Ust Law Pre-Week Notes 2019: Kinds of Bank Role Liability

UST LAW PRE-WEEK NOTES 2019
LETTERS OF CREDIT the beneficiary is the one who in compliance with

the contract of sale ships the goods to the buyer
It is any arrangement, however named or described, and delivers the documents of title and draft to the
whereby the issuing bank acting at the request and on issuing bank to recover payment for the goods. The
the instructions of a customer (applicant) or on its own relationship between them is governed by the law
behalf, binds itself to: (PAN) on sales if it is a commercial L/C but if it is a stand-
by letter of credit it is governed by the law on
1. Pay to the order of, or accept and pay drafts drawn obligations and contract.
by a third party (Beneficiary), or 2. Between the issuing bank and the beneficiary/
2. Authorize another bank to pay or to accept and pay seller/exporter – The issuing bank is the one that
such drafts, or issues the letter of credit and undertakes to pay the
3. Authorizes another bank to Negotiate, against beneficiary upon strict compliance of the latter to
stipulated documents the requirements set forth in the letter of credit. On
the other hand, the beneficiary surrenders
Three (3) distinct but intertwined contracts in a document of title to the bank in compliance with
Letter of Credit transaction (2002, 2008 BAR) the terms of the L/C. Their relationship is governed
by the terms of the L/C.
1. Between the applicant/buyer/importer/account 3. Between the issuing bank and the applicant/
party and the beneficiary/seller/exporter – The buyer/importer – The applicant obliges himself to
applicant is the one who procures the letter of reimburse the issuing bank upon receipt of the
credit and obliges himself to reimburse the issuing documents of title. Their relationship is governed
bank upon receipt of the documents of title while by the terms of the application and agreement for
the issuance of the L/C by the bank.
KINDS OF ROLE LIABILITY

BANK
Notifying/ Serves as an agent of the issuing bank; Does not incur any obligation more than just notifying the
Advising Bank seller/beneficiary of the opening of the L/C after it has
Warrants the apparent authenticity of determined its apparent authority. It does not guarantee the
the L/C (Bank of America NT & SA v. CA, genuineness or due execution of the L/C. It is not liable for
G.R. No. 105395, December 10, 1993). damages even if the L/C turns out to be spurious provided
the spurious character is not apparent on the face of the
instrument.
Confirming Lends credence to the L/C issued by a Direct obligation, as if it is the one which issued the L/C.
bank lesser-known bank.
Its obligation is similar to the issuing banks. Thus,
The confirming bank collects fees for beneficiary may tender documents to the confirming bank
such engagement and obtains and collect payment.
reimbursement from the issuing bank.
Negotiating Buys the seller’s draft and later on sells Depends on the stage of negotiation, thus:
bank the draft to the issuing bank.
1. Before negotiation – No liability with respect to the seller.
Merely suggests its willingness to negotiate.
2. After negotiation – A contractual relationship will then

arise, making the bank liable. As holder, it has the right to
payment from the bank primarily liable on the draft (either
the issuing or confirming bank). If the party primarily liable
on the L/C refuses to honor the draft, the negotiating bank
has the right to proceed against the drawer thereof.
Paying bank May either be the issuing bank or any
other bank in the place of the issuing
bank to facilitate payment to the
beneficiary.
LAWS GOVERNING LETTERS OF CREDIT 750 which is the governing law in letter of credits
transactions.
Letter of credit is governed by the Uniform Customs
and Practice for documentary Credits issued by the
International Chamber of Commerce. (Metropolitan
Waterworks vs. Daway, G.R. No. 160723, July 21, 2004). Doctrine of Independence/ Independence Principle
Sec. 2 of the Code of Commerce, provides that in the
absence of any law governing credit transactions, The relationship of the buyer and the bank is separate
customs and usage shall apply. At present, it is Uniform and distinct from the relationship of the buyer and
Custom and Practices for Documentary Credits, UCP seller in the main contract; the bank is not required to
investigate if the contract underlying the L/C has been
UNIVERSITY OF SANTO TOMAS 1 UST L A W B A R O P E R A T I O N S

FACULTY OF CIVIL LAW ACADEMICS COMMITT EE 2019
fulfilled or not because in transactions involving L/C, obligation from the underlying agreement. This
banks deal only with documents and not goods (BPI v. principle is illustrated by standby L/C.
De Reny Fabric Industries, Inc., L-2481, October 16, 2. Independence only as to the justification aspect -
1970). In effect, the buyer has no course of action which is identical with the same obligations under
against the issuing bank. the underlying agreement. This principle is illustrated
by a commercial L/C or repayment standby. (Transfield
Exception to the Independence Principle (2010 v. Luzon Hydro Corp., supra)
BAR)
Dragnet Clause: is a clause that says that the mortgage
Fraud Exception Principle: It provides that the secures the past, present and future obligations.
untruthfulness of a certificate accompanying a demand
for payment under a standby letter of credit may qualify Explain the Independence Principle under a letter
as fraud sufficient to support an injunction against of credit transaction.
payment.
In determining compliance with the letter of credit, the
Under the fraud exception principle, the beneficiary bank is obliged to examine only the shipping
may be enjoined from collecting on the letter of credit documents presented by the seller. It is precluded from
if the beneficiary committed fraud by substituting determining whether the main contract of sale
fraudulent documents even if on their face the (between buyer and seller) has been strictly complied
documents complied with the requirements. with. Banks deal only with documents and not with
goods or obligations to which they relate.
This principle refers to fraud in relation with the
independent purpose or character of the L/C and not The seller is assured of prompt payment independent
only fraud in the performance of the obligation or of any breach in the main contract. Thus, the bank has
contract supporting the letter of credit (Transfield vs. no duty to verify whether the goods described in the
Luzon Hydro Corp., supra). letter of credit or in the shipping documents actually
tallies with what was loaded aboard the ship. This may
The documents tendered by the seller/beneficiary be invoked by both the seller and the issuing bank.
must strictly conform to the terms of the L/C. The (Dimaampao, 2017)
tender of documents must include all documents
required by the letter. It is not a question of whether or
not it is fair or equitable to require submission of
documents but whether or not the documents were
agreed upon. Thus, a correspondent bank which TRUST RECEIPT LAWS
departs from what has been stipulated under the L/C
acts on its own risk and may not thereafter be able to Trust Receipt (TR) transaction
recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary (Feati It is any transaction between the entruster and
Bank and Trust Company v. CA) entrustee:
What are the kinds of letter of credit? 1. Whereby the entruster who owns or holds title or
A letter of credit may be: security interests over certain specified goods,
a. Commercial or import letter of credit - where the documents or instrument (GDI), releases the same
transaction underlying the letter of credit is a sale or to the possession of entrustee upon the latter’s
importation. execution of a TR agreement.
b. Standby letter of credit - where the transaction 2. Wherein the entrustee binds himself to hold the GDI
underlying the letter of credit is not a sale transaction. in trust for the entruster and, in case of default,
c. Irrevocable - where the terms of the letter of credit a. to sell or otherwise dispose such GDI with the
cannot be changed without the consent of the obligation to turn over to the entruster the
beneficiary. proceeds to the extent of the amount owing to
d. Revocable - where the terms of the letter of credit it or
may be changed even without the consent of the b. to turn over the GDI itself if not sold or
beneficiary. otherwise disposed of in accordance with the
e. Confirmed - When the Letter of credit is guaranteed terms and conditions specified in the TR.
by adding payment confirmation by the advising bank
or any third bank ( Confirming Bank ) on behalf of the Two features of a Trust Receipt transaction
opening bank, it is termed as a confirmed LC.
f. Unconfirmed - when the letter of credit is not 1. Loan feature – is brought about by the fact that the
guaranteed by a confirming bank. Confirmation can be entruster financed the importation or purchase of
added only to irrevocable and not to the revocable the goods under TR (Sps. Vintola vs. Insular Bank of
credits. Asia and America, G.R. No. 73271, May 29, 1987).
2. Security feature – property interest in the GDI to
secure performance of some obligation of the
Two-Fold nature of the Independence Principle entrustee or of some third persons to the entruster
1. Independence in toto - the credit is independent (Rosario Textile Mills Corp. v. Home Bankers Savings
from the justification aspect and is a separate and Trust Company, G.R. No. 137232, June 29, 2005).

RIGHTS OF THE ENTRUSTER manner it wants. Thus, the ownership of the goods
1. To be entitled to the Proceeds from the sale of the GDI remaining with the entrustee, he cannot be relieved of
to the extent of the amount owing to him. the obligation to pay his/her loan in case of loss or
2. To the Return of the GDI in case of non-sale and destruction (Rosario Textile Mills vs. Home Bankers
enforcement of all other rights conferred to him in the Association, supra).
TR.
3. May Cancel the trust and take possession of the Defenses available to negate CRIMINAL liability of
goods, upon default or failure of the entrustee to the Entrustee
comply with any of the terms and conditions of the TR.
4. To Sell the goods and apply the proceeds thereof in 1. Compliance with the terms of the TR either by
payment of the obligation, provided, entrustee is payment, return of the proceeds or return of the
notified at least five (5) days prior to the date of sale. goods (P.D. 115, Sec. 13).
Entrustee shall be liable to pay deficiency, if any. (Sec 7, 2. Consignment.
P.D. 115) 3. Cancellation of the TR agreement and taking into
possession of the goods by the entruster.
OBLIGATION AND LIABILITY OF THE ENTRUSTEE
1. To Hold GDI in trust for the entruster and to dispose NOTE: Repossession of the goods will extinguish
of them strictly in accordance with the terms of TR. only the criminal liability.
2. To Receive the proceeds of the sale for the entruster
and to turn over the same to the entruster to the extent 4. Compromise by parties before filing of information
of amount owing to the latter. in court. Compromise of estafa case arising from TR
3. To Insure GDI against loss from fire, theft, pilferage transaction, after the case has been filed in court
or other casualties. does not amount to novation and does not erase the
4. To Keep GDI or the proceeds thereof, whether in criminal liability of the accused (Ong vs. CA, G.R. No.
money or whatever form, separate and capable of L-58476, September 2, 1983).
identification as property of the entruster. 5. Non-receipt of the goods by the entrustee or where
5. To Return GDI to the entruster in case they could not proof of delivery of goods to the accused is
be sold or upon demand of the entruster. insufficient. (Ramos vs. CA, supra).
6. To Observe all other conditions of the TR. (Sec. 9, P.D. 6. Loss of goods without fault of the entrustee.
115)
Where the debtor received the goods subject of the
Real owner of the articles subject of the Trust trust receipt before the trust receipt was entered
Receipt transaction: The real owner of the articles into, the transaction in question was a simple loan
subject of the TR is the entrustee who binds himself to and not a trust receipt agreement. Prior to the date
hold the designated GDI. The entruster merely holds a of execution of the trust receipt, ownership over the
security interest. goods was already transferred to the debtor. This
situation is inconsistent with what normally obtains in
Entrustee cannot mortgage the goods because one of a pure trust receipt transaction, wherein the goods
the requisites of a valid mortgage is that the mortgagor belong in ownership to the bank and are only released
must be the absolute owner of the property mortgaged to the importer in trust after the loan is granted.
or must have free disposal thereof. The entrustee is not (Colinares vs. CA, G.R. No. 90828, September 5, 2000)
responsible as principal or vendor under any sale or
contract to sell made by the entrustee. Where the goods which is the subject matter of the
transaction is not for sale or resale, the transaction
While a letter of credit is a security arrangement, the in question was also a simple loan and not a trust
liability of the bank that issued the letter of credit is receipt agreement. Considering that the goods in this
neither that of a surety nor a guarantor. The liability case were never intended for sale but for use in the
of the issuing bank is primary and solidary. fabrication of steel communication towers, the trial
court erred in ruling that the agreement is a trust
receipt transaction. (Ng vs. People, G.R. No. 173905, April
Entrustee shall bear the loss of the goods, 23, 2010)
documents, or instruments which are the subject of
a Trust Receipt Correlate the letter of credit transaction with the
trust receipt arrangement.
Res perit domino in trust receipt: not a valid defense
against an Entrustee in cases of loss or destruction of The bank extends a loan covered by the letter of credit
the goods, documents, or instruments secured by a with the trust receipt as security for the loan. The
Trust Receipt. For the principle of res perit domino to transaction involves a loan feautere represented by the
apply the entrustee must be the owner of the goods at letter of credit, and a security feature covered by the
the time of the loss. A TR is a security agreement, trust receipt. (Dimaampao, 2017)
pursuant to which a bank acquires a ‘security interest’
in the goods. It secures an indebtedness and there can P.D. 115 does not violate the prohibition in the
be no such thing as security interest that secures no Constitution against imprisonment for non-
obligation. If under a trust receipt transaction, the payment of a debt.
entruster is made to appear as the owner, it was but an
artificial expedient, more of legal fiction than fact, for if What is being punished is the dishonesty and abuse of
it were really so, it could dispose of the goods in any confidence in the handling of money or goods to the

