. 18, RA 10142) 2006)
debtor's property after the commencement f. No conflict of interest;
1. Cases already pending in the SC as of
date; and “The justification for the suspension of actions g. Has an operating knowledge in
the commencement date; management, finance, and rehabilitation of
f. Consolidate the resolution of all legal or claims, without distinction, pending
proceedings by and against the debtor to the 2. Cases pending or filed at a specialized rehabilitation proceedings is to enable the distressed companies; and
court; provided, however, that the court may court or quasi-judicial agency; management committee or rehabilitation h. Willing and able to file a bond in such amount
allow the continuation of cases on other 3. Enforcement actions against: receiver to effectively exercise its/his powers as determined by the court FR Rules, Rule 2,
courts where the debtor had initiated the suit. a. sureties and other persons free from any judicial or extra-judicial Sec. 21[A])
(FR Rules, Rule 2, Sec. 9) solidarily liable with the debtor interference that might unduly hinder or prevent
the "rescue" of the debtor company. The conflict of interest requirement may be
b. third party or accommodation
waived, expressly or impliedly, by a party who
mortgagors
may be prejudiced thereby. (FRIA, Sec. 29[d])
Page 350 of 393 Page 351 of 393

If the rehabilitation receiver is a juridical c. He is, or was, within 5 years from the filing of (A) Actual or imminent danger of dissipation, loss,
person: Principal Duties of the Rehabilitation Receiver the petition, a director, officer, owner, partner wastage or destruction of the debtor's assets or
a. Duly authorized to do business in the a. Preserving and maximizing the value of the or employee of the debtor or any of the other properties; or
Philippines for at least six (6) years prior to its assets of the debtor during the proceedings; creditors, or the auditor or accountant of the (B) Paralyzation of the business operations of the
appointment; b. Determining the viability of the rehabilitation; debtor; debtor; or
b. Good standing as certified by the appropriate c. Preparing and recommending a d. He is, or was, within 2 years from the filing of (C) Gross mismanagement of the debtor, fraud or
regulatory agency/ies; Rehabilitation Plan to the court; and the petition, an underwriter of the outstanding other wrongful conduct on the part of, or gross or
c. No conflict of interest; Implementing the approved Rehabilitation securities of the debtor; willful violation of the Act by the existing
d. Not been earlier dismissed as a rehabilitation Plan (FR Rules, Rule 2, Sec. 26) e. is related by consanguinity or affinity within management of the debtor or the owner, partner,
receiver; the fourth civil degree to any individual director, officer or representative/s in
e. Must submit the name of the person Removal of a Rehabilitation Receiver creditor, owner/s of a sale proprietorship- management of the debtor.
designated to discharge the responsibilities The rehabilitation receiver may be removed at debtor, partners of a partnership-debtor or to
and powers of a rehabilitation receiver and any time by the court, either motuproprio or upon any stockholder, director, officer, employee In case the court appoints the rehabilitation
the names of the employees and other motion by any creditor/s holding more than 50% or underwriter of a corporation-debtor; or receiver to assume the management of the
persons authorized to assist the designated of the total obligations of the debtor (FR Rules, f. He has any other direct or indirect material debtor, the court may:
representative, together with a sworn Rule 2, Sec. 27) interest in the debtor or any of the creditors.
certification that these persons possess the (FR Rules, Rule 2, Sec. 22) (1) Require the rehabilitation receiver to post an
qualifications and none of the Grounds for Removal additional bond;
disqualifications required from natural a. Incompetence, gross negligence, failure to Any rehabilitation receiver, member of the (2) Authorize him to engage the services or to
persons; perform or failure to exercise the proper management committee or persons employed or employ persons or entities to assist him in the
f. Must submit a sworn undertaking, duly degree of care in the performance of his contracted by them possessing any conflict of discharge of his managerial functions; and
approved in accordance with law, binding duties and powers; interest shall make the appropriate disclosure (3) Authorize a commensurate increase in his
itself to be solidarily liable with the persons b. Lack of a particular or specialized either to the court or to the creditors in case of compensation.
designated by it to discharge the functions competency required by the specific case; out-of-court rehabilitation proceedings. Any party
and responsibilities of a rehabilitation c. Illegal acts or conduct in the performance of to the proceeding adversely affected by the Rules and Liability on Conflicting Decisions
receiver; his duties and powers; appointment of any person with a conflict of In case the rehabilitation receiver is a juridical
g. Willing and able to file a bond in such amount d. Lack of qualification or presence of any interest to any of the positions enumerated above person, the acts of its designated representative
as may be determined by the court; disqualification; may however waive his right to object to such shall be presumed to be carried out in accordance
h. Not disqualified to discharge the duties of a e. Conflict of interest that arises after his appointment and, if the waiver is unreasonably with the authority vested in him by the juridical
rehabilitation receiver under the Constitution appointment; withheld, the court may disregard the conflict of entity which he represents.
and other relevant laws (FR Rules, Rule 2, f. Manifest lack of independence that is interest, taking into account the general interest In case of conflict, the decision of the governing
Sec. 21) detrimental to the general body of the of the stakeholders. body of the juridical entity shall prevail.
stakeholders;
Additional Requirements for Representatives g. Failure, without just cause, to perform any of Management of Debtor’s Business However, the rehabilitation receiver and its
of Juridical Persons his powers and functions under these Rules; General Rule: The management of the juridical representative/s shall remain solidarily liable for
a. Duly designated and authorized to act for and or debtor shall remain with existing management. all obligations and responsibilities, subject to the
on behalf of the juridical entity; h. Any of the grounds for removing a trustee right of withdrawal prior to the implementation of
b. Must be a director, officer, stockholder or under the general principles of trusts. Exception: Displacement of Existing the disputed decision.
partner of the juridical entity; and Management by the Rehabilitation Committee
c. Must submit a sworn undertaking that he Cases of Conflict of Interest Note: Upon assumption of management, the
shall be solidarily liable with his firm for all the An individual shall be deemed to have a conflict Upon motion of any interested party and within receiver shall exercise the same powers granted
obligations and responsibilities of a of interest if he is so situated as to be materially the soonest possible time, the court may appoint under Sec. 26 in addition to the powers granted
rehabilitation receiver. (FR Rules, Rule 2, influenced in the exercise of his judgment for or and direct the rehabilitation receiver to assume to the management committee (FR Rules, Rule 2,
Sec. 21) against any party to the proceedings. Without the powers of management of the debtor, or Sec. 32)
limiting the generality of the foregoing, an appoint a management committee that will
Other qualifications and disqualifications of the individual shall be deemed to have a conflict of undertake the management of the debtor, upon
rehabilitation receiver shall be set forth in interest if: clear and convincing evidence of any of the
procedural rules, taking into consideration the a. He is a creditor, owner, partner or stockholder following circumstances:
nature of the business of the debtor and the need of the debtor;
to protect the interest of all stakeholders b. He is engaged in a line of business which
concerned. competes with that of the debtor;
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v. Management Committee necessary to perform its functions and duties aid it in the exercise of its powers and Confirmation of Plan Notwithstanding
as management committee; performance of its duties and functions, Rejection
Role of the Management Committee e. Report to the court any material adverse including the power to examine parties and Notwithstanding the rejection of the Rehabilitation
1. Take custody of and control all assets owned change in the business of the entity under witnesses under oath; and Plan, the court may, motu proprio or upon motion
or possessed by the debtor; management; q. Exercise such other powers as the court may, of any interested party within ten (10) days from
2. Take the place of the management and f. Evaluate the existing equity, capital, assets from time to time confer upon it. notice of the rejection of the Rehabilitation Plan,
governing body of the debtor; and and liabilities, earnings, and operations of the (FR Rules, Rule 2, Sec. 33) confirm the Plan if all of the following
3. Assume the powers, rights and responsibilities entity under management; circumstances are present:
of the debtor (FR Rules, Rule 2, Sec. 33) g. Determine and recommend to the court the Qualifications of Members of the Management
best way to salvage and protect the interest Committee a. The Rehabilitation Plan complies with the
Note: A majority of all members shall be of the creditors, stockholders and the general Same as with rehabilitation receivers (FR Rules, requirements specified in the FRIA and the
necessary for the management committee to act public, including the rehabilitation of the entity Rule 2, Sec. 36) FR Rules;
or make a decision (FR Rules, Rule 2, Sec. 35) under management; b. The rehabilitation receiver recommends the
h. Prohibit and report to the court any Immunity from Suit confirmation of the Rehabilitation Plan;
Composition of the Management Committee encumbrance, transfer, or disposition of the The rehabilitation receiver, the members of the c. The shareholders, owners or partners of the
The management committee shall be composed debtor’s property outside of the ordinary management committee, and all persons they juridical debtor lose at least their controlling
of three qualified members appointed by the course of business or beyond what is allowed engage shall not be subject to any action, claim interest as a result of the Rehabilitation Plan;
court, as follows: by the court or demand for any act or omission in good faith in and
a. Nominated by the debtor; i. Prohibit and report to the court payments the exercise of their powers and functions (FR d. The Rehabilitation Plan would likely provide
b. Nominated by the creditor/s holding more made outside the ordinary course of Rules, Rule 2, Sec. 38) the objecting class of creditors with
than 50% of the total obligations of the business; compensation, which has a net present value
debtor; j. Have unlimited access to the employees, vi. Rehabilitation Plan greater than that which they would have
c. A chairman nominated by the first and premises, books, records and financial received if the debtor were under liquidation.
second members within 10 days from the documents of the entity under management Rehabilitation Plan (FR Rules, Rule 2, Sec. 62)
appointment (FR Rules, Rule 2, Sec. 34) during business hours; A plan by which the financial well-being and
k. Inspect, copy, photocopy or photograph any viability of an insolvent debtor can be restored The rehabilitation receiver shall submit the
The management committee may overrule or document, paper, book, account or letter, using various means including, but not limited to, approved Plan to the court for confirmation.
revoke the actions of the previous management whether in the possession of the entity or debt forgiveness, debt rescheduling, Within five (5) days from receipt of the
or governing body of the debtor (FR Rules, Rule other persons, that pertain to the business of reorganization or quasi- reorganization, dacion Rehabilitation Plan, the court shall notify the
2, Sec. 33) the debtor; en pago, debt-equity conversion and sale of the creditors that the Rehabilitation Plan has been
l. Gain entry into any property owned by the business (or parts of it) as a going concern, or submitted for confirmation. (FR Rules, Rule 2,
Powers and Duties of the Committee entity under management for the purposes of setting-up of new business entity, or other similar Sec. 63)
The specific powers and duties of the inspecting, measuring, surveying, or taking arrangements as may be approved by the court
management committee, whose members shall photos or videos of any designated relevant or creditors. (FRIA, Sec. 4[ii]) Objections by creditors may be filed 20 days from
also be considered as officers of the court, are the object or operation thereon; notice (FR Rules, Rule 2, Sec. 64).
following: m. Bring to the attention of the court any material Approval of the Rehabilitation Plan
a. Investigate the acts, conduct, properties, change affecting the entity’s ability to meet its Within 20 days from notice to creditors and Grounds for Objection on the Rehabilitation
liabilities, and financial condition of the obligations; stakeholders, the creditors shall be convened for Plan
corporation, association or partnership under n. Take the appropriate steps to modify, nullify, purposes of voting on the approval of the a. The creditors' support was induced by
management; or revoke transactions coming to its Rehabilitation Plan. The Plan shall be deemed fraud;
b. Examine under oath the directors and officers knowledge which it deems detrimental or rejected unless approved by all classes of b. The documents or data relied upon in the
of the entity and any other witnesses that the prejudicial to the interest of the entity under creditors. (FRIA, Sec. 64) Rehabilitation Plan are materially false or
committee may deem appropriate; management; misleading; or
c. Report to the court any ascertained fact o. Recommend the termination of the The Plan is deemed to have been approved by a c. The Rehabilitation Plan is in fact not
pertaining to the causes of the problems, proceedings and the dissolution of the entity class of creditors if members of the said class supported by the voting creditors. (FR
fraud, misconduct, mismanagement and if it determines that the continuance in holding more than 50% of the total class vote in Rules, Rule 2, Sec. 64)
irregularities committed by any other person; business of such entity will no longer work to favor of the plan (FR Rules, Rule 2, Sec. 62)
d. Use the services of or employ such person or the best interest of the stakeholders and Confirmation of the Rehabilitation Plan
persons, such as lawyers, accountants, creditors; The court shall issue an order confirming the
auditors, appraisers and staff as are p. Apply to the court for any order or directive Rehabilitation Plan in any of the following
that it may deem necessary or desirable to instances:
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a. No objections are filed within the twenty b. Compare the amounts expected to be n. State any rehabilitation covenants of the realistic assumptions and goals. (Viva
(20)-day period from receipt of notice received by the creditors under the debtor, the breach of which shall be Shippings Lines v. Keppel Philippines Mining,
from the court that a Rehabilitation Plan Rehabilitation Plan with those that they will considered a material breach of the Plan; G.R. No. 177382, 2016)
has been submitted to court; receive if liquidation ensues within the next o. Identify those responsible for the future
b. The court finds the objections lacking in 120 days; management of the debtor and the Characteristics of a rehabilitation plan that is
merit; c. Contain information sufficient to give the supervision and implementation of the Plan, infeasible:
c. The basis for the objection has been various classes of creditors a reasonable their affiliation with the debtor and their a. The absence of a sound and workable
cured; or basis for determining whether supporting the remuneration; business plan;
d. The debtor has complied with the order Plan is in their financial interest when p. Address the treatment of claims arising after b. Baseless and unexplained assumptions,
to cure the objection. compared to the immediate liquidation of the the confirmation of the Rehabilitation Plan; targets and goals;
debtor, including any reduction of principal q. Require the debtor and its counter-parties to c. Speculative capital infusion or complete lack
The court may confirm the Rehabilitation Plan interest and penalties payable to the adhere to the terms of all contracts that the thereof for the execution of the business plan;
notwithstanding unresolved disputes over claims creditors; debtor has chosen to confirm; d. Cash flow cannot sustain daily operations;
if the Rehabilitation Plan has made adequate d. Establish classes of voting creditors; r. Arrange for the payment of all outstanding and
provisions for paying such claims. e. Establish subclasses of voting creditors if administrative expenses as a condition to the e. Negative net worth and the assets are near
prior approval has been granted by the court; Plan's approval unless such condition has full depreciation or fully depreciated (Viva
If the court finds that there is no substantial f. Indicate how the insolvent debtor will be been waived in writing by the creditors Shippings Lines v. Keppel Philippines Mining,
likelihood that the debtor can be rehabilitated, it rehabilitated including, but not limited to, debt concerned; G.R. No. 177382, 2016)
shall not confirm the Rehabilitation Plan and, forgiveness, debt rescheduling, s. Arrange for the payment of all outstanding
instead, declare a failure of rehabilitation. reorganization or quasi- reorganization, taxes and assessments, or an adjusted vii. Cram Down Effect
dacion en pago, debt-equity conversion and amount pursuant to a compromise settlement
The court shall have the power to approve or sale of the business (or parts of it) as a going with the BlR Or other applicable tax Two Aspects of the Cram Down Power of The
implement the Rehabilitation Plan despite the concern, or setting-up of a new business authorities; Rehabilitation Court
lack of approval, or objection from the owners, entity or other similar arrangements as may t. Include a certified copy of a certificate of tax a. Approval despite opposition; and
partners or stockholders of the insolvent debtor: be necessary to restore the financial well- clearance or evidence of a compromise b. Binding effect of the approved plan
provided, that the terms thereof are necessary to being and viability of the insolvent debtor; settlement with the BIR;
restore the financial well-being and viability of the g. Specify the treatment of each class or u. Include a valid and binding resolution of a Cram-Down
insolvent debtor. subclass described in subsections (d) and meeting of the debtor's stockholders to The power of the rehabilitation court to approve
(e); increase the shares by the required amount and implement a rehabilitation plan
The order confirming the Rehabilitation Plan shall h. Provide for equal treatment of all claims in cases where the Plan contemplates an notwithstanding the objection of the majority of
specify the portions approved by the court and the within the same class or subclass, unless a additional issuance of shares by the debtor; creditors. The “cram-down” clause is necessary
portions rejected during consideration or cured by particular creditor voluntarily agrees to less v. State the compensation and status, if any, of to curb the majority creditors’ natural tendency to
the rehabilitation receiver. (FR Rules, Rule 2, favorable treatment; the rehabilitation receiver after the approval dictate their own terms and conditions to the
Sec. 66) i. Ensure that the payments made under the of the Plan; and rehabilitation, absent due regard to the greater
plan follow the priority established under the w. Contain provisions for conciliation and/or long-term benefit of all stakeholders. Otherwise
The approval of the Rehabilitation Plan shall not provisions of the Civil Code on concurrence mediation as a prerequisite to court stated, it forces the creditors to accept the terms
affect the rights of creditors to pursue separate and preference of credits and other assistance or intervention in the event of any and conditions of the rehabilitation plan,
actions against general partners of a partnership applicable laws; disagreement in the interpretation or preferring long-term viability over immediate but
to the extent they are liable under relevant j. Maintain the security interest of secured implementation of the Rehabilitation Plan. incomplete recovery. (Bank of the Philippine
legislation for the debts thereof. (FR Rules, Rule creditors and preserve the liquidation value of Islands vs. Sarabia Manor Hotel Corporation, GR
2, Sec. 68) the security unless such has been waived or Characteristics of an economically feasible No. 175844, 2013)
modified voluntarily; rehabilitation plan:
Amounts of any indebtedness or obligations k. Disclose all payments to creditors for pre- a. The debtor has assets that can generate The Court may approve a rehabilitation plan over
reduced or forgiven in connection with a Plan's commencement debts made during the more cash if used in its daily operations than the objection of the creditors, if, in its judgment,
approval shall not be subject to any tax. (FR proceedings and the justifications thereof; if sold; the rehabilitation of the debtors is feasible and the
Rules, Rule 2, Sec. 69) l. Describe the disputed claims and the b. Liquidity issues can be addressed by a opposition of the creditors is manifestly
provisioning of funds to account for practicable business plan that will generate unreasonable. The criteria for manifest
Minimum Contents of a Rehabilitation Plan appropriate payments should the claim be enough cash to sustain daily operations; unreasonableness are:
a. Specify the underlying assumptions, the ruled valid or its amount adjusted; c. The debtor has a definite source of financing
financial goals and the procedures proposed m. Identify the debtor's role in the for the proper and full implementation of a
to accomplish such goals; implementation of the Plan; Rehabilitation Plan that is anchored on
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a. The rehabilitation plan complies with the d. Inventory of all its assets including b. There is no substantial likelihood that the
requirements specified in Section 18 of Rule Party Applicant receivables and claims against third parties; debtor may be rehabilitated
3, A.M. No. 00-8-10-SC; An insolvent debtor may apply for liquidation by and
b. The rehabilitation plan would provide the filing a petition for liquidation e. Schedule of current income and expenditures The petition shall also include information to the
objecting class of creditors with payments within three (3) months prior to the filing of the best knowledge of the petitioners on:
whose present value projected in the plan Where to file the application petition; a. The schedule of debts and liabilities,
would be greater than that which they would RTC which has jurisdiction over its principal office f. List of all properties acquired by the debtor in including a list of its known creditors with their
have received if the assets of the debtor were as specified in its articles of incorporation or the immediately preceding two (2) years; addresses, amounts of claims and
sold by a liquidator within a six (6)month partnership. Where the principal office of the g. List of all properties sold, disposed of, or collaterals, or securities, if any;
period from the date of filing of the petition; corporation or partnership as registered with the donated by the debtor in the immediately b. The debtor's assets, including receivables
and Securities and Exchange Commission (SEC) is in preceding two (2) years; and claims against third parties; and
c. The rehabilitation receiver has recommended Metro Manila, the petition must be filed in the RTC h. Schedule of the debtor's executory contracts c. Audited financial statements of the debtor for
approval of the plan. (Victorio-Aquino v. Court of the city or municipality where the head and unexpired leases; the immediately preceding three (3) years.
Pacific Plans, G.R. No. 193108, 2014) office is located. i. Audited financial statements of the debtor for (FLSP Rules, Rule 2, Sec. 4)
the immediately preceding three (3) years;
Effects of Confirmation of Rehabilitation Plan Petition for Voluntary Liquidation and The petitioners shall post a bond in an amount at
a. The Plan and its provisions shall bind the The petition shall be verified, shall establish the j. Income tax return of the debtor for the least equal in value to the aggregate of their
debtor and all persons who may be affected insolvency of the debtor and shall indicate the immediately preceding year claims, conditioned upon payment to the debtor
thereby, including the creditors, whether or names of at least 3 nominees to the position of of all expenses and damages it may incur by
not such persons have participated in the liquidator. 2. Involuntary Liquidation reason of the filing of the petition if the same is
proceedings or opposed the Plan or whether later denied or dismissed by the court, or
or not their claims have been scheduled; It shall include, as minimum attachments, the Party Applicant to Petition for Liquidation withdrawn by the petitioners without the consent
b. The debtor shall comply with the provisions of following: The applicants must be made up of 3 or more of the debtor. (FLSP Rules, Rule 2, Sec. 5)
the Plan and shall take all actions necessary a. Certificate attesting to the holding of a creditors whose claim(s) is/are:
to carry them out; meeting of the Board of Directors of a stock a. At least P1,000,000; or ii. Individual Debtors
c. Payments shall be made to the creditors in corporation or the Board of Trustees of a non- b. At least 25% of the subscribed capital
accordance with the provisions of the Plan; stock corporation, as the case may be, called stock or partners’ contributions (FLSP 1. Suspension of Payments
d. Contracts and other arrangements between for the purpose and the approval during the Rules, Rule 2, Sec. 4)
the debtor and its creditors shall remain valid meeting of a resolution to file the petition, Party Applicant
and continue to apply to the extent that they signed by the secretary of the meeting and at Where to file the Petition An individual debtor who, possessing sufficient
do not conflict with the provisions of the Plan; least a majority of the members of the Board RTC which has jurisdiction over its principal office property to cover all his debts but foreseeing the
e. Any compromises on amounts or present during the meeting; as specified in its articles of incorporation or impossibility of meeting them when they
rescheduling of timing of payments by the b. Certificate attesting to the holding of a partnership. Where the principal office of the respectively fall due, may file a verified petition
debtor shall be binding on the creditors meeting of the stockholders, members or corporation or partnership as registered with the that he be declared in the state of suspension of
regardless of whether or not the Plan is partners comprising the debtor, as the case Securities and Exchange Commission (SEC) is in payments by the court of the province or city in
successfully implemented; and may be, called for the purpose and the Metro Manila, the petition must be filed in the RTC which he has resides for six (6) months prior to
f. Claims arising after the approval of the Plan approval during the meeting of a resolution to Court of the city or municipality where the head the filing of his petition. (FLSP Rules, Rule 3, Sec.
that are otherwise not treated by the Plan are file the petition by the stockholders holding at office is located. 1)
not subject to any Suspension Order. (FR least two-thirds (2/3) of the outstanding
Rules, Rule 2, Sec. 67) capital stock of the stock corporation, or two- Petition for Involuntary Liquidation Petition for Suspension of Payments
thirds (2/3) of the members or partners in The motion shall be verified, shall indicate the The petition shall indicate the names of at least 3
case of a non-stock corporation, association names of at least 3 nominees to the position of nominees to the position of commissioner and
d. Liquidation or partnership, as the case may be, signed by liquidator, and must show that: shall include, as minimum attachments, the
the chairman and the secretary of the a. There is no genuine issue of fact or law on following:
i. Types meeting the claims/s of the petitioner/s, and that the a. Schedule of debts and liabilities, including a
c. Schedule of the debtor's debts and liabilities due and demandable payments thereon have list of creditors with their addresses, amount
a. Kinds of Debtors including a list of creditors with their not been made for at least one hundred of claims and collaterals, if any;
addresses, amounts of claims and eighty (180) days or that the debtor has failed b. Inventory of all the debtor's assets, including
i. Juridical Debtors collaterals, or securities, if any; generally to meet its liabilities as they fall due; receivables and claims against third parties;
and
1. Voluntary Liquidation
Page 358 of 393 Page 359 of 393