prejudice of another regardless of whether the latter is transaction in cash institutions, regardless of the
the owner or not. It does not seek to enforce payment or other equivalent amounts involved, where any
of the loan. Thus, there can be no violation of a right monetary of the following
against imprisonment for non-payment of a debt instrument circumstances exist:
(People vs. Nitafan, G.R. No. 81559, April 6, 1992). involving a total 1. There is no underlying
amount in excess of legal or trade obligation,
Upon failure to return the goods released under the Five hundred purpose or economic
trust receipt transaction, the bank instituted thousand pesos justification;
against the borrower who insisted that he could not (PhP 500,000.00) 2. The client is not properly
be imprisoned for non-paymnet of debt. Is he within one (1) identified;
correct? banking day. (RA 3. The amount involved is
went to F bank to apply for a loan to pay the 9160, Sec. 3 [b]). not commensurate with
construction materials. As security for the loan, C the business or financial
was made to execute a trust receipt. One year later, capacity of the client;
after C failed to pay the balance on the loan, F bank 4. Taking into account all
charged him with violation of the Trust Receipts known circumstances, it
Law. Will the case prosper? Reason briefly. may be perceived that
the client's transaction is
NO. It is not covered by the Trust Receipts Law. Where structured in order to
the debtor received the goods before the trust receipt avoid being the subject of
itself was entered into, the transaction in question must reporting requirements
be considered a simple loan. The Trust Receipts Law under the Act;
does not seek to enforce payment of a loan, rather it 5. Any circumstances
punishes dishonesty and abuse of confidence in relating to the
handling money or goods to the prejudice of another transaction which is
regardless of whether the latter is the owner. observed to deviate from
(Dimaampao, 2017) the profile of the client
and/or the client's past
transactions with the
ANTI-MONEY LAUNDERING ACT OF 2001 (RA covered institution;
9160, AS AMENDED BY RA 9194, 10167, 6. The transactions are in a
10365) way related to an
unlawful activity or
offense under this Act
Money laundering is committed by any person who,
that is about to be, is
knowing that any monetary instrument or property
being or has been
represents, involves, or relates to the proceeds of any
committed; or
unlawful activity:
7. Any transactions that is
similar or analogous to
a. transacts said monetary instrument or property;
any of the foregoing." (RA
b. converts, transfers, disposes of, moves, acquires,
9160, Sec. 3[b-1]).
possesses or uses said monetary instrument or
property;
The term “covered persons” shall exclude lawyers
c. conceals or disguises the true nature, source,
and accountants
location, disposition, movement or ownership of or
These persons must be acting as independent legal
rights with respect to said monetary instrument or
professionals in relation to information concerning
property;
their clients or where disclosure of information would
d. attempts or conspires to commit money laundering
compromise client confidences or the attorney-client
offenses referred to in paragraphs (a), (b) or (c);
relationship. (RA 10365, Sec. 1, amending RA 9160, Sec.
e. aids, abets, assists in or counsels the commission of
3[a]).
the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
FREEZING OF MONEY INSTRUMENT OR PROPERTY
f. performs or fails to perform any act as a result of
which he facilitates the offense of money
Upon a verified ex parte petition by the AMLC and after
laundering referred to in paragraphs (a), (b) or (c)
determination that probable cause exists that any
above.
monetary instrument or property is in any way related
to an unlawful activity as defined in Section 3(i) hereof,
“Money laundering is also committed by any covered
the Court of Appeals may issue a freeze order which
person who, knowing that a covered or suspicious
shall be effective immediately, and which shall not
transaction is required under this Act to be reported to
exceed six (6) months depending upon the
the Anti-Money Laundering Council (AMLC), fails to do
circumstances of the case: Provided, That if there is no
so.” (Sec. 4, RA 10365, amending Sec. 4, RA 9160).
case filed against a person whose account has been
frozen within the period determined by the court, the
freeze order shall be deemed ipso facto lifted: Provided,
COVERED SUSPICIOUS
further, That this new rule shall not apply to pending
'Covered 'Suspicious transaction' are
cases in the courts. In any case, the court should act on
transaction' is a transactions with covered
the petition to freeze within twenty-four (24) hours

from filing of the petition. If the application is filed a day No court shall issue a temporary restraining order or a
before a nonworking day, the computation of the writ of injunction against any freeze order, except the
twenty-four (24)-hour period shall exclude the Supreme Court. (Sec. 8, RA 10365, amending RA 9160.)
nonworking days.
Requisites for in-camera inspection to be allowed
A person whose account has been frozen may file a
motion to lift the freeze order and the court must 1. there must be a pending case before a court of
resolve this motion before the expiration of the freeze competent jurisdiction.
order. 2. the account must be clearly identified.
3. The inspection limited to the subject matter of the order ex-parte for related accounts is separately
pending case before the court of competent based on probable cause that such related account
jurisdiction. is materially linked to the principal account
4. The bank personnel and the account holder must be inquired into; and
notified to be present during the inspection, and d. The authority to inquire into or examine the main
5. Such inspection may cover only the account or principal account and the related accounts shall
identified in the pending case. comply with the requirements of Article III,
Sections 2 and 3 of the Constitution.
NOTE: The inquiry conducted by the AMLC is not
violative of The Law on Secrecy of Bank Deposits or Ra
1405, as amended; Foreign Currency Deposit Act or RA .
No. 6426, as amended; General Banking Laws or RA
8791; and other similar laws. The Court of Appeals shall Note: although the bank inquiry order ex-parte passes
act on the application to inquire into or examine any constitutional muster, there is nothing in Section 11 nor
deposit or investment with any banking institution or the implementing rules and regulations of the AMLA
non-bank financial institution within twenty-four (24)
which prohibits the owner of the bank account, as in
hours from filing of the application.
this instance SPCMB, to ascertain from the CA, post
issuance of the bank inquiry order ex-parte, if his
Cases where no court order shall be required in account is indeed the subject of an examination.
order for the AMLC to inquire into deposit, Considering the safeguards under Section 11 preceding
investment or related accounts. the issuance of such an order, the Court find that there
1. Kidnapping, is nothing therein which precludes the owner of the
2. Hijacking,
account from challenging the basis for the issuance
3. Drugs- violation of Dangerous Drugs Act,
4. Arson, thereof.
5. Murder.
6. Terrorism (Sec. 11 R.A. 9160, as amended) Remedy of the bank account owner
Safe Harbor Provision The allowance to question the bank inquiry order
herein is tied to the appellate court's issuance of a
No administrative, criminal or civil proceedings, shall freeze order on the principal accounts. The occasion
lie against any person for having made a COVERED for the issuance of the freeze order upon the actual
transaction report or a SUSPICIOUS transaction report
physical seizure of the investigated and inquired into
in the regular performance of his duties and in good
faith, whether or not such reporting results in any bank account, calls into motions the opportunity for
criminal prosecution under this Act or any other the bank account owner to then question, not just
Philippine law. probable cause for the issuance of the freeze order
under Section 10, but, to begin with, the determination
Safeguards before a bank inquiry order is issued. of probable cause for an ex-parte bank inquiry order
into a purported related account under Section 11. To
It ensures adherence to the general state policy of
emphasize, this allowance to the owner of the bank
preserving the absolutely confidential nature of
account to question the bank inquiry order is
Philippine bank accounts:
granted only after issuance of the freeze order
a. The AMLC is required to establish probable cause physically seizing the subject bank account. It
as basis for its ex-parte application for bank inquiry cannot be undertaken prior to the issuance of the
order; freeze order.
b. The CA, independent of the AMLC's demonstration
of probable cause, itself makes a finding of
probable cause that the deposits or investments
are related to an unlawful activity under Section Not violative of substantive due process
3(i) or a money laundering offense under Section 4
of the AMLA; Section 11 of the AMLA providing for ex-parte
c. A bank inquiry court order ex-parte for related
application and inquiry by the AMLC into certain bank
accounts is preceded by a bank inquiry court order
ex-parte for the principal account which court deposits and investments does not violate

substantive due process, there being no physical

seizure of property involved at that stage. It is the What are the requisites of negotiability? (WUPOA)
preliminary and actual seizure of the bank deposits or
1. It must be in Writing and signed by the maker or
investments in question which brings these within
drawer;
reach of the judicial process, specifically a 2. Must contain an Unconditional promise or order to
determination that the seizure violated due process. pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
Procedural due process is likewise not violated 5. Where the instrument is Addressed to a drawee, he
must be named or otherwise indicated therein with
SPCMB's constitutional right to procedural due reasonable certainty (NIL, Sec.1).
process is likewise not violated by the ex-parte
application and inquiry by the AMLC into certain bank Matters to be considered:
deposits and investments. AMLC does not possess a. The whole of the instrument
quasi-judicial powers and hence, it has no adjudicatory b. Only what appears on the face of the instrument
power. AMLC's investigation of money laundering c. Provisions of the NIL especially section 1 which
offenses and its determination of possible money gives the requirements of negotiability (The
laundering offenses, specifically its inquiry into certain Philippine Negotiable Instruments Law, De Leon & De
bank accounts allowed by court order, does not Leon, Jr., 2016).
transform it into an investigative body exercising quasi-
When is an instrument payable to order?
judicial powers.
The instrument is payable to order where it is drawn
1. In the case of Rep. of the Phils. v. Hon. Judge Eugenio, payable to the order of a specified person or to him or
Jr., et al. (Eugenio), the court laid down the to his order. It may be drawn payable to the order of:
following principle:
a. The Constitution did not allocate specific rights 1. A Payee who is not a maker, drawer, or drawee;
peculiar to bank deposits; 2. The Drawer or maker; or
b. The general rule of absolute confidentiality is 3. The Drawee; or
simply statutory, i.e. not specified in the 4. Two or more payees Jointly; or
Constitution; 5. One or some of Several payees; or
6. The Holder of an office for the time being (Sec. 8,
c. Exceptions to the general rule of absolute NIL).
confidentiality have been carved out by the
Legislature which legislation have been An order instrument is negotiated by indorsement
sustained, albeit subjected to heightened completed by delivery (Sec. 30, NIL). If an order
scrutiny by the courts; and instrument is not indorsed, the negotiation is
d. One such legislated exception is Section 11 of incomplete and the instrument is in effect, merely
the AMLA. (SUBIDO V CA G.R. No. 216914, EN assigned. The transferee acquires the right to have the
BANC, December 6, 2016.) indorsement of the transferor. It is only at the time of
indorsement that negotiation takes effect and the
transferee acquires all the rights of a holder.
NEGOTIABLE INSTRUMENTS LAW (Dimaampao & Dumlao-Escalante, 2014).
What is Negotiable Instrument? When is an instrument payable to bearer? (ENaF

PaLa)
It is a written contract for the payment of money which
is intended as a substitute for money and passes from 1. When it is Expressed to be so payable; (e.g. I
one person to another as money, in such a manner as to promise to pay to bearer P10,000.00)
give a holder in due course the right to hold the 2. When it is payable to a person Named therein or
instrument free from defenses available to prior parties bearer; (e.g. Pay to P or bearer P10,000.00)
(Sundiang Sr. & Aquino, 2011). 3. When it is payable to the order of a Fictitious
person or non-existing person, and such fact was
What are the characteristics or features of a known to the person making it so payable; (e.g. Pay
negotiable instrument? to John Doe or order)
4. When the name of the Payee does not purport to be
1. Negotiability – the negotiable instrument passes the name of any person; (Pay to cash)
from hand to hand as money so as to give the 5. When the only or the Last indorsement is an
holder in due course the right to hold the indorsement in blank (NIL, Sec 9).
instrument and collect the sum for himself.
2. Accumulation of secondary contracts– contracts are What is Fictitious-Payee rule?
created as the instrument passes from one person
to another (Pre-Week Reviewer in Commercial Law, The fictitious-payee rule contemplates that the payee is
Dimaampao & Dumlao-Escalante, 2014). fictitious or not intended to be true recipient of the

proceeds. The check is considered a bearer instrument 5. Designation of particular kind of currency in
negotiable by delivery alone. The underlying theory is which payment is to be made. (NIL, Sec.6).
that the maker of the check knew that the fictitious
payee cannot indorse the instrument so that he must
have intended for it to be negotiated by mere delivery. PARTIES TO A NEGOTIABLE INSTRUMENT
(PNB v. Rodriguez, G.R. No. 170325, September 26, 2008)
Who are the parties to a negotiable instrument?
GR: In case of controversy, the drawer is liable and the What are their liabilities?
drawee bank is absolved from liability.
In a promissory note there are two parties.
XPN: When there is commercial bad faith, whereby the
drawee bank acts dishonestly and is a party to the  The maker who makes the promise and signs the
fraudulent scheme. The check is deemed payable to instrument and is primarily liable for the payment
order, and consequently, the drawee bank bears the of the obligation;
loss (Ibid).  The payee to whom payment is originally payable.
In a bill of exchange there are four parties.
What are the kinds of negotiable instruments?
 The drawer who issues and draws the bill and
1. Promissory notes (PN) – An unconditional promise whose liability to pay is only secondary, except
in writing made by one person to another, signed when drawee refused to accept; can limit his
by the maker, engaging to pay on demand, or at a liability by putting “without recourse”;
fixed or determinable future time, a sum certain in  The drawee upon whom the bill is drawn may not
money to order or to bearer (NIL, Sec. 184). be held liable until he becomes acceptor;
2. Bill of exchange (BOE) – An unconditional order in  The payee to whom payment is originally payable;
writing addressed by one person to another signed and
by the person giving it, requiring the person to  The acceptor who is the drawee who accepts the
whom it is addressed to pay on demand or at a fixed bill.
or determinable future time a sum certain in
money to order or to bearer (NIL, Sec. 126). NEGOTIABILITY OF OTHER DOCUMENTS
3. Check – A bill of exchange drawn on a bank payable
on demand (NIL, Sec. 185). Determine the negotiability of the following
documents.
What constitutes certainty as to sum?
a. Postal money order is not a negotiable
The sum payable is a sum certain within the meaning of instrument. It is governed by postal rules and
this Act, although it is to be paid: regulation and it may only be negotiated once.
1. With interest b. The certificate of time deposit is a negotiable
2. By stated installments instrument because it is an acknowledgement in
3. By stated installments, with a provision that upon writing by the bank of the amount of deposit with a
default in payment of any installment or of promise to repay the same to the depositor or
interest, the whole shall become due bearer thereof at a specific time (Caltex
4. With exchange whether at a fixed rate or at the (Philippines), Inc. vs. Court of Appeals and Security
current rate Bank and Trust Company, G.R. No. 97753, August 10,
5. With costs of collection or attorney’s fees, in case 1992).
payment shall not be made at maturity (NIL, Sec. c. A letter of credit is not negotiable because it is
2). generally conditional and has limited negotiability
because it is issued in favor of a specific person. But
Provisions Not Affecting Negotiability the Supreme Court held in Lee vs. Court of Appeals,
that the drafts issued in connection with the letters
An instrument is not rendered non – negotiable if it is of credit are negotiable instruments.
the holder who is given an election to require d. A warehouse receipt is not a negotiable
something to be done in lieu of payment of money. instrument because the obligation of a
warehouseman is not to pay but to deliver the
But if the option is with the maker, the instrument is goods under the warehouse receipt which fails to
non-negotiable because the holder cannot compel him comply with the requirements set forth under Sec.
to make payment in money. 1 of the NIL.
e. A treasury warrant require appropriations from
the national government which means that the
Omissions Not Affecting Negotiability particular fund may or may not exists which
renders it conditional, thereby non-negotiable.
1. Non dating of instrument f. A certificate of indebtedness is not negotiable. It
2. Non specification of value given, or that any value merely acknowledges to pay a sum of money to a
had been given specified persons or entity. Since a certificate of
3. Non-specification of place where it is drawn or indebtedness which is not payable to order or
place where it is payable bearer but is payable to a specific person is not
4. Bears a seal negotiable, the assignee takes it subject to the
defect in the title of the assignor.

g. The electronic messages (known in the banking XPN:

industry as SWIFT – Society for Worldwide 1. The party against whom it is sought to enforce such
International Financial Telecommunications) are right is precluded from setting up the forgery or
not signed by the investor-clients as supposed want of authority (Sec.23)
drawers of a bill of exchange; they do not contain 2. Where the forged signature is not necessary to the
an unconditional order to pay a sum certain in holder’s title in which case the forgery may be
money as the payment is supposed to come from disregarded (Sec.48)
a specific fund or account of the investor-clients;
and, they are not payable to order or bearer but to A person whose signature is forged as maker, drawer,
a specifically designated third party. Thus, the payee, or indorsee of a note or check was never a party
electronic messages are not bills of exchange or never gave his consent to the contract which gave
(Hongkong & Shanghai Banking Corporation v. rise to the instrument. Since his signature does not
CIR, G.R. Nos. 166018 & 167728, 04 June 2014). appear in the instrument, he cannot be held liable
thereon by anyone. ((Gempesaw vs. Court of Appeals,
COMPLETION AND DELIVERY 218 SCRA 682 [1993].)
INCOMPLETE BUT DELIVERED (Sec. 14) Forgery is a real or absolute defense even against a
holder in due course (HIDC).
Where the instrument is wanting in any material
particular, the person in possession thereof has a prima Note: Section 23 does not purport to declare the whole
facie authority to complete it by filling up the blanks instrument totally void nor the genuine signatures
therein. (NIL, Sec. 14). thereon inoperative. It is only the forged or
unauthorized signature that it is declared to be
In order that any such instrument when completed may inoperative. Rights may still exist and be enforced as to
be enforced against any person who became a party those whose signatures are found to be genuine.
thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and Forgery of a Note
within reasonable time. If such instrument, after
completion, is negotiated to a holder in due course, it is Forgery of maker's signature – the maker is not liable
valid and effectual for all purposes in his hands, and he to all subsequent parties, whether the instrument is
may enforce it as if it had been filled up strictly in payable to order or to bearer.
accordance with the authority given and within
reasonable time (Ibid). However, indorsers after the forgery are liable
in view of their warranty under Sec. 66.
INCOMPLETE AND UNDELIVERED (Sec. 15)
Forgery of indorser's signature
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of
Note
any holder, as against any person whose signature was
 Payable to order – the party whose indorsement
placed thereon before delivery (NIL, Sec. 15).
is forged is not liable to any holder, even a holder
in due course.
COMPLETE BUT UNDELIVERED (Sec. 16)
Parties prior to forgery, including the maker,
It is incomplete and revocable until delivery of the may not be held liable to any holder. The forged
instrument for the purpose of giving it effect (NIL, Sec. indorsement is inoperative and it cannot
16). Delivery is essential to the validity of any transfer any right or title over the principle.
negotiable instrument (Sundiang Sr. & Aquino, 2009).
 Payable to bearer – the party whose

FORGERY indorsement is forged is liable to a holder in
due course, but not to the one who is not holder
Forgery of Signature in due course. This is because the defense that
may be raised is Sec. 16 (complete but
GR: Where a) Signature is forged; or b) Made without
authority of the person whose signature it purports to undelivered), and not forgery.
be, it is
1. Wholly inoperative and Parties prior to forgery, including the maker,

2. No right: may also be held liable by holders in due
 To retain the instrument course. Again, the defense that they could
 To give a discharge therefor interposed is Sec. 16 which is a personal
 To enforce payment thereof against any party defense.
thereto
can be acquired through or under such signature.

instrument relating to the obligation of a party. In other

Forgery of a Bill/Check words, a material alteration is one which changes the
items which are required to be stated under section 1
 Forgery of a drawer's signature in a bill - the of NIL.
drawer is not liable to all subsequent parties,
whether the instrument is payable to order or Alteration of a serial number of a check does not
constitute material alteration. Serial number is not an
to bearer.
essential requisite for negotiability under Section 1 of
NIL and does not change the relationship of the parties
o XPN: When the drawer is guilty of
(PNB vs. CA, 256 SCRA 491).
negligence, he bears the loss.
ACCOMODATION PARTY
 In case of checks –
same rule as the bill; Who is an accommodation party?
the drawer cannot be
held liable. It is the An accommodation party is one who has signed the
drawee bank who instrument as maker, drawer, acceptor, or indorser,
bears the loss. without receiving value therefor, and for the purpose of
lending his name to some other person (NIL, Sec. 29).
o XPN: When the drawer is guilty of
What are the requisites to be an accommodation
negligence, he bears the loss.
party?
 Forgery of indorser's signature in a bill 1. Accommodation party must sign as maker, drawer,
acceptor or indorser;
 Payable to order – the party whose 2. No value is received by the accommodation party
indorsement is forged, is not liable to any from the accommodated party; and
holder, even a holder in due course 3. The purpose is to lend the name.
The accommodation party, as surety, is deemed an

original promisor and debtor from the beginning; he is
a) Where the signature of the payee is forged, the considered in law as the same party as the debtor in
Collecting Bank is liable to the payee and must bear the relation to whatever is adjudged touching the
loss because it is its legal duty to ascertain that the obligation of the latter since their liabilities are
payee’s endorsement was genuine before cashing the interwoven as to be inseparable. Although a contract of
suretyship is in essence accessory or collateral to a
check.
valid principal obligation, the surety’s liability to the
creditor is immediate, primary and absolute; he is
b) If the drawee pays under a forged indorsement, the
directly and equally bound with the principal. As an
drawer is not liable on the bill and the drawee may not equivalent of a regular party to the undertaking, a
debit the drawer’s account. surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or
c) Where the checks are received merely for collection personal interest in the obligations nor does he receive
and deposit, and the banks as agent, cannot be expected any benefit therefrom.
to know or ascertain the genuineness of all prior
indorements (Jai – Alia Corp. vs. Bank of P.I., 66 SCRA Can a corporation act as an accommodation party?
29 [1975].)
NO. A corporation cannot act as an accommodation
But by stamping on checks accepted by it that “all prior party. The issue or endorsement of negotiable
instrument by a corporation without consideration and
endorsements and/or lack of endorsements
for accommodation of another is ultra vires. In such
guaranteed,” a collecting/presenting bank thereby case, the corporation incurs no liability. The officer who
makes the assurance that it has ascertained the signed shall be personally liable. (Dimaampao &
genuineness of all prior indorsements. (Associated Dumlao-Escalante, 2014)
Bank vs. Court of Appeals)
An accommodation party cannot set up lack of
Payable to bearer – the drawee may debit the drawer’s consideration against any holder, even as to one who is
account in spite of the forged indorsement. The forged not a holder in due course.
indorsement is not necessary to the title of the holder.
NEGOTIATION
Material Alteration An instrument is negotiated when it is transferred from
one person to another in such manner as to constitute
An alteration is said to be material if it alters the effect the transferee the holder thereof.
of the instrument. It means the unauthorized change in
an instrument that purports to modify in any respect If payable to bearer, it is negotiated by delivery.
the obligation of party or an unauthorized addition of
words or numbers or other change to an incomplete

If payable to order, it is negotiated by the indorsement 2. Payees and indorsees possessing order instruments
of the holder and completed by delivery (Sec.30).
Rights of Holder (Sec.51)
Indorsement must be of Entire Instrument The holder of a negotiable instrument may:
GR: indorsement must be an indorsement of the entire 1. Sue thereon in his own name
instrument - A holder even he be a holder only for collection
may sue in his own name (Alabama City, G. & A.
An indorsement which purports to transfer to the Ry Co. vs. Kyle, 202 ALA. 552)
indorsee a part only of the amount payable or which - Indorsee (pledgee) of a note, as a collateral
purports to transfer the instrument to two or more security, may sue as he is a “holder”
indorsees severally, does not operate as a negotiation
of the instrument. 2. Receive Payment
- Payment to him in due course discharges the
XPN: Partial indorsement is allowed if part of the instrument
amount has already been paid. The unpaid balance may - Payment in due course means:
be indorsed (Sec.32). a) Made at or after the maturity of the
instrument
b) Made to the holder thereof
Special Indorsement c) Made in good faith and without notice
that his title is defective
A special indorsement is one where the name of the
HOLDER IN DUE COURSE (HIDC)
payee is specified. It is also known as specific
indorsement or indorsement in full
GR: Every holder is deemed prima facie to be an HIDC.
Forms:
XPN: When it is shown that the title of any person who
1. One that specifies the person to whom the
instrument is payable. has negotiated the instrument was defective. But this is
only as regards a party who became such after the
2. One that specifies the person to whose order the
acquisition of the defective title (NIL, Sec.59).
instrument is to be payable (Sec.34).
What constitutes a Holder in Due Course?
Restrictive Indorsement (Bar 2011, MCQ, asked 3x)
An indorsement is restrictive which either: A holder in due course is a holder who has taken the
a. Prohibits the further negotiation of the instrument instrument under the following conditions:
b. Constitutes the indorsee in trust for or to the use of
some other person 1. That is Complete and regular upon its face;
c. Vests the title in the indorsee in trust for or to the 2. Became the holder before it was Overdue, and
use of some other person. without notice that it has been previously
Mere absence of words implying power to negotiate dishonored, if such was the fact;
does not make an indorsement restrictive (Sec.36). 3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or defect
in the title of the person negotiating it. (NIL, Sec. 52)
Indorsement of Bearer Instrument
A holder in due course holds the instrument free from
even when indorsed specially, the instrument may any defect of title of prior parties and from defenses
nevertheless be further negotiated, but the person available to prior parties among themselves, and may
indorsing specially shall be liable as indorser to only enforce payment of the instrument for the full amount
such holders as make title through his indorsement thereof.
(Sec.40).
Rights of a Holder in Due Course
All payees or indorsees who are not partners must
indorse jointly, unless the one indorsing has authority 1. He may sue on the instrument in his own name
to endorse for the others (Sec.41). (Sec.51)
2. He may receive payment and If the payment is in
due course, the instrument is discharged (Sec.51)
RIGHTS OF THE HOLDER 3. A holder in due course holds the instrument free
from any defect of title of prior parties (sec. 57)
Holder means the payee or indorsee of a bill or note 4. Free from defenses available to prior parties among
who is in possession of it, or the bearer thereof entitled themselves (sec. 57)
to receive the sum for which it calls (Sec. 191, par 7). 5. May enforce payment of the instrument for the full
amount thereof against all parties liable thereon
Includes:
(sec.54)
1. Persons possessing bearer instruments