c. Schedule of current income and expenditures the ordinary operations of commerce or of c. Schedule of current income and expenditures purpose of hindering or delaying the
within three (3) months prior to the filing of the industry in which the petitioning individual within three (3) months prior to the filing of the liquidation or of defrauding his creditors;
petition; debtor is engaged so long as the proceedings petition; f. He has confessed or offered to allow
d. Income tax return of the debtor for the relative to the suspension of payments are d. Income tax return of the debtor for the judgment in favor of any creditor or claimant
immediately preceding year; pending; immediately preceding year; for the purpose of hindering or delaying the
e. List of all properties acquired by the debtor in g. Prohibiting the individual debtor from making e. List of all properties acquired by the debtor in liquidation or of defrauding any creditors or
the immediately preceding two (2) years; any payment outside of the necessary or the immediately preceding two (2) years; claimant;
f. List of all properties sold, disposed of, or legitimate expenses of his business or f. List of all properties sold, disposed of, or g. He has willfully suffered judgment to be taken
donated by the debtor in the immediately industry, so long as the proceedings relative donated by the debtor in the immediately against him by default for the purpose of
preceding two (2) years; to the suspension of payments are pending; preceding two (2) years; and hindering or delaying the liquidation or of
g. Schedule of the debtor's executory contracts and g. Schedule of the debtor's executory contracts defrauding his creditors;
and unexpired leases; and h. Appointing a commissioner to preside over and unexpired leases (FLSP Rules, Rule 3, h. He has suffered or procured his property to
h. Proposed agreement with the creditors. the creditors' meeting. (FLSP Rules, Rule 3, Sec. 11) be taken on legal process with intent to give
(FLSP Rules, Rule 3, Sec. 1) Sec. 2) a preference to one or more of his creditors
If the court finds the petition sufficient in form and and thereby hinder or delay the liquidation or
Court Action in Suspension of Payments Actions Suspended by a Suspension Order substance it shall, within five (5) working days defraud any one of his creditors;
If the court finds the petition sufficient in form and Upon motion filed by the individual debtor, the issue the Liquidation Order (FLSP Rules, Rule 3, i. He has made any assignment, gift, sale,
substance, it shall, within 5 working days from the court may issue an order suspending any Sec. 12) conveyance or transfer of his estate,
filing of the petition, issue a Suspension of pending execution against the individual debtor. property, rights or credits with intent to hinder
Payments Order: Properties held as security by secured creditors Note: The official copy of the FLSP Rules states or delay the liquidation or defraud his
a. Prohibiting creditors from suing or instituting shall not be the subject of such suspension order. Rule 3, Sec. 12 as Rule 3, Sec. 3. creditors;
proceedings for collection against the debtor, j. He has, in contemplation of insolvency, made
except: (i) creditors having claims for The suspension order shall lapse when three (3) 3. Involuntary Liquidation any payment, gift, grant, sale, conveyance or
personal labor, maintenance, expense of last months shall have passed without the proposed transfer of his estate, property, rights or
illness and funeral of the wife or children of agreement being accepted by the creditors or as Party Applicant credits;
the debtor incurred within 60 days soon as such agreement is denied. (FLSP Rules, Any creditor or group of creditors with a claim of, k. Being a merchant or tradesman, he has
immediately prior to the filing of the petition; Rule 3, Sec. 3) or with claims aggregating at least generally defaulted in the payment of his
and (ii) secured creditors; Php500,000.00 may file a verified petition for current obligations for a period of 30 days;
b. Calling a meeting of all the creditors named 2. Voluntary Liquidation liquidation with the court of the province or city in l. For a period of 30 days, he has failed, after
in the schedule of debts and liabilities at such which the individual debtor resides. (FLSP Rules, demand, to pay any moneys deposited with
time not less than 15 days nor more than 40 Party Applicant Rule 3, Sec. 13) him or received by him in a fiduciary; and
days from the date of such Order and An individual debtor whose properties are not m. An execution having been issued against him
designating the date, time and place of the sufficient to cover his liabilities, and owing debts Acts of Insolvency on final judgment for money, he shall have
meeting; exceeding Php500,000.00, may apply to be The following shall be considered acts of been found to be without sufficient property
c. Directing such creditors to prepare and discharged from his debts and liabilities by filing insolvency, and the petition for liquidation shall subject to execution to satisfy the judgment.
present written evidence of their claims a verified petition with the court of the province or set forth or allege at least one of such acts: (FLSP Rules, Rule 3, Sec. 13)
before the scheduled creditors' meeting; city in which he has resided for 6 months prior to a. Such person is about to depart or has
d. Directing the publication of the said order in a the filing of such petition. (FLSP Rules, Rule 3, departed from the Republic of the Philippines, Court Action in Involuntary Liquidation
newspaper of general circulation published in Sec. 11) with intent to defraud his creditors; The court shall issue an Order requiring the
the province or city in which the petition is b. Being absent from the Republic of the individual debtor to show cause, at a time and
filed once a week for 2 consecutive weeks, Petition for Voluntary Liquidation Philippines, with intent to defraud his place to be fixed by the said court, why he should
with the first publication to be made within The petition shall indicate the names of at least 3 creditors, he remains absent; not be adjudged an insolvent. (FLSP Rules, Rule
seven 7 days from the time of the issuance of nominees to the position of commissioner and c. He conceals himself to avoid the service of 3, Sec. 15)
the Order; shall include, as minimum attachments, the legal process for the purpose of hindering or
e. Directing the clerk of court to cause the following: delaying the liquidation or of defrauding his Upon good cause shown, the court may issue an
sending of a copy of the Order by registered a. Schedule of debts and liabilities, including a creditors; Order forbidding the individual debtor from
mail, postage prepaid, to all creditors named list of creditors with their addresses, amount d. He conceals, or is removing, any of his making payments of any of his debts, and
in the schedule of debts and liabilities; of claims and collaterals, if any; property to avoid its being attached or taken transferring any property belonging to him.
f. Forbidding the individual debtor from selling, b. Inventory of all the debtor's assets, including on legal process; However, nothing contained herein shall affect or
transferring, encumbering or disposing in any receivables and claims against third parties; e. He has suffered his property to remain under impair the rights of a secured creditor to enforce
manner of his property, except those used in attachment or legal process for 3 days for the his lien in accordance with its terms.
Page 360 of 393 Page 361 of 393

ii. Conversion of Rehabilitation to The motion shall be verified & shall contain/set iii. Liquidation Order the Liquidator for him to accept and settle or
Liquidation Proceedings forth the same matters mentioned in the FLSP contest. If the liquidator contests or disputes
Rules, Sec. 4. (FLSP Rules, Rule 2, Sec. 6) The Liquidation Order shall: the claim, the court shall allow, hear and
During the pendency of court-supervised or pre- a. Declare the debtor insolvent; resolve such contest except when the case is
negotiated rehabilitation proceedings, the court Action on the Petition or Motion b. Order the liquidation of the debtor and, in the already on appeal. In such a case, the suit
may order the conversion of rehabilitation If the petition or motion is sufficient in form and case of a juridical debtor, declare it as may proceed to judgment, and any final and
proceedings to liquidation proceedings pursuant substance, the court shall issue an Order: dissolved; executor judgment therein for a claim against
to:  Directing the publication of the petition or c. Order the sheriff to take possession and the debtor shall be filed and allowed in court;
a. Section 25(c) of the FRIA which states that motion in a newspaper of general circulation control of all the property of the debtor, and
conversions can be done when the debtor is once a week for 2 consecutive weeks; except those that may be exempt from e. No foreclosure proceeding shall be allowed
insolvent and there is no substantial  Directing the debtor and all creditors who are execution; for a period of 180 days. (FLSP Rules, Rule
likelihood for the debtor to be successfully not the petitioners to file their comment on the d. Order the publication of the petition or motion 4, Sec. 3)
rehabilitated; or petition or motion within 15 days from the in a newspaper of general circulation once a
b. Section 72 of the FRIA or if no Rehabilitation date of last publication; and week for 2 consecutive weeks; iv. Rights of Secured Creditors
Plan is confirmed within 1 year from the date  Directing that a copy of the petition or motion e. Direct payments of any claims and
of the filing of a petition to confirm the be served on the debtor and on all known conveyance of any property due the debtor to The Liquidation Order shall not affect the right of
rehabilitation plan, the proceedings may, creditors, unless they exceed 20 in number, the liquidator; a secured creditor to enforce his lien in
upon motion or motuproprio, be converted in which case, service shall be made on at f. Prohibit payments by the debtor and the accordance with the applicable contract or law,
into one for the liquidation of the debtor; or least the first 20 largest known creditors of transfer of any property by the debtor; unless he waives his right. (FLSP Rules, Rule 4,
c. Section 75 of the FRIA or if termination of the debtor in terms of credits held. However, g. Direct all creditors to file their claims with the Sec. 4)
proceedings is due to failure of rehabilitation if there are more than 20 known creditors liquidator within the period set by the rules of
or dismissal of the petition for reasons other (who are not petitioners) and one or more of procedure Options available to a secured creditor
than technical grounds, the proceedings shall them acquired their credit/s within the 6- h. Authorize the payment of administrative A secured creditor may:
be immediately converted to liquidation; or month period immediately preceding the filing expenses as they become due; a. Waive his right under the security or lien,
d. Section 90 of the FRIA or if during the of the petition, the number of creditors to be i. State that the debtor and creditors who are prove his claim in the liquidation proceedings
pendency of court-supervised or preserved copies of the petition shall be not petitioner/s may submit the names of and share in the distribution of the assets of
negotiated rehabilitation proceedings, the increased by the same number. other nominees to the position of liquidator; the debtor; or
debtor may also initiate liquidation and b. Maintain his rights under the security or lien.
proceedings by filing a motion in the same If, after considering the comments filed, the court j. Set the case for hearing for the election and
court where the rehabilitation proceedings determines that the petition or motion is appointment of the liquidator, which date Failure to file a manifestation means that the
are pending to convert the rehabilitation meritorious, it shall issue the Liquidation Order. shall not be less than 30 days nor more than secured creditor is deemed to have opted to
proceedings into liquidation proceedings. (FLSP Rules, Rule 2, Sec. 8) 45 days from the date of the last publication. maintain his right under the security or lien (FLSP
e. At any other time upon the recommendation (FLSP Rules, Rule 4, Sec. 2) Rules, Rule 4, Sec. 5)
of the rehabilitation receiver that the After notice and hearing, the court where
rehabilitation of the debtor is not feasible. rehabilitation proceedings are pending may also Upon issuance of the Liquidation Order: Nature of Waiver
order the conversion of rehabilitation proceedings a. Juridical debtor shall be deemed dissolved A secured creditor shall not be deemed to have
Motion to Convert Rehabilitation Proceedings into liquidation proceedings in those cases and its corporate or juridical existence waived his right under the security or lien unless
Into Liquidated Proceedings authorized by law, or at any other time upon the terminated; the waiver is made in a public document, in
At any time during the pendency of or after a recommendation of the rehabilitation receiver or b. Legal title to and control of all the assets of unequivocal language, and with full knowledge of
rehabilitation court-supervised or pre-negotiated management committee that the rehabilitation of the debtor, except those that may be exempt the consequences of his action. If a secured
rehabilitation proceedings, creditors may compel the debtor is no longer feasible. (FLSP Rules, from execution, shall be deemed vested in creditor waives his right, he shall be entitled to
a debtor who is undergoing rehabilitation to Rule 2, Sec. 9) the liquidator or, pending his election or participate in the liquidation proceedings as an
liquidate instead. The following are the requisites: appointment, with the court; unsecured creditor. (FLSP Rules, Rule 4, Sec. 6)
Thereupon, the court shall issue the Liquidation c. All contracts of the debtor shall be deemed
The applicants must be made up of 3 or more Order. terminated and/or breached, unless the If the secured creditor maintains his rights
creditors whose claim(s) is/are: liquidator, within 90 days from the date of his under the security or lien:
a. At least P1,000,000; or assumption of office, declares otherwise and a. The value of the property may be fixed in a
b. At least 25% of the subscribed capital the contracting party agrees; manner agreed upon by the creditor and the
stock or partners’ contributions d. No separate action for the collection of an liquidator. When the value of the property is
unsecured claim shall be allowed. Such less than the claim it secures, the liquidator
actions already pending will be transferred to may convey the property to the secured
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creditor and the latter will be admitted in the Appointment of a Liquidator c. Sell, with the approval of the court, any f. Conflict of interest, unless, waived, expressly
liquidation proceedings as a creditor for the The court may appoint the liquidator if: property of the debtor which has come into or impliedly, by a party who may be
balance. If its value exceeds the claim a. On the date set for the election of the his possession or control; prejudiced thereby;
secured, the liquidator may convey the liquidator, the creditors do not attend; d. Redeem all mortgages and pledges, and so g. Partiality or lack of independence; or
property to the creditor and waive the debtor's b. Creditors who attend, fail or refuse to satisfy any judgement which may be an h. Any other ground analogous to the foregoing.
right of redemption upon receiving the excess elect a liquidator; encumbrance on any property sold by him; (FLSP Rules, Rule 4, Sec. 13)
from the creditor; c. After being elected, the liquidator fails to e. Settle all accounts between the debtor and
b. Liquidator may sell the property and satisfy qualify ; or his creditors, subject to the approval of the vi. Determination of Claims
the secured creditor's entire claim from the d. Vacancy occurs for any reason court;
proceeds of the sale; or whatsoever, In any of the cases provided f. Recover any property or its value, Registry of Claims
c. Secure creditor may enforce the lien or herein, the court may instead set another fraudulently conveyed by the debtor; Within 20 days from his assumption into office the
foreclose on the property pursuant to hearing of the election of the liquidator. g. Recommend to the court the creation of a liquidator shall prepare a preliminary registry of
applicable laws. (FLSP Rules, Rule 4, Sec. 7) creditors' committee which will assist him in claims of secured and unsecured creditors.
Qualifications of a Liquidator the discharge of the functions and which shall Secured creditors who have waived their security
v. Liquidator The liquidator shall have the same qualifications have powers as the court deems just, or lien, or have fixed the value of the property
as the rehabilitation receiver: reasonable and necessary; and subject of their security or lien by agreement with
The Liquidator  Citizen of the Philippines or a resident of h. Upon approval of the court, to engage such the liquidator and is admitted as a creditor for the
The Liquidator is a natural person or juridical the Philippines in the 6months professional as may be necessary and balance, shall be considered as unsecured
entity appointed as such by the court and immediately preceding his nomination; reasonable to assist him in the discharge of creditors.
entrusted with such powers and duties.  Good moral character and with his duties.
acknowledged integrity, impartiality and The liquidator shall make the registry available for
If the liquidator is a juridical entity, it must independence; In addition to the rights and duties of a public inspection and provide publication notice to
designated a natural person who possesses all  Has the requisite knowledge of rehabilitation receiver, the liquidator, shall have creditors, individual debtors owner/s of the sole
the qualifications and none of the disqualifications insolvency and other relevant the right and duty to take all reasonable steps to proprietorship- debtor, the partners of the
as its representative, it being understood that the commercial laws, rules and procedures, manage and dispose of the debtor's assets with a partnership-debtor and shareholders or members
juridical entity and the representative are as well as the relevant training and/or view towards maximizing the proceedings of the corporation-debtor, on where and when
solidarity liable for all obligations and experience that may be necessary to therefrom, to pay creditors and stockholders, and they may inspect it. All claims must be duly
responsibilities of the liquidator. (FLSP Rules, enable him to properly discharge the to terminate the debtor's legal existence. Other proven before being paid. (FLSP Rules, Rule 4,
Rule 4, Sec. 8) duties and obligations of a rehabilitation duties of the liquidator in accordance with this Sec. 17)
receiver; and section may be established by procedural rules.
Election of a Liquidator  Has no conflict of interest: Provided, That (FLSP Rules, Rule 4, Sec. 12) Challenging/Opposing Claims
The creditors entitled to vote will elect the such conflict of interest may be waived, Within thirty 30 days from the expiration of the
liquidator in open court. The nominee receiving expressly or impliedly, by a party who Removal of Liquidator period for filing of applications for recognition of
the highest number of votes cast in terms of may be prejudiced thereby. (FLSP Rules, The liquidator may be removed at any time by the claims:
amount of claims and who is qualified shall be Rule 4, Sec. 8) court either motu proprio or upon motion by the 1. creditors,
appointed as the liquidator. debtor or any creditor or creditors on any of the 2. individual debtors,
Powers, Duties and Responsibilities of a following grounds: 3. owner/s of the sole proprietorship-debtor,
Only creditors who have filed their claims within Liquidator a. He did not actually receive the highest 4. partners of the partnership-debtor and
the period set by the court, and whose claims are The liquidator shall be deemed an officer of the number of votes during the election for 5. shareholders or members of the corporation-
not barred by the statute of limitations, will be court with the principal duly of preserving and liquidator; debtor and
allowed to vote in the election of the liquidator. maximizing the value and recovering the assets b. Incompetence, gross negligence, failure to 6. other interested parties
of the debtor, with the end of liquidating them and perform or exercise the proper degree of care
A secured creditor will not be allowed to vote discharging to the extent possible all the claims in the performance of his duties and powers; may submit a challenge to claim or claims to the
unless: against the debtor. The powers, duties and c. Lack of a particular or specialized court, serving a certified copy on the liquidator
a. He waives his security or lien; or responsibilities of the liquidator shall include, but competency required by the specific case; and the creditor holding the challenged claim.
b. Has the value of the property subject of not limited to: d. Illegal acts or conduct in the performance of
his security or lien fixed by agreement a. Sue and recover all the assets, debts and his duties and powers; Upon the expiration of the 30 day period, the
with the liquidator, and is admitted for the claims, belonging or due to the debtor; e. Lack of any of the qualifications stated under rehabilitation receiver shall submit to the court the
balance of his claim. (FLSP Rules, Rule b. Take possession of all the property of the Section 8 of the FLSP Rules or presence of registry of claims containing the undisputed
4, Sec. 9) debtor except property exempt by law from any disqualification; claims that have not been subject to challenge.
execution; Such claims shall become final upon the filling of
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the register and may be subsequently set aside the debtor shall enjoy first preference under VIII. SPECIAL LAWS F. DATA PRIVACY ACT OF 2012
only on grounds or fraud, accident, mistake or Article 2244 of the Civil Code, unless the claims F. DATA PRIVACY ACT OF 2012
inexcusable neglect. (FLSP Rules, Rule 4, Sec. constitute legal liens under Article 2241 and 2242 1. Definitions and scope 1. DEFINITIONS AND SCOPE
19) thereof. (FLSP Rules, Rule 4, Sec. 25) 2. Extraterritorial application
3. Processing of personal information DEFINITIONS
Right of Set-Off Court Action upon Completion of Liquidation a. General principles
If the debtor and creditor are mutually debtor and – Removal from Registry of Legal Entries and b. Sensitive and privileged Informational Privacy
information Right to control the collection, maintenance, use,
creditor of each other, one debt shall be set off Termination of Liquidation Proceeding
c. Subcontracting and dissemination of data about oneself. (Lee v.
against the other and only the balance, if any, Upon determining that the liquidation has been
d. Rule on privileged communication Ilagan, GR. No. 203254, 2014)
shall be allowed in the liquidation proceedings. completed, the court shall issue an Order
4. Rights of the data subject;
(FLSP Rules, Rule 4, Sec. 18) approving the report and ordering the SEC to exceptions/non-applicability
remove the debtor from the registry of legal The individual’s ability to control the flow of
5. Duties and responsibilities of personal
vii. Liquidation Plan entities. information concerning or describing him, which
information controller
Within 3 months from his assumption into office, however must be overbalanced by legitimate
the Liquidator shall submit a Liquidation Plan to Upon receipt of evidence showing that the debtor public concerns. To deprive an individual of his
the court. The Liquidation Plan shall, as a has been removed from the registry of legal power to control or determine whom to share
minimum enumerate all the assets of the debtor entities at the SEC, the court shall issue an Order information of his personal details would deny
and a schedule of liquidation of the assets and terminating the proceedings. (FLSP Rules, Rule him of his right to his own personhood. (KMU v.
payment of the claims. (FLSP Rules, Rule 4, Sec. 4, Sec. 29) NEDA, GR. No. 167798, 2006, J. Ynares-
23) Santiago dissenting opinion; Bayan Muna v.
Ermita, GR. No. 167930, 2006)
Properties Exempt from Liquidation --------end of topic --------
It shall be the duty of the court, upon petition and Consent of the Data subject
after hearing, to exempt and set apart, for the use Any freely given, specific, informed indication of
and benefit of the said insolvent, such real and will, whereby the data subject agrees to the
personal property as is by law exempt from collection and processing of personal information
execution, and also a homestead. about and/or relating to him or her.
However, no such petition shall be heard as Consent shall be evidenced by written, electronic
aforesaid until it is first proved that notice of the or recorded means. It may also be given on behalf
hearing of the application therefor has been duly of the data subject by an agent specifically
given by the clerk, by causing such notice to be authorized by the data subject to do so. (Sec.
posted it at least 3 public places in the province 3(c), Implementing Rules and Regulations,
or city at least 10 days prior to the time of such hereinafter IRR)
hearing, which notice shall set forth the name of
the said insolvent debtor, and the time and place Data Subject
appointed for the hearing of such application, and An individual whose personal information is
shall briefly indicate the homestead sought to be processed. (Sec. 3(d), IRR)
exempted or the property sought to be set aside;
and the decree must show that such proof was Data Sharing
made to the satisfaction of the court, and shall be The disclosure or transfer to a third party of
conclusive evidence of that fact. personal data under the custody of a personal
information controller or personal information
Preference of Credit processor. In the case of the latter, such
The Liquidation Plan and its Implementation shall disclosure or transfer must have been upon the
ensure that the concurrence and preference of instructions of the personal information controller
credits as enumerated in the Civil Code and other concerned.
relevant laws shall be observed, unless a
preferred creditor voluntarily waives his preferred The term excludes outsourcing, or the disclosure
right. For purposes of this chapter, credits for or transfer of personal data by a personal
services rendered by employees or laborers to
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information controller to a personal information information is collected, or the purpose or extent licenses or its denials, suspension or employment with the
processor (Section 3(f), IRR) of its processing. (Sec. 3(m), IRR) revocation, and tax returns; and government.
4. Specifically established by an executive
Personal Data Personal Information Processor order or an act of Congress to be kept b. Information about an individual who is or
 All types of personal information (Section 3(j), Any natural or juridical person qualified to act as classified was performing service under contract
IRR) such under this Act to whom a personal for a government institution that
 Any information from which the identity of an information controller may outsource the SCOPE (SECTION 4) relates to the services performed,
individual is apparent or any information that processing of personal data pertaining to a data including the terms of the contract, and
can be put together with other information to subject. (Sec. 3(n), IRR) General Rule: The DPA applies to the the name of the individual given in the
reasonably and directly identify an individual processing of all types of personal information course of the performance of those
 Includes sensitive personal information such Privileged Information by: services;
as your health, education, genetic or sexual This refers to any and all forms of data which  any natural and juridical person involved
life and information that is classified or under the Rules of Court and other pertinent laws in personal information processing c. Information relating to any discretionary
privileged constitute privileged communication.  personal information controllers and benefit of a financial nature such as the
processors who, although not found or granting of a license or permit given by
Personal Data Breach Processing established in the Philippines, use the government to an individual,
A breach of security leading to the accidental or Any operation or any set of operations performed equipment that are located in the
including the name of the individual and
unlawful destruction, loss, alteration, upon personal information including, but not Philippines, or those who maintain an
the exact nature of the benefit;
unauthorized disclosure of, or access to, personal limited to, the collection, recording, organization, office, branch or agency in the
data transmitted, stored, or otherwise processed storage, updating or modification, retrieval, Philippines (Sec. 4, DPA)
Provided, that they do not include
(Section 3(k), IRR) consultation, use, consolidation, blocking,
benefits given in the course of an
erasure or destruction of data. (Sec. 3(o), IRR) Limitations:
ordinary transaction or as a matter of
Personal Information  The rule on privileged communications right
Any information whether recorded in a material Profiling  The DPA does not amend or repeal RA Note: (a), (b), (c) considers the right to
form or not, from which the identity of an Any form of automated processing of personal 53 which protects publishers, editors, or information on matters of public concern
individual is apparent or can be reasonably and data consisting of the use of personal data to duly accredited reporters of any
directly ascertained by the entity holding the evaluate certain personal aspects relating to a newspaper, magazine, or periodical of d. Personal information processed for
information, or when put together with other natural person, in particular to analyze or predict general circulation from being compelled journalistic, artistic, literary or
information would directly and certainly identify aspects concerning that natural person’s to reveal the source of published news or
performance at work, economic situation, health, research purposes;
an individual. (Sec. 3(l), IRR) information obtained in confidence.
personal preferences, interests, reliability, Note: The IRR explains this exemption
behavior, location or movements (Section 3(p), as limited to that necessary in order to
Personal Information Controller Information Outside the Scope of the DPA
IRR) uphold freedom of speech, of expression,
A person or organization who controls the a. Information about any individual who is or
or of the press, subject to requirements
collection, holding, processing or use of personal was an officer or employee of a
Sensitive Personal Information of other applicable law or regulation. For
information, including a person or organization government institution that relates to
This refers to personal information: research purpose, research is for a public
who instructs another person or organization to the position or functions of the individual,
1. About an individual’s race, ethnic origin, benefit, where processing is subject to
collect, hold, process, use, transfer or disclose including:
marital status, age, color, and religious, the requirements of applicable laws,
personal information on his or her behalf. 1. The fact that the individual is or
philosophical or political affiliations; regulations, or ethical standards.
was an officer or employee of the
The term excludes: 2. About an individual’s health, education,
government institution e. Information necessary in order to carry
1. A person or organization who performs genetic or sexual life of a person, or to
2. The title, business address and out the functions of public authority
such functions as instructed by another any proceeding for any offense
committed or alleged to have been office telephone number of the which includes the processing of
person or organization; and
committed by such person, the disposal individual personal data for the performance by the
2. An individual who collects, holds,
of such proceedings, or the sentence of 3. The classification, salary range independent, central monetary authority
processes or uses personal information
any court in such proceedings; and responsibilities of the and law enforcement and regulatory
in connection with the individual’s
3. Issued by government agencies peculiar position held by the individual; agencies of their constitutionally and
personal, family or household affairs.
to an individual which includes, but not and statutorily mandated functions.
Note: There is control if the natural or juridical limited to, social security numbers, 4. The name of the individual on a
previous or current health records, document prepared by the Note: the DPA shall not be construed as
person or any other body decides on what
individual in the course of to have amended or repealed:
Page 368 of 393 Page 369 of 393