rights as such holder to the latter and acquires the right

DEFENSES AGAINST THE HOLDER to enforce the instrument as if he was an HIDC. The
principle applies to a "sheltered" holder who is not a
When subject to Original Defense party to any fraud or illegality impairing the validity of
the instrument.
GR: In the hands of any holder other than a holder in
due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable – both real What are the defenses against a Holder?
and personal defenses.
1. Real or Absolute Defenses – those that are attached
XPN: But a holder who derives his title through a holder to the instrument itself and are available against all
in due course, and who is not himself a party to any parties, both immediate and remote, including
fraud or illegality affecting the instrument, has all the holders in due course.
rights of such former holder in respect of all parties 2. Personal or Equitable Defenses – defenses which are
prior to the latter (Sec.58). only available against a holder not in due course.
Those which grow out of the agreement or conduct
Shelter Principle or Holder in Due Course by of a particular person which renders it inequitable
Subrogration. for him, though holding the legal title, to enforce it
against the party sought to be made liable.
Under the "shelter principle," the HIDC, by negotiating
the instrument, to a party not an HIDC, transfers all his
What are the Real or Absolute Defenses available drawer will be discharged from liability thereon to the
against the Holder? extent of the loss caused by the delay.
1. Incomplete and undelivered instrument What are the essential characteristics of checks?
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are 1. They are drawn on a bank; and
concerned 2. Payable instantly on demand.
4. Ultra–vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration What is the distinction between a check and a bill of
7. Forgery exchange?
8. Duress amounting to Forgery
9. Prescription BASIS CHECKS BOE
10. Other infirmities appearing on the face of the Drawee Always drawn on a May or may not be
instrument bank or banker drawn on a bank and
against a previous need not be drawn
11. Discharge in insolvency deposit of funds against a deposit
12. Illegal Contract Payability Always payable on Either payable on
13. Fraud in Factum or Esse Contractus demand demand or at a fixed
or determinable
future time (NIL,
What are the Personal or Equitable Defenses Sec.4)
available against the Holder? Function Ordinarily intended Intended for
for immediate circulation as
1. Innocent alteration or spoliation payment instrument of credit
Presentment Must be presented for Must be presented
2. Discharge of party Secondarily liable by discharge for Payment payment within a for payment within a
of prior party. reasonable time after reasonable time after
3. Set-off between immediate parties its issue(NIL, Sec.186) its last negotiation
4. Filling up of blanks not in accordance with the (NIL, Sec. 171)
Authority given Discharge of When a check is They remain liable
Liability accepted or certified, despite acceptance
5. Acquisition of instrument by Duress or force and the drawer & (NIL, Sec. 84)
fear; unlawful means or for an illegal consideration indorsers are
6. Discharge by payment or renunciation or release discharged from
liability thereon (NIL,
before maturity
Sec. 188)
7. Failure or absence of consideration. Effect of the Death of the drawer Death of the drawer
8. Undelivered complete instrument Death of the of a check with the of an ordinary bill
9. Insertion of a wrong date Drawer knowledge of the does not revoke the
10. Fraud in inducement or simple fraud bank revokes the authority of the
authority of the bank drawee to pay.
to pay.
Presentment Need not be Must be presented
CHECKS for Acceptance presented for for acceptance in
acceptance (NIL, Sec. certain cases (NIL,
185) Sec. 143)
What is a check?
It is a bill of exchange drawn on a bank and payable on

demand (NIL, Sec. 185). A check must be presented for
payment within a reasonable time after its issue or the

What is the effect of erasure or alteration on NOTE: Manager’s and cashier’s checks are still the
checks? subject of clearing to ensure that the same have not
been materially altered or otherwise completely
counterfeited. However, manager’s and cashier’s
Pursuant to Philippine Clearing House Corporation checks are preaccepted by the mere issuance thereof by
Memorandum Circular No. 15-460A effective the bank, which is both its drawer and drawee. Thus,
January 4, 2016, the following shall no longer be eligible while manager’s and cashier’s checks are still subject to
or acceptable for clearing: clearing, they cannot be countermanded for being
drawn against a closed account, for being drawn against
a. Any check that shows or indicates on its face insufficient funds, or for similar reasons such as a
erasure or alteration regardless of any signature or condition not appearing on the face of the check
initials that appear to indicate authorization of the (Metrobank and Trust Company vs Chiok, GR No. 172652,
alteration or erasure; or November 26, 2014).
b. Does not indicate the date, payee, amount payable
in figures, amount payable in words, or signature of
the drawer What is the meaning of the notation “Account Payee
Only” in a crossed check?
Material alteration on checks
A crossed check with the notation account payee can
When the drawee bank pays a materially altered check, only be deposited in the named payees account. It is
it violates the terms of the check, as well as its duty to gross negligence for a bank to ignore this rule solely on
charge its client’s account only for bona fide the basis of a third partys’ oral representations of
disbursements he had made. If the drawee did not pay having a good title thereto (Equitable Banking
according to the original tenor of the instrument, as Corporation v. Special Steel Products, G.R. No. 175350,
directed by the drawer, then it has no right to claim June 13, 2012, in Divina, 2014).
reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse INSURANCE LAW
to recover its loss. The collecting banks are ultimately
liable for the amount of the materially altered check CONCEPT OF INSURANCE
(Areza vs. Express Savings Bank, Inc., G.R. No. 176697,
September 10, 2014). Q: What is a Contract of Insurance?
A: It is an agreement whereby one undertakes for a

What is a crossed check? consideration to indemnify another against the loss,
damage or liability arising from an unknown or
Done by writing 2 parallel lines on the left top portion contingent event (IC, Sec. 2[a]).
of the check. The marking signifies that the bank should
pay only with the intervention of the company only. Q: May a member of the MILF or its breakaway
group, the Abu Sayyaf, be insured with a company
What is the effect of crosschecking? licensed to do business under the Insurance Code of
the Philippines? Explain.
a. That the check may not be encashed but only
deposited in the bank; A: YES. A member of the MILF or the Abu Sayyaf may be
b. That the check may be negotiated only once - to one insured with a company licensed to do business under
who has an account with a bank; the Insurance Code of the Philippines. What is
c. That the act of crossing the check serves as a prohibited to be insured is a public enemy. A public
warning to the holder that the check has been issued enemy is a citizen or national of a country with which
for definite purpose so that he must inquire if he has the Philippines is at war. Such member of the MILF or
received the check pursuant to the purpose. the Abu Sayyaf is not a citizen or national of another
Otherwise, he is not an HIDC (State Investment country, but of the Philippines.
House v. IAC, G.R. No. 72764, July 13, 1989).
Q: BD has a bank deposit of half a million pesos.
Since the limit of the insurance coverage of the PDIC

is only 1/10 of BD’s deposit, he would like some sister. The married woman or the minor herein allowed
protection for the excess by taking out an insurance to take out an insurance policy may exercise all the
against all risk or contingencies of loss arising from rights and privileges of an owner under a policy.
any unsound or unsafe banking practices including
unforeseen adverse effects of the continuing crisis All rights, title and interest in the policy of insurance
involving the banking and financial sector in the taken out by an original owner on the life or health of a
Asian region. Does BD have an insurable interest minor shall automatically vest in the minor upon the
within the meaning the Insurance Code of the death of the original owner, unless otherwise provided
Philippines? (2000 BAR) for in the policy.
A: YES. BD has insurable interest in his bank deposit. In 2. Insurable Interest

case of loss of said deposit, more particularly to the
extent of the amount in excess of the limit covered by Sec. 10. Every person has an insurable interest in the
the PDIC Act, BD will be damnified. He will suffer life and health:
pecuniary loss of P400, 000, that is, his bank deposit of (a) Of himself, of his spouse and of his children;
half a million pesos minus P100, 000 which is the (b) Of any person on whom he depends wholly or in
maximum amount recoverable from the PDIC. part for education or support, or in whom he has a
pecuniary interest;
Q: In return for the 20 years of faithful service of X (c) Of any person under a legal obligation to him for the
as a house helper to Y, the latter promised to pay payment of money, or respecting property or services,
P100, 000 to X’s heirs if he (X) dies in an accident by of which death or illness might delay or prevent the
fire. X agreed. Is this an insurance contract? (2011 performance; and
BAR) (d) Of any person upon whose life any estate or interest
vested in him depends.
a. Yes, since all the elements of an insurance
contract are present. An insurable interest is that interest which a person is
b. Yes, since X’s services may be regarded as the deemed to have in the subject matter insured, where he
consideration. has a relation or connection with or concern in it, such
c. No, since Y actually made a conditional donation that the person will derive pecuniary benefit or
in X’s favor. advantage from the preservation of the subject matter
d. No, since it is in fact an innominate contract insured and will suffer pecuniary loss or damage from
between X and Y. its destruction, termination, or injury by the happening
of the event insured against.
A: b) No, since Y actually made a conditional donation
in X’s favor. 1. Pecuniary nature—In general, a person is deemed
to have an insurable interest in the subject matter
1. What may be insured insured where he has a relation or connection with or
concern in it that he will derive pecuniary benefit or
Sec. 3. Any contingent or unknown event, whether past advantage from its preservation and will suffer
or future, which may damnify a person having an pecuniary loss or damage from its destruction,
insurable interest, or create a liability against him, may termination, or injury by the happening of the event
be insured against, subject to the provisions of this insured against.
chapter.
a. Benefit from its existence and prejudice from its
The consent of the husband is not necessary for the destruction
validity of an insurance policy taken out by a married
woman on her life or that of her children. b. The price is generally the measure, but the interest in
a thing, every benefit or advantage arising out of or
Any minor of the age of eighteen years or more, may, depending on such thing may be considered
notwithstanding such minority, contract for life, health
and accident insurance, with any insurance company 2. Exception—The term has a somewhat broader
duly authorized to do business in the Philippines, meaning in connection with life insurance. To have an
provided the insurance is taken on his own life and the insurable interest in the life of a person, the expectation
beneficiary appointed is the minor's estate or the of benefit from the continued life of that person need
minor's father, mother, husband, wife, child, brother or not necessarily be of a pecuniary nature.

NOTE: The existence of insurable interest is a matter of 1. The person insured is

public policy and is not susceptible to the principle of the same;
estoppel. The existence of an insurable interest gives a 2. Two or more insurers
person the legal right to insure the subject matter of the insuring separately;
policy of insurance (Violeta R. Lalican vs. The Insular 3. The subject matter is
Life Assurance Co. Ltd., G.R. No. 183526, August 25, the same;
2009). 4. The interest insured is
also the same; and
5. The risk or peril
3. Double Insurance and overinsurance insured against is
likewise the same.
DOUBLE INSURANCE OVER INSURANCE
Double insurance exists There is overinsurance There may be no over When the amount of the
where the same person whenever the insured insurance as when the insurance is beyond the
is insured by several obtains a policy in an sum total of the amounts value of the insured’s
insurers separately, in amount exceeding the of the policies issued insurable interest.
respect to the same value of his insurable does not exceed the
subject and interest interest. insurable interest of the
(Sec. 95, ibid). It is not insured.
contrary to law and The insurer may insert an There are two or more There may be only one
hence, in case of double “other insurance clause” insurers insuring the insurer, with whom the
insurance, the insurers which will prohibit same subject matter. insured takes insurance
may still be made liable double insurance. beyond the value of his
up to the extent of the insurable interest
value of the thing The rationale is to
insured but not to prevent the danger that Q: Terrazas de Pation Verde, a condominium
exceed the amount of the insured will over building, has a value of P50 M. The owner insured
the policies issued. insure his property and the building against fire with 3 insurance
thus avert the possibility companies for the following amounts:
In double insurance, the of perpetration of fraud Northern Insurance Corp.—P20
insurers are considered (ibid). It is lawful and M Southern Insurance Corp.—P30
as coinsurers. Each one specifically allowed M Eastern Insurance Corp.—P50 M
is bound to contribute under Sec. 75 of the
ratably to the loss in Insurance Code which a. Is the owner’s taking of insurance for the building
proportion to the provides that “a policy with 3 insurers valid? Discuss.
amount for which he is may declare that a b. The building was totally razed by fire. If the
liable under his violation or a specified owner decides to claim from Eastern Insurance
contract. This is known provision thereof shall Corp. only P50M, will the claim prosper? Explain.
as the “principle of avoid it, otherwise the (BAR 2008)
contribution” or breach of an immaterial
“contribution clause” provision does not avoid A:
Requisites of double it.” a. The taking of insurance from the 3 insurers is valid.
insurance 1. The person It is a case of “double insurance”. The Insurance Code
insured is the same; 2. provides that a double insurance exist where the same
Two or more insurers person is insured by several insurers separately in
insuring separately; 3. respect to the same subject and interest. Double
The subject matter is the insurance is valid. What is prohibited is for the insured
same; 4. The interest to recover more than his interest or value of the
insured is also the same; property pursuant to the “principle of indemnity”.
and 5. The risk or peril
insured against is b. YES, the owner may legally claim the entire P50 M
likewise the same. from Eastern Insurance, Corp. The Insurance Code
provides that where the insured is overinsured by
Requisites of double double insurance, the insured, unless the policy
insurance otherwise provides, may claim payment from the