 Republic Act No. 1405, 2. EXTRATERRITORIAL APPLICATION 3. PROCESSING OF PERSONAL as reasonably practicable, after
otherwise known as the Secrecy INFORMATION collection.
of Bank Deposits Act; The DPA applies to an act done or practice  Only personal data that is
 Republic Act No. 6426, engaged in and outside of the Philippines by an A. General principles necessary and compatible with
otherwise known as the Foreign entity if: declared, specified, and
Currency Deposit Act; and 1. The natural or juridical person involved in the Transparency legitimate purpose shall be
processing of personal data is found or The data subject must be aware of the nature,
 Republic Act No. 9510, collected. (Section 19 (a) of the
established in the Philippines (IRR, Section 4 purpose, and extent of the processing of his or IRR)
otherwise known as the Credit
(a)) her personal data, including the risks and 2. Processed fairly and lawfully
Information System Act (CISA)
2. The act, practice or processing relates to safeguards involved, the identity of personal  Processing shall uphold the rights of the
personal information about a Philippine information controller, his or her rights as a data data subject, including the right to refuse,
Note: Exemption for law enforcement is
citizen or a resident; subject, and how these can be exercised. Any withdraw consent, or object. It shall
only to extent allowed by Constitution,
3. The processing of personal data is being information and communication relating to the likewise be transparent, and allow the
including right against unreasonable
done in the Philippines (IRR, Section 4(c)) processing of personal data should be easy to data subject sufficient information to
search and seizure
4. The entity has a link with the Philippines, and access and understand, using clear and plain know the nature and extent of
the entity is processing personal information language. (Section 18(a), IRR) processing.
f. Information necessary for banks and
other financial institutions under the in the Philippines or even if the processing is  Information provided to a data subject
outside the Philippines as long as it is about Legitimate Purpose
jurisdiction of the independent, central must always be in clear and plain
Philippine citizens or residents such as, but The processing of information shall be compatible
monetary authority or Bangko Sentral ng language to ensure that they are easy to
not limited to, the following: with a declared and specified purpose which must
Pilipinas to comply with Republic Act No. understand and access.
9510, and Republic Act No. 9160, as  Use of equipment located in the country, not be contrary to law, morals, or public policy.
 Processing must be in a manner
or maintains an office, branch, or (Section 18(b), IRR)
amended, otherwise known as the Anti- compatible with declared, specified, and
Money Laundering Act and other agency in the Philippines for processing legitimate purpose (Section 19 (b), IRR-
of personal data (IRR, Section 4(d)(1)) Proportionality
applicable laws; and DPA).
 A contract is entered in the Philippines; The processing of information shall be adequate,
3. Accurate, relevant and, where necessary for
 A juridical entity unincorporated in the relevant, suitable, necessary, and not excessive
g. Personal information originally collected purposes for which it is to be used the
Philippines but has central management in relation to a declared and specified purpose.
from residents of foreign jurisdictions processing of personal information, kept up to
and control in the country; and Personal data shall be processed only if the
in accordance with the laws of those date; inaccurate or incomplete data must be
 An entity that has a branch, agency, purpose of the processing could not reasonably
foreign jurisdictions, including any rectified, supplemented, destroyed or their
office or subsidiary in the Philippines be fulfilled by other means. (Section 18(c), IRR)
applicable data privacy laws, which is further processing restricted.
being processed in the Philippines. and the parent or affiliate of the  Processing should ensure data quality.
Philippine entity has access to personal The processing of personal information shall be
(Section 19 (b), IRR-DPA)
information; allowed, subject to compliance with the
Note: IRR explains that the burden of 4. Adequate and not excessive in relation to the
5. The entity has other links in the Philippines requirements of the DPA and other laws allowing
proving the law of the foreign jurisdiction purposes for which they are collected and
such as, but not limited to: disclosure of information to the public and
falls on the person or body seeking processed.
 The entity carries on business in the adherence to the three principles above.
exemption. In the absence of proof, the 5. Retained only for as long as necessary for the
applicable law shall be presumed to be Philippines; and fulfillment of the purposes for which the data
Processing of Personal information must be:
the Act and these Rules.  The personal information was collected was obtained or for the establishment,
1. Collected for specified and legitimate
or held by an entity in the Philippines exercise or defense of legal claims, or for
purposes determined and declared before, or
The non-applicability of the Act or the Rules does (Sec. 6, DPA) legitimate business purposes, or as provided
as soon as reasonably practicable after
not extend to personal information controllers or by law.
collection, and later processed in a way
personal information processors, who remain 6. Kept in a form which permits identification of
compatible with such declared, specified and
subject to the requirements of implementing data subjects for no longer than is necessary
legitimate purposes only.
security measures for personal data protection. for the purposes for which the data were
 When consent is required, it
collected and processed: Provided, That
must be time-bound in relation to
The processing of the information provided in the personal information collected for other
the declared, specified and
preceding paragraphs shall be exempted from purposes may be processed for historical,
legitimate purpose. Consent
the requirements of the Act only to the minimum statistical or scientific purposes, and in cases
given may be withdrawn.
extent necessary to achieve the specific purpose, laid down in law may be stored for longer
 Purpose should be determined
function, or activity. (Section 5, IRR) periods: Provided, further, That adequate
and declared before, or as soon
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safeguards are guaranteed by said laws Example: 6. The processing concerns such personal shall prove the nature of the communication
authorizing their processing. (Sec. 11, DPA) Q: Lawyer got the CENOMAR w/o the consent of information as is necessary for the protection in an executive session.
 Personal data shall not be retained in the Data Subject but it was legally obtained from of lawful rights and interests of natural or 2. Should the communication be determined as
perpetuity in contemplation of a possible the PSA (PSA made an error in releasing the legal persons in court proceedings, or the privileged, it shall be excluded from evidence,
future use yet to be determined (Section CENOMAR). Can the Lawyer use the establishment, exercise or defense of legal and the contents thereof shall not form part of
19(e)(3), IRR) CENOMAR? claims, or when provided to government or the records of the case
public authority. (Sec. 13, DPA) 3. where the privileged communication itself is
Criteria for Lawful Processing of Personal NPC Ruling: YES. Cannot fault the lawyer for the subject of a breach, or a privacy concern
Information (Section 12, DPA) (not sensitive) legally obtaining evidence. or investigation, it may be disclosed to the
The processing of personal information shall be C. Subcontracting Commission but only to the extent necessary
permitted only if not otherwise prohibited by law, for the purpose of investigation, without
B. Sensitive and privileged information Subcontract of Personal Information including the contents thereof in the records.
and when at least one of the following conditions
A personal information controller may (Sec. 23, IRR)
exists:
Criteria For Lawful Processing Of Sensitive subcontract the processing of personal
1. The data subject has given his or her consent
Personal Information And Privileged information subject to the following parameters: Applicability of DPA to Surveillance
prior to the collection, or as soon as
Information (Section 13, DPA) 1. the personal information controller shall be
practicable and reasonable. Surveillance of Suspects and Interception of
General Rule: The processing of sensitive responsible for ensuring that proper
2. The processing of personal information is Recording of Communications. Section 7 of
personal information and privileged information safeguards are in place
necessary and is related to the fulfillment of a Republic Act No. 9372, otherwise known as the
shall be prohibited. 2. ensure the confidentiality of the personal
contract with the data subject or in order to “Human Security Act of 2007”, is hereby
information processed,
take steps at the request of the data subject amended to include the condition that the
Exceptions: 3. prevent its use for unauthorized purposes, processing of personal data for the purpose of
prior to entering into a contract;
1. The data subject has given his or her and surveillance, interception, or recording of
3. The processing is necessary for compliance
consent, specific to the purpose prior to the 4. generally, comply with the requirements of communications shall comply with the Data
with a legal obligation to which the personal
processing, or in the case of privileged the DPA, other laws for processing of Privacy Act, including adherence to the principles
information controller is subject;
information, all parties to the exchange have personal information, and issuances of the of transparency, proportionality, and legitimate
4. The processing is necessary to protect vitally
given their consent prior to processing; National Privacy Commission (Sec. 43, IRR) purpose. (Sec. 24, IRR)
important interests of the data subject,
including life and health; 2. The processing of the same is provided for by
existing laws and regulations; The personal information processor shall comply
5. The processing is necessary in order to 4. RIGHTS OF THE DATA SUBJECT;
3. The processing is necessary to protect the with the requirements of the Act, these Rules,
respond to national emergency, to comply EXCEPTIONS/NON-APPLICABILITY
life and health of the data subject or another other applicable laws, and other issuances of the
with the requirements of public order and
person, and the data subject is not legally or Commission, in addition to obligations provided in Rights of the data subject
safety, or to fulfill functions of public authority
physically able to express his or her consent a contract, or other legal act with a personal 1. Right to Information
which necessarily includes the processing of
prior to the processing; information controller. (Sec. 45, IRR) The right to be informed whether personal
personal data for the fulfillment of its mandate
or the processing of personal information is 4. The processing is necessary to achieve the information pertaining to him or her shall be,
necessary for the fulfillment of the lawful and noncommercial objectives of are being, or have been processed. Including
public organizations and their associations: D. Rule on privileged communication
constitutional or statutory mandate of a public the existence of automated decision-making
authority (Section 21(f) of the IRR) Provided that: and profiling. (Sec. 34(a), IRR)
Personal information controllers may invoke the
6. The processing is necessary for the purposes  such processing is only confined and
principle of privileged communication over
of the legitimate interests pursued by the related to the bona fide members of these 2. Right to Object
privileged information that they lawfully control or
personal information controller or by a third organizations or their associations: The data subject shall have the right to object
process. (Sec. 15, DPA)
party or parties to whom the data is disclosed,  the sensitive personal information are not to and be notified and be given an opportunity
except where such interests are overridden transferred to third parties: Inadmissibility of Privileged Information to withhold consent to the processing of his
by fundamental rights and freedoms of the  consent of the data subject was obtained Subject to existing laws and regulations, any or her personal data, including processing for
data subject which require protection under prior to processing; evidence gathered on privileged information is direct marketing, automated processing or
the Philippine Constitution. 5. The processing is necessary for purposes of inadmissible. (Sec. 15) profiling. (Sec. 34(b), IRR)
medical treatment, Provided, that it is carried
out by a medical practitioner or a medical Rules on the Use of Privileged 3. Right to Access
treatment institution, and an adequate level of Communication The Data Subject shall have reasonable
protection of personal information is ensured; 1. When the Commission inquires upon access to, upon demand, the following:
or communication claimed to be privileged, the  Contents of his or her personal
personal information controller concerned information that were processed;
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 Sources from which personal  The personal data is incomplete, over his or her personal data being destruction, alteration and disclosure, as well as
information were obtained; outdated, false, or unlawfully processed based on consent or contract, against any other unlawful processing (Sec.
 Names and addresses of recipients of obtained; for commercial purpose, or through 20(a), DPA)
the personal information;  The personal data is being used for automated means (Sec. 36, IRR)
 Manner by which such data were purpose not authorized by the data Note: The personal information controller should
processed; subject; 8. Right to File a Complaint (Sec. 34(f), IRR) implement organizational, physical and technical
 Reasons for the disclosure of the  The personal data is no longer security measures to ensure the confidentiality,
personal information to recipients; necessary for the purposes for which Transmissibility of Rights integrity and availability of personal data.
 Information on automated processes they were collected; The rights of the data subject may be invoked by
where the data will or likely to be made  The data subject withdraws consent the lawful heirs and assigns of the data subject to Organizational Security Measures
as the sole basis for any decision or objects to the processing, and which he or she is an heir or an assignee. This 1. Data Protection Officers – Persons
significantly affecting or will affect the there is no other legal ground or may be invoked at any time after the death of the accountable for ensuring compliance with
data subject; overriding legitimate interest for the data subject, or when the data subject is applicable laws and regulations for the
 Date when his or her personal processing; incapacitated or incapable of exercising his or her protection of data privacy and security
rights. (Sec. 17, DPA) 2. Data Protection Policies – Policies that
information concerning the data subject  The personal data concerns private
were last accessed and modified; and information that is prejudicial to data provide for organization, physical, and
 The designation, or name or identity and subject, unless justiﬁed by freedom NON-APPLICABILITY technical security measures.
address of the personal information of speech, of expression, or of the 3. Management of Human Resources –
The provisions on the rights of the data subject
controller. (Sec. 34(c), IRR) press or otherwise authorized; are not applicable if the processed personal Selection and supervision of the processor’s
 The processing is unlawful; information is: employees, agents, or representatives,
4. Right to Correct/Rectification  The personal information controller particularly those who will have access to
1. used only for the needs of scientific and
The data subject has the right to: or personal information processor personal data.
statistical research and,
 dispute the inaccuracy or error in the violated the rights of the data subject. 4. Records of Processing Activities –
2. on the basis of such, no activities are carried Maintain records that sufficiently describe its
personal data out and no decisions are taken regarding the
 have the personal information controller The personal information controller may data processing system, and identify the
data subject. The personal information shall
correct it immediately and accordingly, notify third parties who have previously duties and responsibilities of those
be held under strict confidentiality and shall
unless the request is vexatious or received such processed personal individuals who will have access to personal
be used only for the declared purpose.
otherwise unreasonable (Sec. 34(d), information. (Sec. 34(e), IRR) data.
3. information gathered for the purpose of 5. Ensure that its personal information
IRR) investigations in relation to any criminal,
6. Right to Damages processors, where applicable, shall also
administrative or tax liabilities of a data
If the personal information have been The Data subject may be indemnified for any implement the security measures required by
subject.
corrected, the personal information controller damages sustained due to such inaccurate, the Act and these Rules.
Note: Any limitations on the rights of the data 6. Implement reasonable and appropriate
shall ensure the accessibility of both the new incomplete, outdated, false, unlawfully
subject shall only be to the minimum extent measures to protect personal information
and the retracted information and the obtained or unauthorized use of personal
necessary to achieve the purpose of said against natural and human dangers.
simultaneous receipt of the new and the information, taking into account any violation
research or investigation. (Sec. 19, DPA) 7. Ensure implementation by third-party
retracted information by recipients thereof. of his or her rights and freedoms as data
subject (Sec. 34(f), IRR) processors of the security measures required
5. DUTIES AND RESPONSIBILITIES OF by this provision (Sec. 20, DPA)
5. Right to Erasure/Blocking
The data subject shall have the following 7. Right to Data Portability PERSONAL INFORMATION CONTROLLER
rights in relation to his or her personal data in  Where data is processed by electronic Notification for Breach
Duties of Personal Information Controller The PIC should promptly notify the Commission
the PIC’s filing system: means and in a structured and
1. Ensure implementation of personal and affected data when:
 suspend commonly used format
information processing principles of the
 withdraw  The data subject may obtain from the
DPA. (Sec. 11, DPA)  The personal data involves sensitive
 order the blocking personal information controller a copy of
2. Uphold rights of data subjects personal information or any other
 remove data undergoing processing in an
3. Implement reasonable and appropriate
electronic or structured format, which is information that may be used to enable
 destroy a. organizational
commonly used and allows for further identity fraud
b. physical and  There is reasonable belief that that the
This right may be exercised upon discovery use by the data subject
c. technical measures information may have been acquired by
and substantial proof of any of the following:  This should primarily take into account
the right of data subject to have control These are intended for the protection of personal an unauthorized person (confidentiality
information against any accidental or unlawful breach); and
Page 374 of 393 Page 375 of 393

 The personal information controller or 2. Safeguards to protect their computer network 5 PILLARS OF COMPLIANCE OF THE
the Commission believes that such against accidental, unlawful or unauthorized NATIONAL PRIVACY COMMISSION
unauthorized acquisition is likely to give usage, any interference which will affect data
rise to a real risk of serious harm to any integrity or hinder the functioning or
affected data subject. availability of the system, and unauthorized 1. Designate a Data Protection Officer
access through an electronic network; 2. Conduct Risk Assessment or Privacy
Note: The National Privacy Commission requires 3. Ensure and maintain the confidentiality, Impact Assessment
notification of both NPC and data subjects within integrity, availability, and resilience of their 3. Have a Privacy Management Program
72 hours from breach or reasonable belief that processing systems and services; 4. Implement Security Measures
personal data breach occurred. (Sec. 38 (a), 4. Restore the availability and access to 5. Be prepared in case of a Breach
DPA) personal data in a timely manner in the event
of a physical or technical incident; ————- end of topic ————-
Notification may be delayed only to the extent 5. Regularly test, assess, and evaluate the
necessary to determine the scope of the breach, effectiveness of security measures;
to prevent further disclosures, or to restore 6. Encrypt personal data during storage and
reasonable integrity to the information and while in transit, authentication processes,
communications system. (Sec. 26, IRR) and other technical security measures that
control and limit access. (Sec. 28, IRR)
Physical Security Measures
Where appropriate, personal information Accountability for Transfer of Personal
controllers and personal information processors Information
shall comply with the following guidelines for
physical security: Responsibilities of the PIC:
1. Monitor and limit access to and activities in 1. Responsible for personal information under
the room, workstation or facility, and specify its control or custody
the proper use of and access to electronic 2. Shall be responsible for information
media; transferred to a third party for processing
2. Provide privacy to anyone processing a. This includes domestic or international
personal data when designing office space information
and work stations, taking into consideration b. Also subject to cross-border
the environment and accessibility to the arrangement and cooperation (Sec. 21,
public; DPA)
3. Implement policies and procedures regarding
the transfer, removal, disposal, and re-use of Duties of the PIC:
electronic media, to ensure appropriate 1. Comply with the requirements of the Data
protection of personal data; Privacy Act
4. Prevent the mechanical destruction of files 2. Use contractual or other reasonable means
and equipment. The room and workstation to provide a comparable level of protection
used in the processing of personal data shall, while the information are being processed by
as far as practicable, be secured against a third party (Sec. 21(a), DPA)
natural disasters, power disturbances, 3. Designate and individual or individuals who
external access, and other similar threats. are accountable for the organization’s
(Sec. 27, IRR) compliance with the DPA
a. The Data Privacy Officer’s identity may
be known to the data subject upon
Technical Security Measure.
request (Sec. 21(b), DPA)
Where appropriate, personal information
controllers and personal information processors
shall adopt and establish the following technical
security measures:
1. A security policy with respect to the
processing of personal data;
Page 376 of 393 Page 377 of 393