insurers in such order as he may select, up to the

amount for which the insurers are severally liable 5. No fault, suicide, and incontestability clauses
under their respective contracts. Each insurer is bound,
as between himself and the other insurers, to COMPULSORY MOTOR VEHICLE LIABILITY
contribute ratably to the loss in proportion to the INSURANCE
amount for which he is liable under his contract.
No fault indemnity clause (1994 BAR)
4. Reinsurance and Co-insurance It is a clause where the insurer is required to pay a third
party injured or killed in an accident without the
CO-INSURANCE REINSURANCE necessity of proving fault or negligence on the part of
A plan of indemnity It is a contract through the insured. There is a stipulated maximum amount to
insurance under which which the insurer be recovered.
the reinsurer assumes procures a third person
the obligation on the to insure him against Rules under the “no fault indemnity clause”
amount reinsured, in the loss or liability by reason
same fashion as the of such original 1. The total indemnity in respect of any one person shall
insurer is obligated to insurance. In every not exceed P15, 000 for all motor vehicles (Ins. Memo.
the insured (excluding reinsurance, the original Circ. No. 4-2006).
policy loans). For this contract of insurance
risk, the insurer the and the contract of 2. Proof of loss: a. Police report of accident b. Death
insurer usually pays to reinsurance are separate certificate and evidence sufficient to establish proper
the reinsurer the gross and distinct from each payee c. Medical report and evidence of medical or
premium (less other and covered by hospital disbursement (IC, Sec. 391 [3]).
commissions and separate policies (Diaz,
expense, allowances) it et. al. 2014) 3. Claim may be made against one motor vehicle only
has collected from the (Sec. 391 [c], ibid).
insured on the amount
insured (it should be 4. In case injury of an occupant of a vehicle, the claim
noted that the insurer shall lie against the insurer of the vehicle in which the
has no relationship with occupant is riding, mounting or dismounting from
the insured or (ibid).
beneficiary).
The insurer remains as The insurer becomes the 5. In any other case (not an occupant), claim shall lie
the insurer of the insured, insofar as the against the insurer of the directly offending vehicle
original insured reinsurer is concerned
The subject of insurance The subject is the 6. In all cases, the right of the party paying the claim to
is the property original insurer’s risk recover against the owner of the vehicle responsible for
An insurance of the same nsurance of a different the accident shall be maintained
interest interest
The insured party is the The original insured has Authorized driver clause
party in interest in all no interest in the
contracts contract of reinsurance It indemnifies the insured owner against loss or
which is independent of damage to the car but limits the use of the insured
the original contract of vehicle to:
insurance
The insured has to give Consent of the original 1. The insured himself; or
consent insured (who is hardly
even aware of the The insured need not prove that he has a driver’s
reinsurance transaction) license at the time of the accident if he was the driver
is not necessary (De (Sundiang Sr. & Aquino, 2014).
Leon, 2014).
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in accordance

constitutes theft under the insurance policy that is

with the law, and is not disqualified (Villacorta v. compensable (Paramount Insurance v. Spouses
Insurance Commissioner, G.R. No. 54171, October 28, Remonduelaz, G.R. No. 173773, November 8, 2012).
1980). Incontestability
The main purpose of this clause is to require a person Incontestability Clause

other than the insured, who drives the car on the
insured’s order or with his permission, to be duly Q: What is incontestability?
licensed drivers and have no disqualification to drive a A: It means that after the requisites are shown to exist,
motor vehicle. the insurer shall be estopped from contesting the policy
or setting up any defense, except as is allowed, on the
Theft clause ground of public policy.
There is theft if the vehicle is taken with intent to gain Incontestable clauses create a kind of contractual
without the consent of the insured-owner. Thus, there statute of limitations on certain defenses that may be
is theft even if: raised by the insurer. Q: What are the requisites for
incontestability?
1. The vehicle is returned;
A:
2. The vehicle was stolen by the driver of the insured 1. The policy is a life insurance policy
(Alpha Insurance and Surety Company v. Castor, G.R. 2. It is payable on the death of the insured
198174, September 2, 2013); (2014 BAR) 3. It has been in force during the lifetime of the insured
for at least 2 years from its date of issue or of its last
3. The vehicle was taken to the owner of a repair shop reinstatement.
for the purpose of repair and in order to attach
accessories (Paramount Insurance v. Spouses B. Perfection of the Insurance Contract
Remondeulaz, G.R. No. 173773, November 28, 2012)
The contract of insurance is perfected when the assent
Q: On May 26, 2014, Jess insured with Jack or consent is manifested by the meeting of the offer and
Insurance (Jack) his 2014 Toyota Corolla sedan the acceptance upon the thing and the cause which are
under a comprehensive motor vehicle insurance to constitute the contract. Mere offer or proposal is not
policy for one year. On July 1, 2014, Jess’ car was contemplated (De Lim v. Sun Life Assurance Co., G.R.
unlawfully taken. Hence, he immediately reported No. L-15774, November 29, 1920). Cognition Theory:
the theft to the traffic Management Command acceptance made by letter shall not bind the person
(TMC) of the Philippine National Police (PNP), making the offer except from the time it came to his
which made Jess accomplish a complaint sheet as knowledge.
part of its procedure. In the complaint sheet, Jess
alleged that a certain Ric Silat (Silat) took Delivery of Policy
possession of the subject vehicle to add accessories
and improvements thereon. However, Silat failed to Q: On September 25, 2013, Danny Marcial (Danny)
return the subject vehicle within the agreed three- procured an insurance on his life with a face value
day period. As a result, Jess notified Jack of his claim of P5 M from RN Insurance Company (RN), with his
for reimbursement of the value of the lost vehicle wife Tina Marcial (Tina) as sole beneficiary. On the
under the insurance policy. Jack refused to pay same day, Danny issued an undated check to RN for
claiming that there is no theft as Jess gave Silat the full amount of the premium. On October 1, 2013,
lawful possession of the car. Is Jack correct? (2014 RN issued the policy covering Danny’s life
Bar) insurance. On October 5, 2013, Danny met a tragic
accident and died. Tina claimed the insurance
A: NO, Jack Insurance is not correct. Ric Silat was benefit, but RN was quick to deny the claim because
merely given physical possession of the car. He did not at the time of Danny’s death, the check was not yet
have juridical possession over the same. It is also encashed and therefore the premium remained
apparent that the taking by Silat of the car of Jess is unpaid. Is RN correct? Will your answer be the same
without the consent or authority of the latter. Thus, the if the check is dated October 15, 2013? (2014 BAR)
act of Silat in depriving Jess of his car, soon after the
transfer of physical possession of the same to him,

A: NO. RN is not correct. After the issuance of the check 1. In case of life or industrial life policy whenever the
by Danny for the full amount of the premium, the grace period provision applies, or whenever under the
unconditional delivery of an insurance policy of RN to broker and agency agreements with duly licensed
Danny corresponding to the terms of the application intermediaries, a ninety (90)-day credit extension is
ordinarily consummates the contract, and the policy as given. No credit extension to a duly licensed
delivered becomes the final contract between the intermediary should exceed ninety (90) days from date
parties. Where the parties, so intend, the insurance of issuance of the policy (IC, Sec. 77).
becomes effective at the time of the delivery of the
policy notwithstanding the fact that the check was not 2. When there is acknowledgment in a policy of a
yet encashed. My answer will still be the same even if receipt of premium, which the law declares to be
the check is dated October 15, 2013 since an conclusive evidence of payment, even if there is
acknowledgment in a policy of the receipt of premium stipulation therein that it shall not be binding until the
is conclusive evidence of its payment for the purpose of premium is actually paid. This is without prejudice
making the policy binding. however to right of insurer to collect corresponding
premium (Sec. 77, ibid).
Transfer of Policy
Section 77 of the Insurance Code in effect allows waiver
Q: The policy of insurance upon his life, with a face by the insurer of the condition prepayment by making
value of P100, 000, was assigned by Jose, a married an acknowledgment in the insurance policy of receipt
man with 2 legitimate children, to his nephew Y, as of premium as conclusive evidence of payment so far as
security for a loan of P50, 000. He did not give the to make the policy binding despite the fact that
insurer any written notice of such assignment premium is actually unpaid. (Makati Tuscany
despite the explicit provision to that effect in the Condominium Corp. vs. Court of Appeals G.R. No.
policy. Jose died. Upon the claim on the policy by the 95546, November 6, 1992)
assignee, the insurer refused to pay on the ground
that it was not notified of the assignment. Upon the 3. When there is an agreement allowing the insured to
other hand, the heirs of Jose contended that Y is not pay the premium in installments and partial payment
entitled to any amount under the policy because the has been made at the time of loss (Makati Tuscany
assignment without due notice to the insurer was Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992)
void. Resolve the issues. (1991 BAR)
4. When there is an agreement to grant the insured
A: A life insurance is assignable. A provision, however, credit extension for the payment of the premium. (Art.
in the policy stating that written notice of such an 1306, NCC), and loss occurs before the expiration of the
assignment should be given to the insurer is valid. The credit term (UCPB General Insurance v. Masagana
failure of the notice of assignment would thus preclude Telemart, G.R. No. 137172, Apr. 4, 20012006, 2007
the assignee from claiming rights under the policy. The Bar).
failure of notice did not, however, avoid the policy;
hence, upon the death of Jose, the proceeds would, in 5. When estoppel bars the insurer to invoke
the absence of a designated beneficiary, go to the estate nonrecovery on the policy.
of the insured. The estate, in turn, would be liable for
the loan of P50, 000 owing in favor of Y. 6. When the public interest so requires, as determined
by the Insurance Commissioner
PREMIUM PAYMENT
Non-payment of premium
“Cash and carry” rule
Non-payment of the first premium prevents the
GR: No policy or contract of insurance issued by an contract from becoming binding notwithstanding the
insurance company is valid and binding unless and acceptance of the application or the issuance of the
until the premium thereof has been paid. Any policy, unless waived. But nonpayment of the balance
agreement to the contrary is void. of the premium due does not produce the cancellation
of the contract.
XPN: A policy is valid and binding even when there is
non-payment of premium: With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless, by
express stipulation, it is provided that the policy shall

in that event be suspended or shall lapse (De Leon, 3. Discovery of misrepresentation fraud or material
2010).
4. Discovery omissions against of willful increasing or
Payment by post-dated check the reckless hazard acts or insured
A postdated check bearing a date prior to the loss, 5. Physical changes in the property insured which
assuming availability of the funds thereof, would be result in the property becoming uninsurable
sufficient even if it remains unencashed at the time of
the loss, constitutes valid payment of premium. The 6. Discovery of other insurance coverage that makes the
subsequent effects of encashment would retroact to the total insurance in excess of the value of the property
date of the instrument and its acceptance by the insured
creditor. (2007 BAR)
7. A determination by the Commissioner that the
The payment of a promissory note or postdated check continuation of the policy would violate or would place
at a stated maturity subsequent to the loss, is the insurer in violation of the Insurance Code (IC, Sec.
insufficient to put the insurance into effect. (Vitug, 64)
Commercial Laws and Jurisprudence, 2006, Vol. I, p.
250) No policy of insurance other than life shall be canceled
by the insurer except upon prior notice thereof to the
Rights and Obligations of parties insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective
1. Insurer - party who assumes or accepts the risk of date of the policy, of one or more of the
loss and undertakes for a consideration to indemnify abovementioned instances (Sec. 64, Ibid).
the insured on the happening of a specified contingency
or event. The term “insurer” no longer includes Notice of cancellation of the contract
“individuals” under RA 10607
All notices of cancellation shall be in writing,
2. Insured - person in whose favor the contract is mailed or delivered to the named insured at the address
operative and is indemnified. shown in the policy, or to his broker provided the
NOTE: The insured is not always the person to whom broker is authorized in writing by the policy owner to
the proceeds are paid. receive the notice of cancellation on his behalf, and shall
state:
3. Assured/Beneficiary- a person designated by the
terms of the policy to receive the proceeds of the 1. Which of the grounds set forth in Section 64
insurance. He may be the insured or a third party in the is relied upon; and
contract for whose benefit the policy is issued and to
whom the loss is payable. 2. That, upon written request of the named
insured, the insurer will furnish the facts on which the
Rescission of insurance contracts cancellation is based (IC, Sec. 65).
Instances wherein a contract of insurance may be 1. Concealment

rescinded (1991, 1994, 1996 - 1998 Bar)
Concealment is a neglect to communicate that which a
1. Concealment party knows and ought to communicate (IC, Sec. 26).
2. Misrepresentation/ omission
3. Breach of warranties Under Section 27 of the Insurance Code, “a
concealment entitles the injured party to rescind a
Instances wherein a contract of insurance may be contract of insurance.” Moreover, under Section 168 of
canceled by the insurer the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or
1. Nonpayment of premium condition of the thing insured (Malayan Insurance
Company vs. PAP Co., G.R. No. 200784, August 7, 2013,
2. Conviction of a crime arising out of acts increasing in Divina 2014).
the hazard insured against.
Requisites:

NOTE: In the absence of evidence that the insured has

1. A party knows a fact which he neglects to sufficient medical knowledge to enable him to
communicate or disclose to the other party distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was “associated
2. Such party concealing is duty bound to disclose such with ulcer of the stomach” should be considered an
fact to the other; expression in good faith. Fraudulent intent of insured
must be established to entitle insurer to rescind the
3. Such party concealing makes no warranty as to the insurance contract. Misrepresentation, as a defense of
fact concealed; insurer, is an affirmative defense which must be proved
(Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No.
4. The other party has no means of ascertaining the fact L30685, May 30, 1983).
concealed; and
Requisites of misrepresentation
5. The fact must be material.
1. The insured stated a fact which is untrue;
Q: X insured his life for P20 million. X, plays golf and
regularly exercises everyday, hence is considered 2. Such fact was stated with knowledge that it is untrue
in good health. He did not know, however, that his and with intent to deceive or which he states positively
frequent headache is really caused by his being as true without knowing it to be true and which has a
hypertensive. In his application form for a life tendency to mislead; and
insurance for himself, he did not put a check to the
question if he is suffering from hypertension, 3. Such fact in either case is material to the risk. A
believing that because of his active lifestyle, being representation cannot qualify an express provision in a
hypertensive is a remote possibility. While playing contract of insurance but it may qualify an implied
golf one day, X collapsed at the fairway and was warranty (IC, Sec. 40).
declared dead on arrival at the hospital. His death
certificate stated that X suffered a massive heart 3. Breach of warranties
attack. (2016, BAR) (a) Will the beneficiary of X be
entitled to the proceeds of the life insurance under Warranties (1993 Bar)
the circumstances, despite the non-disclosure that
he is hypertensive at the time of application? (b) If Statements or promises by the insured set forth in the
X died in an accident instead of a heart attack, policy itself or incorporated in it by proper reference,
would the fact of X's failure to disclose that he is the untruth or non-fulfillment of which in any respect,
hypertensive be considered as material and without reference to whether the insurer was in
information? fact prejudiced by such untruth or non-fulfillment
render the policy voidable by the insurer.
A: (a) No, the beneficiary of X is not entitled to the
proceeds of the life insurance. The hypertension of X is Purpose of warranties
a material fact that should have been disclosed to the
insurer. The concealment of such material fact entitles To eliminate potentially increasing moral or physical
the insurer to rescind the insurance policy. (b) It is still hazards which may either be due to the acts of the
a material information. It is settled that the insured insured or to the change of the condition of the
cannot recover even though the material fact not property.
disclosed is not the cause of the loss
Basis of warranties
2. Misrepresentation or omissions
The insurer took into consideration the condition of the
It occurs when the facts fail to correspond with its property at the time of effectivity of the policy.
assertions or stipulations. Misrepresentation is an
affirmative defense. To avoid liability, the insurer has Kinds of warranties (APIE)
the duty to establish such a defense by satisfactory and
convincing evidence (IC, Sec. 44; Ng Gan Zee v. Asian 1. Affirmative warranty – one which relates to matters
Crusader Life Assn. Corp., G.R. No. L- 30685, May 30, which exist at or before the issuance of the policy.
1983).

2. Promissory warranty – one in which the insured out at the Pace Factory which totally burned the
undertakes that something shall be done or omitted insured properties.
after the policy takes effect and during its continuance.
The policy forbade the removal of the insured
3. Express warranty – a statement in a policy, of a properties unless sanctioned by Ilocano. Condition
matter relating to the person or thing insured, or to t he 9 (c) of the policy provides that “the insurance
risk, as a fact. ceases to attach as regards the property affected
unless the insured, before the occurrence of any
4. Implied warranty – an agreement or stipulation not loss or damage, obtains the sanction of the company
expressed in the policy but the existence of which is signified by endorsement upon the policy… (c) if the
admitted or presumed from the fact that the contract of property insured is removed to any building or
insurance has been executed. place other than in which is herein stated to be
insured.” PAM claims that it has substantially
Effects of breach of warranty complied with notifying Ilocano through its sister
company, the RBC which in fact, referred PAM to
1. Material Ilocano for the insurance coverage. Is Ilocano liable
under the policy? (2014 Bar)
GR: Violation of material warranty or of material
provision of a policy will entitle the other party to A: NO. Ilocano Insurance is not liable under the policy.
rescind the contract. By the clear and express condition in the renewal
policy, the removal of the insured property to any
XPN: (with regard to “promissory” warranties) a. Loss building or place required the consent of Ilocano. Any
occurs before the time of performance of the warranty; transfer effected by PAM, Inc. without Ilocano’s consent
b. The performance becomes unlawful at the place of would free the latter from any liability (Malayan
the contract; or c. Performance becomes impossible (IC, Insurance Company, Inc v. PAPCO, Ltd., G.R. No.
Sec.73). 200784, August 7, 2013).
2. Immaterial E. Loss
GR: It will not avoid the policy. Loss in insurance
XPN: When the policy expressly provides, or declares The injury, damage or liability sustained by the insured
that a violation thereof will avoid it. in consequence of the happening of one or more of the
perils against which the insurer, in consideration of the
For instance, an “Other Insurance Clause” which is a premium, has undertaken to indemnify the insured. It
condition in the policy requiring the insured to inform may be total, partial, or constructive, in case of marine
the insurer of any other insurance coverage of the insurance.
property. A violation of the clause by the insured will
not constitute a breach unless there is an additional Notice of loss
provision stating that the violation thereof will avoid
the policy (IC, Sec. 75). It is the more or less formal notice given to the
insurer by the insured or claimant under a policy, of the
Q: On May 13, 1996 PAM Inc. obtained a P15 million occurrence of the loss insured against.
fire insurance policy from Ilocano Insurance
covering its machineries and equipment effective Purposes of notice of loss (IFC)
for one year or until May 14, 1997. The policy
expressly stated that the insured properties were 1. To give insurer Information by which he may
located at “Sanyo Precision Phils. Building Phase III determine the extent of his liability
Lots 4 and 6 Block 15 PEZA, Rosario, Cavite.” Before
its expiration, the policy was renewed on “as is” 2. To afford the insurer a means of detecting any Fraud
basis for another year or until May 13 1998. The that may have been practiced upon him
subject properties were later transferred to Pace
Factory also in PEZA. On October 12, 1997 during 3. To operate as a Check upon extravagant claims
the effectivity of the renewed policy, a fire broke

Instances when the defects in the notice or proof of - Must be a Person, corporation, firm or
loss are considered waived (MaJoRDeW) association
- Engaged in the Business of carrying or
When the insurer: transporting passengers or goods or both;
- The carriage or transport must either be by
1. Writes to the insured that he considers the policy null Land, water or air;
and void as the furnishing of notice or proof of loss - The service is for a Fee;
would be useless; - The service is offered to the Public (Art. 1732,
NCC).
2. Recognizes his liability to pay the claim;
Q: AM Trucking, a small company, operates two
3. Denies all liability under the policy trucks for hire on a selective basis. It caters only to
a few customers, and its trucks do not make regular
4. Joins in the proceedings for determining the amount or scheduled trips. It does not have a certificate of
of the loss by arbitration, making no objections on public convenience. On one occasion, Reynaldo
account preliminary proof; or of notice and contracted AM to transport, for a fee, 100 sacks of
rice from Manila to Tarlac. However, AM failed to
5. Makes Objection on any ground other than the formal deliver the cargo because its truck was hijacked
defect in the preliminary proof. when the driver stopped in Bulacan to visit his
girlfriend. May Reynaldo hold AM liable as a
Instances when delay in the presentation of notice common carrier?
or proof of loss deemed waived If caused by:
A: YES. The fact that AM Trucking operates only two
1. Any act of the insurer; or trucks for hire on a selective basis, caters only to a few
customers, does not make regular or scheduled trips,
2. By failure to take objection promptly and specifically and does not have a certificate of public convenience
upon that ground (IC, Sec. 93). are of no moment. The law does not distinguish
between one whose principal business activity is the
Proof of loss carrying of persons or goods or both and anyone who
does such carrying only as an ancillary activity;
It is the more or less formal evidence given the between a person or enterprise offering transportation
company by the insured or claimant under a policy of service on a regular or scheduled basis and one on an
the occurrence of the loss, the particulars thereof and occasional, episodic or unscheduled basis; and between
the data necessary to enable the company to determine a carrier offering its services to the general public and
its liability and the amount thereof. one who offers services or solicits business only
from a narrow segment of the general population
(Pedro de Guzman v. CA, G.R. No. L-47822 December
27, 1988)
TRANSPORTATION LAW
Q: Spouses Dante and Leona Cruz lodged a
Complaint against Sun Holidays, Inc. with the RTC
for damages arising from the death of their son who
Define common carrier. perished with his wife while on board the boat M/B
Coco Beach III that capsized en route to Batangas
A common carrier is a person engaged in the business from Puerto Galera, Oriental Mindoro where the
of carrying or transporting passengers or goods or couple had stayed at Coco Beach Island Resort
both, by land, water, or air, for compensation, offering owned by Sun Holidays.
services to the public. (Art. 1732 of the NCC)
Spouses contended that as a common carrier, it was
Enumerate the requisites for an entity to be guilty of negligence in allowing M/B Coco Beach to
classified as a common carrier (1996, 1997, 2000, sail notwithstanding storm warning bulletins
2002 BAR) issued by PAGASA. Sun Holidays denied being a
(PBL-FP) common carrier, alleging that its boats are not
available to the general public as they only ferry

resort guests and crew members. Is Sun Holidays care consistent with that which an ordinarily prudent
liable as a common carrier? person would have observed when confronted with a
similar situation. (Crisostomo v CA, supra)
A: YES. Sun Holiday’s ferry services are so intertwined
with its main business as to be properly considered OBLIGATIONS AND LIABILITIES
ancillary thereto. The constancy of respondent’s ferry
services in its resort operations is underscored by its What are the duties of a common carrier?
having its own Coco Beach boats. And the tour packages
it offers, which include the ferry services, may be A common carrier is bound to carry the passengers
availed of by anyone who can afford to pay the same. safely as far as human care and foresight can provide,
These services are thus available to the public (Spouses using the utmost diligence of a very cautious persons,
Dante Cruz v. Sun Holidays, G.R. No. 18312, June 29, with a due regard for all the circumstance (NCC, Art.
2010). 1755).
What is a private carrier? Once a passenger in the course of travel is injured, or

does not reach his destination safely, the carrier and
A private carrier is one who, without making the driver are presumed to be at fault. (Bacarro v. Castano,
activity a vocation, or without holding himself or itself 118 SCRA 187)
out to the public as ready to act for all who may desire
his or its services, undertakes, by special agreement in It is the duty of common carriers of passengers,
a particular instance only, to transport goods or including common carriers by railroad train, streetcar,
persons from one place to another either gratuitously or motorbus, to stop their conveyances a reasonable
or for hire (Spouses Pereña v. Spouses Zarate, G.R. No. length of time in order to afford passengers an
157917, August 29, 2012). opportunity to board and enter, and they are liable for
injuries suffered by boarding passengers resulting from
the sudden starting up or jerking of their conveyances
Common Carrier v. Private Carrier. (2002 Bar) while they are doing so. (Dangwa vs. CA, G.R. No. 95582,
October 7, 1991).
The substantial distinctions of a Common Carrier and a
Private carrier are the following: All persons who remain on the premises a reasonable
time after leaving the conveyance are to be deemed
As to nature, a common carrier holds himself out to the passengers, and what is a reasonable time or a
public as engaged in the business of transporting reasonable delay within this rule is to be determined
persons or property form place to place, for from all the circumstances, and includes a reasonable
compensation, offering his services to the public. While time to see after his baggage and prepare for his
a private carrier is undertaken by special agreement departure (La Mallorca v. CA, G.R. No. L-21486, May 14,
and carrier does not hold himself out to carry goods for 1966).
the general public.
As to the degree of care required, a common carrier Carrier-passenger relationship continues until the
is required to exercise extraordinary diligence while a passenger has been landed at the port of destination
private carrier is required diligence of a good father of and has left the vessel-owner’s premises. The victim’s
a family. presence in a vessel after 1 hour from his
disembarkation is not enough in order to absolve the
The SC held that the true test of a common carrier is the carrier from liability in his death. (Aboitiz Shipping
carriage of goods or passengers provided it has space Corporation v. CA, GR No. 84458, November 6, 1989).
for all who opt to avail themselves of its transportation
for a fee (National Steel Corp. vs. CA 1997) The failure of the common carrier to maintain in
seaworthy condition its vessel involved in the contract
DILIGENCE REQUIRED of carriage is a clear breach of its duty prescriber in
Article 1755 of the Civil Code.
A common carrier is required to exercise extraordinary
diligence which is defined as the rendition of service What are the liabilities of the common carrier?
with the greatest skill and utmost foresight. While a
private carrier is required to exercise the diligence of a In case of death of or injuries to passengers, common
good father of a family which connotes a reasonable carriers are presumed to have been at fault or to have