VIII. SPECIAL LAWS G. PHILIPPINE COMPETITION ACT advancing domestic and international arrangements with their employers
G. PHILIPPINE COMPETITION ACT trade and economic development. (Sec. when such combinations, activities,
1. Definition and scope of application 1. DEFINITION AND SCOPE OF 2) agreements, or arrangements are
2. Powers and functions of the Philippine
APPLICATION designed solely to facilitate
Competition Commission b. Scope of Application
3. Jurisdiction and enforcement collective bargaining in respect of
4. Determining the relevant market a. Definition conditions of employment. (Sec. 3,
i. As to who: The Act is enforceable against
5. Determining control or dominance of any person or entity engaged in any trade, last par.)
market The Philippine Competition Act (PCA) or R.A.
No. 10667, which took effect on Aug. 8, 2015, is industry and commerce. (Sec. 3)
6. Prohibited acts
the primary legislative act which provides for a 2. Neither does it apply to trade
a. Prohibited mergers and
national competition policy and establishes the “Entity” refers to any person, natural or associations. Section 48 provides
acquisitions
b. Anti-competitive agreements main competition authority in the Philippines, the juridical, sole proprietorship, partnership, that nothing contained in the Act shall
c. Abuse of dominant position Philippine Competition Commission (PCC). combination or association in any form,
be construed to prohibit the existence
7. Forbearance by the Philippine
whether incorporated or not, domestic or
foreign, including those owned or controlled and operation of trade associations
Competition Commission Competition policy broadly refers to all laws, organized to promote quality standard
government policies and regulations aimed at by the government, engaged directly or
indirectly in any economic activity. (Sec. and safety issues, provided that:
establishing competition and maintaining the
same. It includes measures intended to promote, 4[h]) a. These associations shall not in
advance and ensure competitive market any way be used to justify any
conditions by the removal of control, as well as to Single Economic Entity Doctrine violation of the PCA
redress anti-competitive results of public and An entity that controls, is controlled by, or is b. It shall not be illegal to use the
private restrictive practice under common control with another entity or association as a forum to discuss
entities, have common economic interests, or promote quality standards,
Declaration of Principles and Policy and are not otherwise able to decide or act efficiency, safety, security,
independently of each other, shall not be productivity, competitiveness
 Efficiency of market competition is an
considered competitors for purposes of and other matters of common
effective mechanism for allocating goods and
Section 14 (Anti-Competitive Agreements). interest involving the industry
services.
(Sec. 14, last par.) *Provided that such is done
 Equal opportunities for all promotes
entrepreneurial spirit, encourages private without any anti-competitive
ii. As to what: intent or effect.
investment, facilitates technology
development and transfer and enhances (a) Any trade, industry and
resources productivity. commerce in the Republic of the 2. POWERS AND FUNCTIONS OF THE
 Competition serves the interest of Philippines PHILIPPINE COMPETITION COMMISSION
consumers by allowing them to exercise their (b) International trade having direct,
right of choice over goods and services. substantial, and reasonably Definition
 Pursuant to the constitutional goals for the foreseeable effects in trade,
The Philippine Competition Commission
national economy under Sec. 1, Art. XII of the (“PCC” or the “Commission”) is an independent
industry, or commerce in the quasi-judicial body created by the PCA to
1987 Constitution and to the mandate under
Sec. 19, Art. XII, the State shall: Republic of the Philippines, implement the policy, objectives, and purposes of
including those that result from acts the Act. It is an attached agency to the Office of
o Enhance economic efficiency and done outside the Philippines. (Sec. the President. (Sec. 5)
promote free and fair competition in 3)
trade, industry and all commercial Powers and Functions
economic activities and establish a Note: The PCA applies to non-profit The Commission shall have original and primary
National Competition Policy; activities. The term “economic activity” does jurisdiction over the enforcement and
o Prevent economic concentration which not only cover activities that generate profits implementation of the PCA. The Commission
will control the production, distribution, or dividends for shareholders; it may also shall exercise the following powers and functions:
trade, or industry that will unduly stifle include activities conducted on a not for-
competition, lessen, manipulate or profit basis. (3.4, PCC Merger Review 1. Conduct inquiry, investigate, and hear
constrict the discipline of free markets; Guidelines) and decide on cases involving any
o Penalize all forms of anti-competitive violation of the PCA and other existing
agreements, abuse of dominant Exceptions competition laws motu proprio or upon
position, and anti-competitive mergers 1. The PCA does not apply to the receipt of a verified complaint, and
and acquisitions, with the objective of institute the appropriate civil or
combinations or activities of workers
protecting consumer welfare and criminal proceedings;
or employees nor to agreements or
Page 378 of 393 Page 379 of 393

2. Review proposed mergers and 12. Monitor and analyze the practice of recommendation on the matter before the PCC (b) Not less than P100M but not more than
acquisitions; determine thresholds, competition in markets that affect the makes a decision on any case. (Sec. 32) P250M for the second offense (Sec. 29)
requirements, and procedures for Philippine economy;
notification; and upon exercise of its 13. Conduct, publish, and disseminate Note: This is why the PCC has original and Appeals of PCC Decisions
powers to review, prohibit mergers and studies and reports on anti- primary, not exclusive, jurisdiction. Decisions of the PCC shall be appealable to the
acquisitions that will substantially competitive conduct and agreements Court of Appeals in accordance with the Rules
prevent, restrict, or lessen competition in to inform and guide the industry and Preliminary inquiry by the PCC of Court. The appeal does not stay the decision,
the relevant market; consumers; The PCC, motu proprio, or upon the filing of a unless directed otherwise by the CA. (Sec. 39)
3. Monitor and undertake consultation 14. Intervene or participate in verified complaint by an interested party or upon
with stakeholders and affected agencies; administrative and regulatory b. Criminal proceedings
referral by a regulatory agency, shall have the
4. Stop or redress any anti-competitive proceedings requiring consideration of
sole and exclusive authority to initiate and
agreement; the provisions of this Act that are initiated Jurisdiction
5. Conduct administrative proceedings, by government agencies; conduct a fact-finding or preliminary inquiry
for the enforcement of the PCA based on The Regional Trial Court of the city or province
impose sanctions, fines or penalties 15. Assist the National Economic and where the entity or any of the entities whose
for any noncompliance with or breach of Development Authority, in consultation reasonable grounds. (Sec. 31)
business act or conduct constitutes the subject
this Act and its implementing rules and with relevant agencies and sectors, in the matter of a case, conducts its principal place of
regulations (IRR) and punish for preparation and formulation of a national The PCC shall terminate said preliminary inquiry business, shall have original and exclusive
contempt; competition policy; by issuing a resolution: jurisdiction, regardless of the penalties and fines
6. Issue subpoena duces tecum and 16. Act as the official representative of the a. Ordering its closure if no violation or herein imposed, of all criminal and civil cases
subpoena ad testificandum to require Philippine government in international infringement of the Act is found; or involving violations of the PCA and other
the production of books, records, or other competition matters; competition-related laws. (Sec. 44)
b. To proceed, on the basis of reasonable
documents or data which relate to any 17. Promote capacity building and the
grounds, to conduct a full administrative
matter relevant to the investigation and sharing of best practices with other DOJ-OFC
personal appearance before the PCC, competition-related bodies; investigation. (Sec. 31)
The Office for Competition under the DOJ
summon witnesses, administer oaths, 18. Advocate pro-competitive policies of conducts the preliminary investigation and
and issue interim orders; the government by: If the evidence so warrants, the Commission may
prosecution criminal offenses arising from the
7. Upon order of the court, undertake a. Reviewing economic and file before the DOJ criminal complaints for PCA and other competition-related laws. (Sec.
inspections of business premises and administrative regulations, violations of this Act or relevant laws for 13)
other offices, land and vehicles, as motu proprio or upon request; preliminary investigation and prosecution before
used by the entity; and the proper court. (Sec. 31) Criminal Penalties
8. Issue adjustment or divestiture orders b. Advising the Executive An entity that enters into any anti-competitive
including orders for corporate Branch on the competitive Note: A single violation of the PCA can give rise agreement under Section 14(a) and 14(b) shall,
reorganization or divestment. Such implications of government for each and every violation, be penalized by
to three (3) kinds of liabilities: (a) administrative,
orders, which are structural remedies, actions, policies and programs; imprisonment from 2-7 years and a fine of not
(b) civil, and (c) criminal.
should only be imposed: and less than P50M but not more than P250M.
a. Where there is no equally 19. Charging reasonable fees to defray the (Sec. 30)
effective behavioral remedy; or administrative cost of the services
a. Administrative proceedings
b. Where any equally effective rendered. (Sec. 12) Note: Entities can be investigated and fined
behavioral remedy would be Jurisdiction
It is within the PCC’s powers and functions to administratively by the PCC and can be
more burdensome for the 3. JURISDICTION AND ENFORCEMENT
conduct administrative proceedings, impose proceeded against separately in the Regional
enterprise concerned than the
structural remedy; sanctions, fines or penalties for any non- Trial Courts for criminal violations. There is no
The PCC’s jurisdiction
9. Deputize any and all enforcement compliance with or breach of the PCA and its IRR double jeopardy as the case before the PCC is
The PCC has original and primary jurisdiction
agencies of the government or enlist (Sec. 12[e]) administrative in nature.
over the enforcement and implementation of the
the aid and support of any private PCA. (Sec. 12)
institution, corporation, entity or Administrative Penalties
c. Civil proceedings
association, in the implementation of its Relationship with sector regulators In any investigation under Sections 14 (Anti-
powers and functions; The PCC shall have original and primary Private Actions
Competitive Agreements), 15 (Abuse of
10. Monitor compliance by the person or jurisdiction in the enforcement and regulation of Any person who suffers direct injury by reason of
entities concerned with the cease and Dominant Position), 17 (Compulsory Notification), any violation of the PCA may institute a separate
all competition-related issues. (Sec. 32) and 20 (Prohibited Mergers and Acquisitions) of
desist order or consent judgment; and independent civil action after the PCC has
11. Issue advisory opinions and the PCA, after due notice and hearing, the PCC completed the preliminary inquiry provided under
The PCC shall still have jurisdiction if the issue
guidelines on competition matters involves both competition and noncompetition may impose administrative fines on the Sec. 31 of the Act. (Sec. 45)
and submit annual and special reports issues, but the concerned sector regulator violating entity, as follows:
to Congress, including proposed shall be consulted and afforded reasonable (a) Up to P100M for the first offense
legislation; opportunity to submit its own opinion and
Page 380 of 393 Page 381 of 393