negligently, unless they proved that they observed Causes falling outside the foregoing list even if they
extraordinary diligence as prescribed in Articles 1733 appear to constitute specie of force majeure, fall within
and 1755 (NCC, Art. 1756). the scope of 1735. In other words, if the goods are lost,
destroyed, or deteriorated other than those mentioned
The liability of the common carriers does NOT cease in Article 1734, the common carrier must present clear
upon proof that they exercised all the diligence of a and convincing evidence that they are not negligent. (p.
good father of a family in the selection and supervision 36, Transportation Laws, Judge Noli Diaz)
of their employees (NCC, Art. 1759).
The extraordinary responsibility of the common carrier
lasts from the time the goods are unconditionally
Acts of employees - Common carriers are liable for the placed in the possession of, and received by the carrier
death of or injuries to passengers through the for transportation until the same are delivered, actually
NEGLIGENCE OR WILLFUL ACTS of the former’s or constructively, by the carrier to the consignee, or to
employees, although such employees may have acted the person who has a right to receive them. (NCC, Art.
beyond the scope of their authority or in violation of the 1736)
orders of the common carriers.
In order that the common carrier may be exempted
Acts of co-passengers or strangers – A common from responsibility, the natural disaster must have
carrier is responsible for injuries suffered by a been the proximate and only cause of the loss. However,
passenger on account of the WILLFUL ACTS OR the common carrier must exercise due diligence to
NEGLIGENCE of other passengers or of strangers, if the prevent or minimize loss before, during and after the
carrier’s employees through the exercise of the occurrence of flood, storm or other natural disaster in
diligence of a good father of a family would have order that the common carrier may be exempted from
prevented or stopped the act or omission (NCC, Art. liability for the loss, destruction, or deterioration of the
1763). goods. The same duty is incumbent upon the common
carrier in case of an act of the public enemy. (NCC, Art.
Acts of criminals – A common carrier is NOT absolved 1739)
from liability committed by thieves or robbers.
XPN: Where such thieves or robbers acted with grave SAFETY OF PASSENGERS
or irresistible threat, violence, or force.
The passenger must observe the diligence of a good
Note: Hijacking is not considered as force majeure father of a family or ordinary diligence to avoid
where only one of the two hijackers was armed with a injury to himself (NCC, Art. 1761). This means that if the
bladed weapon. The hijackers did not act with grave or proximate cause of the passenger’s injury is his
irresistible threat, violence, or force. negligence, the common carrier is not liable.
Passengers must take such risks incident to the mode of

VIGILANCE OVER GOODS travel. Carriers are NOT insurers of any and all risks to
passengers and goods. It merely undertakes to perform
Common carriers are responsible for the loss, certain duties to the public as the law imposes, and
destruction, or deterioration of the goods, unless the holds itself liable for any breach thereof (Pilapil v. CA,
same is due to any of the following causes only: G.R. No. 52159, Dec. 22, 1989).
(1) Flood, storm, earthquake, lightning, or other natural
disaster or calamity;
(2) Act of the public enemy in war, whether DEFENSES OF A COMMON CARRIER IN THE
international or civil; CARRIAGE OF PASSENGERS
(3) Act or omission of the shipper or owner of the
goods; - Exercise of extraordinary diligence. (Art. 1756)
(4) The character of the goods or defects in the packing - Caso Fortuito/ Force Majeure
or in the containers;
(5) Order or act of competent public authority. (NCC,
Art. 1734) DEFENSES OF A COMMON CARRIER IN THE
CARRIAGE OF GOODS

1. CASO FORTUITO/FORCE MAJEURE GR: The common carrier is presumed to have been at
Requisites: fault or to have acted negligently when the goods
- Must be the proximate and only cause of the transported are lost, destroyed, or deteriorated, unless
loss they prove that they observed extraordinary diligence.
- Exercise of due diligence to prevent or (Art. 1735, NCC).
minimize the loss before, during or after the occurrence
of the disaster (NCC Art. 1739) It is the duty of a common carrier to overcome the
- Carrier has not negligently incurred in delay presumption of negligence (Philippine National
in transporting the goods (NCC Art. 1740) Railways v Court of Appeals, 139 SCRA 187) and it mus
be shown that the carrier had observed the required
Fire is not considered a natural disaster or calamity as extraordinary diligence of a very cautious person as far
it arises almost invariably from some act of man. as human care and foresight can provide or that the
(Eastern Shipping Lines Inc. vs. IAC) accident was caused by a fortuitous event. (Estrada v
Consolacion, 71 SCRA 523)
Mechanical defects are not force majeure if the same
was discoverable by regular and adequate inspections. DILIGENCE OF SELECTION AND SUPERVISION OF
(Notes and Cases on the Law on Transportation and EMPLOYEES
Public Utilities, Aquino, T. & Hernando, R.P. 2004 ed.
p.120-122) The liability of the common carriers does not cease
upon proof that they exercised all the diligence of a
good father of a family in the selection and supervision
2. NEGLIGENCE OF THE SHIPPER OR of their employees.
OWNER
Common carriers are liable for the death of or injuries
Requisites: to passengers through the NEGLIGENCE OR WILLFUL
- Sole and proximate cause: absolute defense ACTS of the former’s employees, although such
- Contributory: partial defense. (NCC, Art. 1741) employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carriers.
3. CHARACTER OF THE GOODS OR
DEFECTS IN THE PACKING OR IN THE CONTAINER Diligence in the selection and supervision of employees
under Article 2180 of the Civil Code cannot be
Even if the damage should be caused by the interposed as a defense by the common carrier because
defect/character of the goods or common carrier must the liability of the carriers arises from the breach of the
exercise due diligence to forestall or lessen the loss. contract of carriage. The defense under said articles are
applicable to negligence in quasi- delicts under Art.
The carrier which knowing the fact of Improper 2176. (Del Prado v. Manila Electric Co., 52 Phil 900)
packing of the goods upon ordinary observation,
still accepts the goods notwithstanding such FORTUITOUS EVENTS
condition is not relieved of liability or loss or injury 1. Fortuitous events are
resulting therefrom. (Southern Lines, Inc. v. CA, 4 SCRA - Flood
258) - Storm
- Earthquake
4. ORDER OR ACT OF PUBLIC AUTHORITY - lightning, or
- other natural disaster or calamity
Said public authority must have the power to issue the Provided, the following conditions are present:
order (Art. 1743). It is incumbent upon the common a. Natural disaster was the proximate and only
carrier to prove that the public authority had the power cause;
to issue the order. Consequently, where the officer acts b. Carrier exercised due diligence to prevent or
without legal process, the common carrier will be minimize loss before, during, and after the occurrence
held liable. (Ganzon v. CA 161 SCRA 646) of the natural disaster; and
c. The common carrier has not negligently
incurred delay in transporting the goods (Art. 1739-
PROOF OF NEGLIGENCE 1740, NCC).

Force majeure generally applies to a natural accident, Explain the doctrine of discovered peril (last clear
such as that caused by a lightning, earthquake, a chance). (Bar Question 2007)
tempest or public enemy. Jurisprudence states that the
five (5) list of causes that will absolve the common The doctrine of last clear chance states that where the
carrier from liability is a closed list. plaintiff was guilty of prior or antecedent negligence,
but the defendant, who had the ultimate opportunity to
CONTRIBUTORY NEGLIGENCE avoid the impending harm failed to do so, it is the
defendant who is liable for all the consequences of the
What is contributory negligence? accident notwithstanding the prior negligence of the
plaintiff. An example is where a person was riding a
Contributory Negligence is conduct on the part of the pony on a bridge and improperly pulled the pony to the
injured party, contributing as a legal cause to the harm wrong side when he saw a car coming. The driver of the
he has suffered, which falls between the standard to car did not stop or change direction, and nearly hit the
which he is required to conform for his own protection. horse, and, the frightened animal jumped to its death.
(Valenzuela v. CA, 253 SCRA 303, citing Prosser and The driver of the car is guilty of negligence because he
Keaton on Torts) had a fair opportunity to avoid the accident and failed
to avail himself of that opportunity. He is liable under
If the shipper or owner merely contributed to the loss, the doctrine of last clear chance (Picart v. Smith, 37 Phil.
destruction or deterioration of the goods, the 809, 1918)
proximate cause thereof being the negligence of the
common carrier, the latter shall be liable for damages,
which however, shall be equitably reduced (NCC, Art. Q: B Traversing EDSA swerved then collision took
1741). place with B barely encroaching on C’s lane. Prior to
and at the time of collision, C did not take any
Contributory negligence on the part of the passenger defensive maneuver to prevent the accident and
does NOT justify the common carrier’s exemption from minimize the impending damage to life and
liability (Martin, 1989). It will only mitigate the liability property, which resulted in the collision in the
of the common carrier, that is to say, the damages middle of the highway, where a vehicle would
recoverable from the common carrier should be normally be traversing. Is C liable for his lack of
equitably reduced by the Court. care in driving?
Doctrine of Last Clear Chance and Rule on Contributory A: Yes. The collision was certainly foreseen and
Negligence cannot be applied in collision cases because avoidable but C took no measures to avoid it. Rather
of Art.827 of the Code of Commerce. (Notes and Cases than exhibit concern for the welfare of his passengers
on the Law on Transportation and Public Utilities, and the driver of the oncoming vehicle, who might have
Aquino, T. & Hernando, R.P. 2004 ed.) fallen asleep or suddenly fallen ill at the wheel, C coldly
and uncaringly stood his ground closed his eyes, and
DOCTRINE OF LAST CLEAR CHANCE left everything to fate, without due regard for the
consequences. Such a suicidal mindset cannot be
Doctrine of last clear chance provides that where both tolerated, for the grave danger it poses to the public and
parties are negligent but the negligent act of one is passengers availing of petitioners' services. Where both
appreciably later in point of time than that of the other, parties are negligent but the negligent act of one is
or where it is impossible to determine whose fault or appreciably later in point of time than that of the other,
negligence brought about the occurrence of the or where it is impossible to determine whose fault or
incident, the one who had the last clear opportunity to negligence brought about the occurrence of the
avoid the impending harm but failed to do so, is incident, the one who had the last clear opportunity to
chargeable with the consequences arising therefrom. avoid the impending harm but failed to do so, is
chargeable with the consequences arising therefrom. In
The rule is that the antecedent negligence of a person this case C, clearly had the Last Clear Chance, thus he is
does not preclude recovery of damages caused by the should be the one liable for having failed to avert the
supervening negligence of the latter, who had the last clearly imminent danger. (Greenstar v Universal Robina
fair chance to prevent the impending harm by the G.R. No. 205090, October 17, 2016)
exercise of due diligence. (Canlas v. Court of Appeals,
383 Phil. 315, 324 (2000) The doctrine of “last clear chance” cannot apply if
the: (iCOIN)

carrier but the amount of damages shall be equitably

a. Negligence of the plaintiff is concurrent with that of reduced (NCC, Art. 1762).
the defendant (in pari delicto);
b. Party charged is required to act instantaneously;
c. Injury cannot be avoided despite the application at all STIPULATIONS LIMITING THE LIABILITY
times of all the means to avoid the injury (after the peril Explain the stipulations for limitation of liability.
is or should have been discovered), at least in all
instances where the previous negligence of the party Even if there is an agreement limiting the liability of the
charged cannot be said to have contributed to the injury common carrier in the vigilance over the goods, the
at all. (O'Mally vs. Eagan, 77 ALR 582) common carrier is still disputably presumed to have
been negligent in case of its loss, destruction or
deterioration (NCC, Art. 1752).
RECOVERABLE DAMAGES
The presumption of negligence against the common
Enumerate the kinds of damages that may be recovered carrier is not relaxed even if there is an agreement
in case of death of a passenger. between the shipper and the common carrier limiting
the common carrier’s liability in the vigilance over the
- An indemnity for the Death of the victim goods. In other words, the common carrier’s liability in
- An indemnity for loss of Earning capacity of the the vigilance of over the goods is not an exemption
deceased; enunciated in Article 1735. (p. 108, Transportation
- Moral damages; Laws Book, Judge Noli Diaz)
- Exemplary damages;
- Attorney's fees and expenses of litigation; A contract fixing a sum that may be recovered for the
- Interest in proper cases (Briñas v. People, G.R. loss, destruction, and deterioration is binding provided
No. L-30309, Nov. 25, 1983). it is:
- Hospital and funeral expenses - Just and reasonable under the circumstances
- Has been fairly and freely agreed upon.
In case of death of a passenger, the common carrier is
liable to pay P50, 000 as indemnity for the life of a GR: The liability of the common carrier shall not exceed
passenger (Victory Liner vs. Gammad, G.R. No. 159636, the stipulation in a contract of carriage even if the loss
November 25, 2004). Carrier is NOT liable for or damage results from the carrier's negligence
exemplary damages where there is no proof that it (Eastern and Australian Shipping Co. vs. Great American
acted in a wanton, fraudulent, reckless, oppressive or Insurance Co., GR No. L-37604, October 23, 1981).
malevolent manner.
XPN: Common carrier’s liability may be extended
Moral damages beyond the specified amount mentioned if:
GR: Moral damages are NOT recoverable for breach of
contract of carriage in view of Articles 2219-20 of the - the shipper or owner of the goods declares a
Civil Code. greater value and;
- pays corresponding freight (NCC, Art. 1749).
XPNs:
• Where the mishap results in the death of the The liability of an airline company for lost baggage is
passenger; and limited to the amount stated in the ticket unless the
• Where it is proved that the common carrier passenger declared a higher valuation and paid
was guilty of fraud or bad faith, even if death does not additional fare (Pan American World Airways, Inc. vs.
result. Intermediate Appellate Court, G.R. No. 70462, August 11,
1988).
Defenses available in culpa contractual (FEC) WARSAW CONVENTION OF 1929 (WC)

1. Exercise of extraordinary due diligence
2. Fortuitous event The Warsaw Convention has the force and effect of law
3. Contributory negligence of passengers – it in this country. Its purpose is to protect the emerging
does NOT bar recovery of damages for death or injury air transportation industry and to secure the
if the proximate cause is the negligence of the common uniformity of recovery by the passengers.