d. Other matters of general application a. The possibilities of substituting the ii. There is power to Direct or
4. DETERMINING THE RELEVANT goods or services in question with govern the financial and
Confidentiality Rules MARKET others of domestic or foreign origin, operating policies of the entity
1. Confidentiality of Information considering the technological under a statute or agreement;
General Rule: Confidential business Definition possibilities, the extent to which iii. There is power to Appoint or
information submitted by entities, relevant to Market refers to the group of goods or services substitutes are available to consumers
remove the majority of the
any inquiry or investigation being conducted that are sufficiently interchangeable or and the time required for such
substitution; members of the board of directors
pursuant to the PCA as well as any substitutable and the object of competition, and
b. The cost of distribution of the good or or equivalent governing body;
deliberation in relation thereto, shall not, in the geographic area where said goods or
any manner, be directly or indirectly service, its raw materials, its iv. There is power to Cast the
services are offered.
disclosed, published, transferred, copied, or supplements and substitutes from majority votes at meetings of
disseminated. The PCC shall, to the extent Relevant market refers to the market in which a other areas and abroad, considering the board of directors or
possible, keep such information confidential particular good or service is sold and which is a freight, insurance, import duties, and equivalent governing body;
when it issues notices, bulletins, rulings and combination of the relevant product market and non-tariff restrictions; the restrictions v. There exists Ownership over or
other documents. (Sec. 34) the relevant geographic market. imposed by economic agents or by their the right to use all or a significant
associations; and the time required to part of the assets of the entity;
“Confidential business information” Note: The relevant market is one considered for supply the market from those areas;
vi. There exist Rights or contracts
refers to information which concerns or purposes of determining: i) whether or not an c. The cost and probability of users or
consumers seeking other markets; which confer decisive influence
relates to the operations, production, Entity is dominant, and ii) whether or not there will
and on the decisions of the entity.
sales, shipments, purchases, transfers, be a substantial lessening of competition. The act
identification of customers, inventories, d. National, local or international (Sec. 25)
of determining the relevant market is known as
or amount or source of any income, “Market Definition” restrictions which limit the access by
profits, losses, expenditures. (Sec. 4[e]) users or consumers to alternate sources Dominance or a Dominant Position refers to a
of supply or the access of suppliers to position of economic strength that an entity or
a. A relevant product market comprises
Exceptions: The Rule shall not apply if: alternate consumers. (Sec. 24, PCA and entities hold which makes it capable of
all those goods and/or services which are
1. The notifying entity consents to the Rule 5, IRR) controlling the relevant market independently
regarded as interchangeable or
disclosure; or from any or a combination of the following:
substitutable by the consumer or the
2. The document or information is 5. DETERMINING CONTROL OR competitors, customers, suppliers, or consumers.
customer, by reason of the goods and/or
mandatorily required to be disclosed by (Sec. 4[g))
services' characteristics, their prices and DOMINANCE OF MARKET
law; or their intended use.
3. The document or information is Note: Dominance can exist on the part of one
Control refers to the ability to substantially
mandatorily required to be disclosed by a entity (single dominance) or of two or more
b. A relevant geographic market influence or direct the actions or decisions of an
valid order of a court of competent entities (collective dominance) (Rule 8, Sec. 1
comprises the area in which the entity entity, whether by contract, agency or otherwise.
jurisdiction or of a government or of IRR)
concerned is involved in the supply and (Sec. 4[f])
regulatory agency, including an demand of goods and services, in which
exchange. (Sec. 34) Factors to determine dominance
the conditions of competition are Factors to determine control
In determining whether an entity has market
sufficiently homogenous and which can In determining the control of an entity, the PCC
2. Confidentiality of Identity dominant position, the Commission shall consider
be distinguished from neighboring areas may consider the following:
General Rule: The identity of the persons the following: [SEE-ACCO]
because the conditions of competition
who provide information to the PCC under are different in those areas. (Sec. 4[k]) a. Control is presumed to exist when the
condition of anonymity, shall remain a. The Share of the entity in the relevant
parent owns directly or indirectly, through
confidential. (Sec. 34) market and the ability of the entity to
c. Market refers to the group of goods or subsidiaries, more than ½ of the voting
fix prices unilaterally or to restrict
services that are sufficiently power of an entity, unless in exceptional
Exception: When such confidentiality is supply in the relevant market;
interchangeable or substitutable and the circumstances, it can clearly be
expressly waived by these persons. (Sec. 34) b. The Existence of barriers to entry and
object of competition, and the geographic demonstrated that such ownership does
the elements which could foreseeably
area where said goods or services are not constitute control.
Statute of Limitations alter both the said barriers and the supply
offered.
Any action arising from a violation of any from competitors;
b. Control also exists even when an entity
provision of the PCA shall be forever barred c. The Existence and power of its
Factors to determine the relevant market owns one half (½) or less of the voting
unless commenced within five (5) years from: competitors;
The following factors, among others, affecting the power of another entity when:
a. For criminal actions: the time the d. The possibility of Access by its
substitutability among goods or services [VADCOR]
violation is discovered by the offended competitors or other entities to its
constituting such market, and the geographic
party, the authorities, or their agents; and sources of inputs;
area delineating the boundaries of the market i. There is power over more than ½
b. For administrative and civil actions: e. The power of its Customers to switch
shall be considered: of the Voting rights by virtue of
the time the cause of action accrues. to other goods or services;
an agreement with investors; f. Its recent Conduct;
(Sec. 46)
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g. Other criteria established by the A. Prohibited Mergers and Acquisitions Compulsory Notification Commission in the form and containing the
regulations of this Act. (Sec. 27) information specified in the regulations issued by
Definition i. Notifying entities the Commission. (Sec. 17) However, the
Dominance not prohibited Merger refers to the joining of two (2) or more threshold as provided in the PCA has already
What is prohibited under Sec. 15 is not entities into an existing entity or to form a new Who must notify the PCC? been adjusted.
dominance per se but the abuse of that entity. (Sec. 4[j]) The parties to a merger or acquisition that satisfy
dominance. the thresholds for compulsory notification are Current Threshold
Acquisition refers to the purchase of securities required to notify the Commission before the Size of Party: The aggregate annual gross
Note: This is the essence of Sec. 27 which or assets, through contract or other means, for execution of the definitive agreements relating to revenues in, into or from the Philippines, or value
provides that the Commission shall not consider the purpose of obtaining control by: the transaction. (Sec. 2[a], Rule 4 of IRR) of the assets in the Philippines of the ultimate
the acquiring, maintaining and increasing of (1) One (1) entity of the whole or part of parent entity of at least one of the acquiring or
market share through legitimate means not another; These parties include: acquired entities, including that of all entities that
substantially preventing, restricting, or (2) Two (2) or more entities over another; or (1) All acquiring and acquired pre-acquisition
the ultimate parent entity controls, directly or
lessening competition in the market such as (3) One (1) or more entities over one (1) or ultimate parent entities; or
but not limited to having superior skills, rendering indirectly, exceeds Six billion Pesos
more entities. (Sec. 4[a]) (2) Any entity authorized by the ultimate
superior service, producing or distributing quality parent entity to file notification on its (Php6,000,000,000.00); and
products, having business acumen, and the Distinction Between Mergers Under the PCA behalf (Sec. 2[b], Rule 4 of IRR)
enjoyment and use of protected intellectual and Under the Revised Corporation Code Size of Transaction: The value of the
property rights as violative of the PCA. Note: In the formation of a joint venture transaction exceeds Two Billion Four Hundred
Revised Corporation Philippine (other than in connection with a merger Million Pesos (Php2,400,000,000.00) (PCC
Presumption of dominance Code (RCC) Competition or consolidation), the contributing entities Commission Resolution No. 02-2020, effective 01
There is a rebuttable presumption of market Act shall be deemed acquiring entities, and March 2020)
dominant position if the market share of an entity the joint venture shall be deemed the
in the relevant market is at least fifty percent Two (2) or more Merger refers to the acquired entity. (Sec. 2[c], Rule 4 of IRR) Note: All mergers or acquisitions the definitive
(50%), unless a new market share threshold is corporations may merge joining of two (2) or agreements of which are executed prior to the
determined by the Commission for that particular into a single corporation more entities into an The parties shall not consummate the transaction annual adjustment of thresholds contemplated
sector. (Sec. 27) which shall be one of existing entity or to before the expiration of the relevant periods herein are subject to the thresholds for
the constituent form a new entity. provided in this Rule. (Sec. 2[b], Rule 4 of IRR) notification that are applicable prior to the
corporations or may [Sec. 4(j)] adjustment. (PCC Memorandum Circular 18-001)
6. PROHIBITED ACTS
consolidate into a new “Ultimate parent entity” is the juridical entity
single corporation which that, directly or indirectly, controls a party to the iii. PCC Review By Notification
Prohibited Acts under the PCA [MAD]
shall be the transaction, and is not controlled by any other
a. Anti-competitive Mergers and
consolidated entity. (Rule 2[m] of IRR) (1) Phase 1 Review
acquisitions (Sec. 20)
corporation. (Sec. 75,
b. Anti-competitive agreements (Sec. 14);
RCC) Note: It is the Ultimate Parent Entities who must Parties to the merger or acquisition agreement
and
c. Abuse of Dominant position (Sec. 15); notify the PCC about the mergers conducted. subject to compulsory notification are prohibited
Based on the distinction above, the definitions from consummating their agreement until thirty
Substantial Lessening of Competition Test reveal that a “merger” or “acquisition” as ii. Covered transactions (30) days after providing notification to the PCC.
(SLC) contemplated under the PCA does not strictly (Sec. 17, PCA) Basically, notification must be
It is the general standard used by the PCC to refer to a merger or consolidation under the RCC. PCA Current Threshold given prior to the consummation of the
determine whether there is a: Rather, it refers to any transaction that serves to (2015) (2020) agreement.
(1) prohibited merger/acquisition, transfer control of an economic entity to another, Size of Party:
(2) anti-competitive agreement not per se, or the joining of two such entities into a single The covered entities must notify the PCC before
Covered Exceeds Php 6 Billion
and business entity. Thus, the definition under the the execution of the definitive agreements
Merger Exceeds
(3) an abuse of dominant position. The RCC should not be applied to the PCA. relating to the transaction. (Sec. 2[a], Rule 4 of
and Php 1 Size of Transaction:
inquiry is whether the conduct or agreement IRR)
Acquisition Billion Exceeds Php 2.4
has the object or effect of substantially Note: Joint ventures, for purposes of the PCA, Billion
preventing, restricting or lessening are covered under mergers. (Rule 2 [k] of IRR) Note: A definitive agreement sets out the
competition. (Secs. 14[b] and [c], 15, 20) Basis of Change: Section 19, PCA complete and final terms and conditions of a
The PCC’s Merger Control Power merger or acquisition, including the rights
Note: Generally, “object” refers to the intent of The Commission shall have the power to review What must be notified? and obligations between or among
the entity, while “effect” refers to the actual mergers and acquisitions based on factors Parties to a merger or acquisition agreement transacting parties.
impact on competition. The existence of either deemed relevant by the Commission. (Sec. 16, wherein the value of the transaction exceeds one
satisfies the requirement. PCA) billion pesos (P1,000,000,000.00) are prohibited This may be in the form of a share purchase
from consummating their agreement until thirty agreement, asset purchase agreement, joint
(30) days after providing notification to the venture agreement, or the like.
Page 384 of 393 Page 385 of 393

Note: The periods for Phases 1 and 2 shall not  Horizontal Agreements – exist between
The inclusion of conditions that must be (b) Effect of notification apply in cases of motu propio review. (2.10., PCC firms (suppliers or consumers) at the
fulfilled by a party or the parties to make the If within the relevant periods stipulated in Rules on Merger Procedure) same level of the production chain. An
agreement effective against a party or the Sec. 17, the Commission determines that example of this is when firms agree on a
parties will not negate the definitive nature of such agreement is prohibited and does Summary of the Merger Review Process price. This shows that the combined firms
the agreement. (Philippine Competition not qualify for exemption, the The merger review process starts: have influence over the price.
Commission Clarificatory Note No. 16-001) Commission may: (a) By notification from the parties; or  Vertical Agreements – exists where
a. Prohibit the implementation of (b) Motu proprio by the PCC firms at different stages of the
Note: Phase 1 involves an assessment to the agreement; production chain collude. Typically, it
determine if the notified merger raises any b. Prohibit the implementation of Standard: Substantial Lessening of Competition happens between suppliers and users.
competition concerns. (2.7., PCC Rules on the agreement unless and until it This may relate to price or other matters
Merger Procedure) The Commission may is modified by changes specified Thresholds: Php5.6B (size of party), Php2.2B (i.e. quotas, exclusive dealings, etc.).
determine whether the merger or acquisition falls by the Commission; (size of transaction)
under the prohibition under Sec. 20, applying the c. Prohibit the implementation of i. Per se violations
SLC test. the agreement unless and until Overview of the Merger Review Procedure
the pertinent party or parties Phase 1 Phase 2 The following agreements, between or among
If, after the conduct of Phase 1, the PCC is unable enter into legally enforceable 30 calendar days 60 calendar days competitors, are per se prohibited:
to conclude that the merger does not raise agreements specified by the (a) Restricting competition as to price, or
Prohibit Prohibit
competition concerns, it will provide the parties a Commission. (Sec. 18) components thereof, or other terms of
Notification
notice and request for additional information to trade (Price-fixing) (Sec. 14 [a]);
commence Phase 2. (2.8., PCC Rules on Merger Note: The PCC shall, from time to time, adopt Approve Approve (b) Fixing price at an auction or in any form
Procedure) and publish regulations stipulating exemptions unconditionally unconditionally of bidding including cover bidding, bid
from the notification requirement. (Sec. 19) Approve with Approve with suppression, bid rotation and market
(2) Phase 2 Review conditions conditions allocation and other analogous practices
Agreement deemed approved
Deemed Deemed of bid manipulation; (Bid Rigging) (Sec.
Should the PCC deem it necessary, it may When the relevant periods of review have expired
request further information that are reasonably and no decision has been promulgated for approved approved 14 [a])
necessary and directly relevant to the prohibition whatever reason, the merger or acquisition shall
under Section 20 from the parties to the be deemed approved and the parties may Note: A per se violation is always illegal. It is
Incontestability of Mergers
agreement before the expiration of the thirty (30)- proceed to implement or consummate it. (Sec. conclusively presumed to have been done with
General Rule: Merger or acquisition agreements
day period. The issuance of such a request has 17) the objective of harming competition, whereas
that have received a favorable ruling from the
the effect of extending the period within which the other violations still allow the introduction of
PCC may not be challenged under the Act. (Sec.
agreement may not be consummated for an Motu Proprio Review evidence to show that these acts were performed
23)
additional sixty (60) days, beginning on the day with no anti-competitive objectives in mind.
after the request for information is received by the Section 12(a) of the PCA gives to the PCC the Exception: When such ruling was obtained on
parties. (Sec. 17) power to conduct inquiry and investigate cases Elements of Price-fixing
the basis of fraud or false material
involving any violation of this Act and other 1. There are two or more entities in the same
information. (Sec. 23)
In no case shall the total period for review by the existing competition laws motu proprio. horizontal market.
PCC of the subject agreement exceed ninety (90) PCC, motu proprio or upon notification as 2. Basic element: An “agreement” is reached,
B. Anti-competitive Agreements
days from initial notification by the parties. (Sec. provided under these Rules, shall have the power whether overt or tacit, which implies two or
17) to review mergers and acquisitions having a more businesses must be involved in
Definition
direct, substantial and reasonably restraint.
Agreement refers to any type or form of contract,
Note: Phase 2 is a more detailed and in-depth foreseeable effect on trade, industry, or 3. Intent to “fix” prices by restricting
arrangement, understanding, collective
assessment of the merger. (2.9., PCC Rules on commerce in the Philippines, based on factors competition as to price.
recommendation, or concerted action, whether
Merger Procedure) deemed relevant by the Commission. (Sec. 1 of formal or informal, explicit or tacit, written or oral.
IRR) Example of Price-fixing
(Sec. 4[d])
(3) Consequences of notification After several months of competing against each
Notwithstanding the notification requirement, other, Company A and Company B, the only
Conduct refers to any type or form of
(a) Effect of non-notification nothing prevents the PCC from reviewing a sellers of soda drinks in Quezon City, agreed to
undertaking, collective recommendation,
An agreement consummated in violation merger on its own initiative if there are set the price of their products to PhP 100.00 per
independent or concerted action or practice,
of this requirement to notify the reasonable grounds to believe that Section 17 bottle.
whether formal or informal. (Sec. 4[c])
Commission shall be considered void (Compulsory Notification) or Section 20
and subject the parties to an (Prohibited Mergers and Acquisitions) of the PCA Kinds of Bid Rigging
Note: Forms that Anti-Competitive Agreements
administrative fine of one percent has been or is likely to be infringed. (3.3., PCC a. Cover bidding – A typical example of
may take:
(1%) to five percent (5%) of the value Rules on Merger Procedure) this is when bidders submit bids that are
of the transaction. (Sec. 17) too high to be accepted. In this
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scenario, there is no intention to secure 4. The object or effect of the agreement Note: The standard of proof required to prove
the acceptance of the bid but only to substantially prevents, restricts or iii. Determining existence of anti- anti-competitive agreements in the PCA is
make it appear as though there was a lessen competition. competitive agreement or conduct Substantial Evidence which is ”that amount of
genuine competitive bidding. relevant evidence that a reasonable mind might
b. Bid suppression – One or more Note: Violations of Section 14(a) and (b) are In determining whether an anti-competitive accept as adequate to support a conclusion”
competitors who are expected to bid, or the only ones in the PCA which carry a penalty agreement or conduct substantially prevents,
who have previously bid, agree to of imprisonment; such is imposed upon the restricts, or lessens competition, the PCC, in C. Abuse of Dominant Position
refrain from bidding or withdraw a responsible officers and directors of the entity. appropriate cases, shall, inter alia: [RAPBA]
previously submitted bid so that the (Sec. 30) It shall be prohibited for one or more entities to
designated winning competitor's bid will (a) Define the Relevant market allegedly abuse their dominant position by engaging in
be accepted. (2) Agreements other than those specified in (a) affected by the anti-competitive conduct that would substantially prevent,
c. Bid rotation - All conspirators submit and (b) of Section 14 which have the object agreement or conduct, following the restrict or lessen competition,
bids but take turns on being the low or effect of substantially preventing, principles laid out in Section 24 of the
bidder. The terms of the rotation may restricting or lessening competition shall PCA and Rule 5 of the PCA-IRR. Elements of Abuse of Dominant Position
vary and depend on different also be prohibited. (Sec. 14[c]) (b) Determine if there is actual or 1. The entity must have market power;
circumstances. A strict bid rotation potential Adverse impact on 2. The entity commits abusive conduct;
pattern may suggest that collusion is Exception: Those which contribute to competition in the relevant market 3. The conduct must have a substantial
taking place improving the production or distribution of caused by the alleged agreement or foreclosure effect on the relevant market;
d. Market allocation - Agreements in which goods and services or to promoting technical conduct, and if such impact is 4. There is no objective justification for the
competitors divide markets among or economic progress, while allowing substantial and outweighs the actual conduct.
themselves. In such schemes, competing consumers a fair share of the resulting or potential efficiency gains that result
firms allocate specific customers or benefits, may not necessarily be deemed a from the agreement or conduct; Forms of Abuse of Dominant Position
types of customers, products, or violation of the PCA. (Sec. 14[c]) (c) Adopt a broad and forward-looking (a) Selling goods or services below cost with
territories among themselves. A typical Perspective, recognizing future market the object of driving competition out of the
example of which is an allocation based Rule of Reason Violations developments, any overriding need to relevant market (Predatory pricing)
on geographic areas where competitors When a violation is labeled as Rule of make the goods or services available to (Sec. 15)
agree to sell only in certain areas and Reason, it cannot be said to be immediately consumers, the requirements of large
refuse to sell to, or quote intentionally illegal. The reason for this is that such investments in infrastructure, the In other words, monopolizing the market
high prices to customers in areas conduct may possess reasonable requirements of law, and the need of our by imposing extremely low prices that its
allocated to them. economy to respond to international competitors won’t be able to compete as
commercial justifications, or otherwise
e. Other analogous practices competition, but also taking account of they would likely not profit anymore.
benefit consumers. In such cases, the
past behavior of the parties involved and
ii. Not per se violations competition commission must establish the prevailing market conditions; Note: PCC shall consider whether the
pro or anticompetitive effects first, usually (d) Balance the need to ensure that entity or entities have no such object and
(1) The following agreements, between or among supported by evidence adduced by the competition is not prevented or the price established was in good faith to
competitors, which have the object or effect supposed violator and affected parties. substantially restricted and the risk meet or compete with the lower price of a
of substantially preventing, restricting or that competition efficiency, competitor in the same market selling the
lessening competition shall be prohibited: The rule of reason violations under the PCA productivity, innovation, or same or comparable product or service
(a) Setting, limiting, or controlling production, are Sec. 14 (c), because of its justification development of priority areas or of like quality.
markets, technical development, or proviso, and the acts of abuse of dominance industries in the general interest of the
investment; under Section 15, likewise because each country may be deterred by overzealous (b) Imposing barriers to entry or committing
(b) Dividing or sharing the market, whether violation allows presentation of justifying or undue intervention; and acts that prevent competitors from
by volume of sales or purchases, evidence. (e) Assess the totality of evidence on growing within the market in an anti-
whether it is more likely than not that competitive manner (Imposing barriers
territory, type of goods or services,
Note: Sec. 14 (c) is intended as a catch-all the entity has engaged in anti- to entry) (Sec. 15)
buyers or sellers or any other means.
clause to allow the PCC to investigate all competitive agreement or conduct
(Sec. 14[b]) including whether the entity's conduct In other words, it prevents the entry of
violations no matter their manner of
performance. was done with a reasonable commercial new players in the industry and
Elements of a Sec. 14 (b) Violation purpose such as but not limited to gatekeeps the industry only to the
1. There is an agreement; Note: Since Section 14 (a) and (b) requires that phasing out of a product or closure of a dominant firms.
2. The parties are competitors or do not the entities be “competitors,” the entities covered business, or as a reasonable commercial
belong to a single economic entity; by the single economic entity doctrine cannot response to the market entry or conduct Exception: Those that develop in the
3. The subject of the agreement is to either commit any violation under said subsections. of a competitor. (Sec. 26, PCA and Rule market as a result of or arising from a
limit production, or divide or share the Section 14(c), however, captures agreements 7 of IRR) superior product or process, business
market; between entities that are not competitors; hence, acumen, or legal rights or laws; (Sec. 15)
it may be violated by single economic entities.
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Elements (d) Setting prices or other terms or substantially prevent, restrict, lessen (f) Making supply of particular goods or
1. Entity has a dominant position in conditions that discriminate competition; services dependent upon the purchase of
the relevant market; unreasonably between customers or 6. It does not fall under any of the block other goods or services from the supplier
2. It imposes barriers to entry or sellers of the same goods or services, exemptions. which have no direct connection with the
committing acts that prevent where such customers or sellers are main goods or services to be supplied
competitors contemporaneously trading on similar (e) Imposing restrictions on the lease or (Bundling) (Sec. 15)
3. from growing within the relevant terms and conditions, where the effect contract for sale or trade of goods or
market; may be to lessen competition services concerning where, to whom, or In other words, there is an inclusion of an
4. Such conduct must have substantially (Price discrimination) in what forms goods or services may be unrelated product together with the
foreclosure effect on competition; (Sec. 15) sold or traded, such as fixing prices, purchase of another product.
and giving preferential discounts or rebate
5. The barrier to entry is not an In other words, even though they involve upon such price, or imposing conditions (g) Directly or indirectly imposing unfairly low
indispensable and natural result of the same products, there is a difference not to deal with competing entities, where purchase prices for the goods or services
the entity’s superior product or in the price and the basis of which is not the object or effect of the restrictions is to of, among others, marginalized
process, business acumen or legal associated with costs of supply. prevent, restrict or lessen competition agricultural producers, fisherfolk, micro-,
rights or laws. substantially (Exclusive dealing) (Sec. small-, medium-scale enterprises, and
Exception: The following shall be 15) other marginalized service providers and
(c) Making a transaction subject to considered permissible price producers (Unfair purchasing pricing)
acceptance by the other parties of other differentials (SD-CC) In other words, there are certain (Sec. 15)
obligations which, by their nature or 1. Socialized pricing for the less exclusive stipulations given to customers
according to commercial usage, have no fortunate sector of the economy; which then restricts the competitions as In other words, there is an imposition of
connection with the transaction (Tying 2. Price differential which reasonably or other firms won’t be able to offer the an extremely low price where the
and bundling); (Sec. 15) approximately reflect Differences in same. competitor might not be able to give as
the cost of manufacture, sale, or they are marginalized, otherwise they
In other words, the offer to sell of Note: Nothing in the Act shall prohibit or would not profit from the business.
delivery resulting from differing
Company 1 is accompanied by the render unlawful: (Sec. 15)
condition that the customer is either methods, technical conditions, or Elements
quantities in which the goods or 1. Permissible franchising, licensing,
bound to buy from Company 2 or to not exclusive merchandising or 1. The entity has a dominant position
buy from any of its competitors. services are sold or delivered to the in the relevant market;
buyers or sellers; exclusive distributorship agreements
2. It must directly or indirectly impose
Elements of Tying 3. Price differential or terms of sale such as those which give each party unfairly low purchase prices for the
1. The entity has a dominant position in offered in response to the the right to unilaterally terminate the goods or services;
the relevant market; Competitive price of payments, agreement; or 3. Its counterparty must be considered
2. It makes a transaction subject to services or changes in the facilities 2. Agreements protecting intellectual a marginalized supplier;
acceptance of other obligations furnished by a competitor; and property rights, confidential 4. The conduct has foreclosure effect.
having no connection with the information, or trade secrets.
4. Price changes in response to
transaction; (h) Directly or indirectly imposing unfair
3. The conduct has foreclosure effect; Changing market conditions, purchase or selling price on their
Elements
4. The entity has no objective marketability of goods or services, or competitors, customers, suppliers or
1. The entity has a dominant position in
justification for its conduct. volume; (Sec. 15) the relevant market; consumers (Unfair selling pricing)
2. In a lease or contract of sale, he (Sec. 15)
Elements of Bundling Elements entity imposes restrictions
1. The entity has a dominant position in 1. The entity has a dominant position in concerning where, to whom, or in In other words, imposing a selling price
the relevant market; the relevant market; what forms products may be sold or that other firms cannot compete.
2. There must be at least two sets of 2. The entity discriminates between traded;
products; customers or sellers of the same 3. Such restrictions pertain to prices, Exception: Prices that develop in the
3. Both products have no direct products; giving preferential discounts or market as a result of or due to a superior
connection with each other; 3. The discrimination is in the form of rebate upin such price; product or process, business acumen, or
4. The supply of the main product to the difference in price, terms, or 4. Such restrictions have anti- legal rights or laws shall not be
customer is made dependent on the conditions, when such customers or competitive effect; considered unfair prices. (Sec. 15)
purchase of the secondary product sellers contemporaneously trade on 5. The case is not among the block
by such customer; similar terms and conditions; exemptions; (i) Limiting production, markets or technical
5. The conduct has a foreclosure effect 4. There is no justifiable reason for such 6. The entity has no objective development to the prejudice of
on competition. discrimination; justification for its conduct. consumers (Output restriction) (Sec.
5. The discrimination must have a 15)
reasonable possibility to
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In other words, the seller lowers the Tying and Must substantially prevent, Unfair Prices must be unfairly low. The Commission’s order exempting the relevant
output to drive up the cost of the product. bundling restrict or lessen competition. purchasing (Sec. 15[g]) entity or group of entities under this section shall
(Sec. 15[c]) pricing be made public. Conditions may be attached to
Exception: Limitations that develop in the forbearance if the Commission deems it
the market as a result of or due to a Unfair selling Prices that develop in the appropriate to ensure the long-term interest of
superior product or process, business pricing market as a result of or due to a consumers. (Sec. 28)
acumen, or legal rights or laws shall not Price Permissible price differentials:
discrimination (a) Socialized pricing for the superior product or process,
be a violation of this Act. (Sec. 15) business acumen or legal rights In the event that the basis for the issuance of the
less fortunate sector of exemption order ceases to be valid, the order
the economy; or laws shall not be considered
Nothing in the PCA shall be construed or unfair prices (Sec. 15[h]) may be withdrawn by the Commission. (Sec. 28
interpreted as a prohibition on the following, if (b) Price differential which and Rule 9, Sec. 1 of IRR)
done through legitimate means that do not reasonably or
Output Limitations that develop in the
substantially prevent, restrict or lessen approximately reflect ————- end of topic ————-
restriction market as a result of or due to a
competition: Differences in the cost of
superior product or process,
a. Having a dominant position in a relevant manufacture, sale, or
business acumen or legal rights
market or delivery resulting from
or laws shall not be a violation
differing methods,
b. Acquiring, maintaining and increasing (Sec. 15[i])
technical conditions, or
market share (Sec. 15) quantities in which the
goods or services are sold 7. FORBEARANCE BY THE PCC
The following conducts may not necessarily or delivered to the buyers
be considered an abuse of dominant position: or sellers;
a. Those which contribute to improving (c) Price differential or terms The Commission, motu proprio or upon
production or distribution of goods or of sale offered in application, prior to its initiation of an inquiry, may
services within the relevant market; response to the forbear from applying the provisions of the PCA,
b. Those which contribute to promoting Competitive price of for a limited time, in whole or in part, in all or
technical and economic progress while payments, services or specific cases, on an entity or group of entities, if
allowing consumers a fair share of the changes in the facilities in its determination: [NICE]
resulting benefit. (Sec.15) furnished by a competitor; a. Enforcement is Not necessary to the
and attainment of the policy objectives of
Abuse of Dominant Position (d) Price changes in the PCA;
Summary of Exceptions as Defenses response to Changing b. Forbearance will neither Impede
market conditions, competition in the market where the
ACT DEFENSE marketability of goods or entity or group of entities seeking
services, or volume; (Sec. exemption operates nor in related
Predatory (a) Entity has no object of 15[d]) markets;
pricing driving competition out; c. Forbearance is Consistent with public
Exclusive (a) Object or effect of the interest and the benefit and welfare of
and
dealing restrictions must be to to the consumers; and
(b) The price established was
prevent, restrict or lessen d. Forbearance is justified in Economic
in good faith to meet or
competition substantially terms. (Sec. 28 and Rule 9, Sec. 1 of
compete with the lower
(b) Permissible franchising, IRR)
price of a competitor in the
licensing, exclusive
same market selling the
merchandising or Maximum period and extensions
same or comparable
exclusive distributorship Forbearance will be granted for a maximum
product or service of like
agreements; or period of one (1) year. Any extension to the
quality. (Sec. 15[a])
(c) Agreements protecting IP period will have to be expressly approved by the
Imposing The barriers to entry developed rights, confidential PCC. Any extension of the duration of an
barriers to in the market as a result of or information, or trade exemption shall not be longer than one year.
entry/competiti arising from a superior product secrets; (Sec. 15[e]) (Rule 9, Sec. 1 of IRR)
on growth or process, business acumen,
Bundling If the goods have a direct
hindrance or legal rights or laws (Sec. Public hearing
15[b]) connection with the main goods
A public hearing shall be held to assist the
or services to be supplied (Sec.
Commission in making this determination. (Sec.
15[f])
28)
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The Ateneo Law School: Ad Maiorem Dei Gloriam

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The Ateneo Law School: Ad Maiorem Dei Gloriam

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PHILIPPINE COPYRIGHT

THE ATENEO CENTRAL BAR OPERATIONS 2020-2021

All Rights Reserved

This material is an intellectual creation of the Ateneo Central Bar Operations

Ad maiorem Dei gloriam.

ISABELLE BEATRIZ DLS. GINEZ RIVER M. GADDI LUIS TEODORO B. PASCUA

JUSTIN LUIGI V. HERNANDEZ

I. INSURANCE I. CLAIMS SETTLEMENT AND

B. ELEMENTS OF AN INSURANCE J. BUSINESS OF INSURANCE;

C. CHARACTERISTICS AND NATURE K. INSURANCE COMMISSIONER AND

Commercial Law 7. Compulsory motor vehicle liability

G. PERFECTION OF THE CONTRACT

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which should be renewable every 3 Insurance Contract vs. Gambling Contract

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Kinds of Representation: Warranty v. Reproduction

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May include loss by lightning, windstorm, tornado mportance of Distinction

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II. PRE-NEED A. DEFINITION

TOPIC OUTLINE UNDER THE SYLLABUS

Commercial Law delivery of other benefits at the time of

"Pre-need company" refers to any corporation

The term "pre-need company" also refers to

B. REGISTRATION OF PRE-NEED PLANS

Registration of Pre-need Contracts/Plans

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pre-need company thirty (30) days upon

Consequences of Delay or Default

Note: Any dividend declared shall be reported to

Note: Section 30 of R.A. No. 9829 expressly

————- end of topic ————-

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b. Liability for checked baggage

The carrier’s liability for hand-carried baggage