Philippine Courts have no jurisdiction over a tortuous

conduct committed against a Filipino Citizen and
resident airline personnel of a foreign carrier traveling
beyond the territorial limit of any foreign country.
Under Article 28(1) of the Warsaw Convention, the
plaintiff may bring the action for damages before:
1. The court where the carrier is domiciled;

2. The court where the carrier has its principal
place of business;
3. The court where the carrier has an
establishment by which the contract has been made;
4. The court of the place of the destination.
APPLICABILITY
The transportation must be:
- International transportation;
- Air transportation; and
- Carriage of passengers, baggage or goods.
The WC shall also apply to fortuitous transportation by

aircraft performed by an air transportation enterprise.
Transportation to be performed by several successive

air carriers shall be deemed to be one undivided
transportation, if it has been regarded by the parties as
a single operation, whether it has been agreed upon
under the form of a single contract or of a series of
contracts, and it shall not lose its international
character merely because one contract or a series of
contracts is to be performed entirely within a territory
subject to the sovereignty, suzerainty, mandate, or
authority of the same High Contracting Party. (Art. 1
Sec.3)
WHEN INAPPLICABLE
1. When public policy is contradicted;
2. If the requirements under the Convention are not
complied with.

Redmont Consolidated Mines Corp. (Redmont) took

THE CORPORATION CODE interest in mining and exploring certain areas of
the province of Palawan. After inquiring with the
DENR, it learned that the areas where it wanted to
(BP BLG. 68) Those not affected by RCC (R.A.
undertake exploration and mining activities were
11232)
already covered by Mineral Production Sharing
Agreement (MPSA) applications of Narra Corp.,
Define corporation. Tesoro Inc., and McArthur Inc., which were all
domestic corporations.
A corporation is an artificial being created by operation
of law, having the right of succession and the powers, Redmont, however, questioned these applications
attributes and properties expressly authorized by law for MPSA arguing that at least 60% of the capital
or incident to its existence. (Sec. 2, CC) stock of these three corporations were owned and
controlled by MBMI Resources, Inc. (MBMI), a
NATIONALITY OF CORPORATIONS 100% Canadian corporation, which was
disqualified from engaging in mining activities
How is the nationality of a corporation determined? reserved only for Filipino citizens.
1. Place of Incorporation Test. This means Are Narra, Tesoro and McArthur Filipino
that a corporation is considered a national corporations?
of the country where it is incorporated
regardless of the nationality of the NO. A grave violation of the Constitution, specifically
controlling stockholders. (Sec. 123, CC) Section 2 of Article XII, is being committed by a foreign
2. Control Test. corporation right under our country’s nose through a
myriad of corporate layering under different, allegedly,
a) War – the nationality of the corporation is Filipino corporations.
determined by the nationality of the
controlling stockholders; Basically, there are two acknowledged tests in
b) Exploitation of Natural Resources – only a determining the nationality of a corporation: the
Filipino corporation, that is, 60% of its capital control test and the grandfather rule. Paragraph 7 of
stock are owned by Filipinos, may exploit DOJ Opinion No. 020, Series of 2005, adopting the 1967
natural resources (Sec. 2, Art. XII of the 1987 SEC Rules which implemented the requirement of the
Constitution); Constitution and other laws pertaining to the
c) Public utilities – only a Filipino corporation, controlling interests in enterprises engaged in the
60% of its capital stock are owned by Filipinos, exploitation of natural resources owned by Filipino
may be granted franchise or certificate to citizens, provides:
operate public utilities (Sec. 11, Art. XII of the
1987 Constitution); “Shares belonging to corporations or partnerships at
d) Investment purposes – a Philippine national or least 60% of the capital of which is owned by Filipino
corporation is one whereby 60% of the capital citizens shall be considered as of Philippine nationality,
stock outstanding and entitled to vote is owned but if the percentage of Filipino ownership in the
and held by citizens of the Philippines. (Foreign corporation or partnership is less than 60%, only the
Investment Act of 1991) number of shares corresponding to such percentage
shall be counted as of Philippine nationality.”
3. Grandfather Rule The first part of paragraph 7, DOJ Opinion No. 020,
Under this rule, the percentage of Filipino equity in a stating "shares belonging to corporations or
corporation engaged in nationalized and/or partly partnerships at least 60% of the capital of which is
nationalized areas of activities, provided for under the owned by Filipino citizens shall be considered as of
Constitution and other nationalization laws, is Philippine nationality," pertains to the control test or
computed, in cases where corporate shareholders are the liberal rule. On the other hand, the second part of
present in the situation, by attributing the nationality of the DOJ Opinion which provides, "if the percentage of
the second or even subsequent tier of ownership to the Filipino ownership in the corporation or
determine the nationality of the corporate shareholder. partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as
If the percentage of Filipino ownership in the Philippine nationality," pertains to the stricter, more
corporation or partnership is less than 60%, only the stringent grandfather rule.
number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Under the Under the liberal Control Test, there is no need to
Strict Rule or Grandfather Rule Proper, the combined further trace the ownership of the 60% (or more)
totals in the Investing Corporation and the Investee Filipino stockholdings of the Investing Corporation
Corporation must be traced (i.e., “grandfathered”) to since a corporation which is at least 60% Filipino-
determine the total percentage of Filipino ownership. owned is considered as Filipino.
(SEC Opinion, 27 October 2011); (Dimaampao and
Escalante, 2017) Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e.,

"grandfathered") to determine the total percentage of review. If the Filipino has the voting power of the
Filipino ownership. Moreover, the ultimate Filipino "specific stock", i.e., he can vote the stock or direct
ownership of the shares must first be traced to the level another to vote for him, or the Filipino has the
of the Investing Corporation and added to the shares investment power over the "specific stock", i.e., he can
directly owned in the Investee Corporation. (Narra dispose of the stock or direct another to dispose of it for
Nickel Mining and Development Corporation v. Redmont him, or both, i.e., he can vote and dispose of that "specific
Consolidated Mines, 722 SCRA 382, in Dimaampao and stock" or direct another to vote or dispose it for him,
Escalante, 2017) then such Filipino is the "beneficial owner" of that
"specific stock." Being considered Filipino, that "specific
stock" is then to be counted as part of the 60% Filipino
What is the interpretation of the below provision in ownership requirement under the Constitution. The
the Constitution? right to the dividends, jus fruendi - a right emanating
from ownership of that "specific stock" necessarily
Section 11, Article XII of the Constitution: No accrues to its Filipino "beneficial owner."
franchise, certificate, or any other form of What does the term “capital” under Sec. 11 of Art.
authorization for the operation of a public utility XII pertain to?
shall be granted except to citizens of the Philippines
or to corporations or associations organized under The term "capital" in Section 11, Article XII of the
the laws of the Philippines at least sixty per centum Constitution refers only to shares of stock entitled
of whose capital is owned by such citizens. to vote in the election of directors, and thus in the
present case only to common shares, and not to the
The Gamboa Decision already held, in no uncertain total outstanding capital stock comprising both
terms, that what the Constitution requires is "full [and common and nonvoting preferred shares.
legal] beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the Considering that common shares have voting rights
voting rights must rest in the hands of Filipino which translate to control, as opposed to preferred
nationals." And, precisely that is what SEC-MC No. 8 shares which usually have no voting rights, the term
provides, viz.: "For purposes of determining compliance "capital" in Section 11, Article XII of the Constitution
[with the constitutional or statutory ownership], the refers only to common shares. However, if the
required percentage of Filipino ownership shall be preferred shares also have the right to vote in the
applied to BOTH (a) the total number of outstanding election of directors, then the term "capital" shall
shares of stock entitled to vote in the election of include such preferred shares because the right to
directors; AND (b) the total number of outstanding participate in the control or management of the
shares of stock, whether or not entitled to vote." corporation is exercised through the right to vote in the
election of directors. In short, the term "capital" in
In construing "full beneficial ownership," the Section 11, Article XII of the Constitution refers only to
Implementing Rules and Regulations of the Foreign shares of stock that can vote in the election of directors.
Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine Full beneficial ownership of 60 percent of the
citizens or Philippine nationals, mere legal title is not outstanding capital stock, coupled with 60 percent of
enough to meet the required Filipino equity. Full the voting rights is required
beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the A simple illustration involving Company X with three
voting rights of which have been assigned or transferred kinds of shares of stock, easily shows how compliance
to aliens cannot be considered held by Philippine with the requirements of SEC-MC No. 8 will necessarily
citizens or Philippine nationals. result to full and faithful compliance with the Gamboa
Decision as well as the Gamboa Resolution.
In turn, "beneficial owner" or "beneficial ownership" is
defined in the Implementing Rules and Regulations of The following is the composition of the outstanding
the Securities Regulation Code (SRC-IRR) as: capital stock of Company X:
Any person who, directly or indirectly, through any  100 common shares
contract, arrangement, understanding, relationship or  100 Class A preferred shares (with right to
otherwise, has or shares voting power (which includes elect directors)
the power to vote or direct the voting of such security)  100 Class B preferred shares (without right to
and/or investment returns or power (which includes elect directors)
the power to dispose of, or direct the disposition of such
security).
SEC-MC No. 8 GAMBOA DECISION APPLICATION
Thus, the definition of "beneficial owner or beneficial (1) 60% If at least a total of 120
(required of common shares and
ownership" in the SRC-IRR, which is in consonance with percentage of "shares of stock Class A preferred
the concept of "full beneficial ownership" in the FIA-IRR, Filipino) entitled to vote in shares (in any
is, as stressed in the Decision, relevant in resolving only applied to the the election of combination) are
the question of who is the beneficial owner or has total number directors"(60% of owned and controlled
of outstanding the voting rights) by Filipinos, Company
beneficial ownership of each "specific stock" of the
shares of stock X is compliant with
public utility company whose stocks are under entitled to the 60% of the voting

vote in the rights in favor of of directors, officers and stockholders are not the
election of Filipinos requirement properties of the corporation.
directors of both SEC-MC No. 8
and the Gamboa
Decision. Parenthetically, as a consequence of its status as a
distinct legal entity, a corporation incurs its own
liabilities and is legally responsible for payment of its
(2) 60% If at least a total of 180 obligations. In other words, by virtue of the separate
(required shares of all the juridical personality of a corporation, the corporate
percentage of outstanding capital debt or credit is not the debt or credit of the
Filipino) stock of Company X are
"Full beneficial stockholder. This protection from liability for
applied to owned and controlled
BOTH (a) the
ownership of 60
by Filipinos, provided shareholders is the Principle of Limited Liability.
percent of the
total number that among those 180 (Philippine National Bank v. Hydro Resources
outstanding capital
of outstanding
stock, coupled with
shares a total of 120 Contractors Corporation, 693 SCRA 294, March 13, 2013,
shares of of the common shares
60 percent of the in Dimaampao and Escalante, 2017)
stock, entitled and Class A preferred
voting rights" or
to vote in the shares (in any
"Full beneficial Stockholders have no claim on corporate property as
election of combination) are
ownership of the
directors;
stocks, coupled with
owned and controlled owners, but mere expectancy or inchoate right to the
AND (b) the by Filipinos, then
appropriate voting same upon dissolution of the corporation after all
total number Company X is
of outstanding
rights x x x shares
compliant with both corporate creditors have been paid. Such right is
with voting rights,
shares of requirements of limited only to their equity interest (doctrine of limited
as well as with full
stock, whether
beneficial
voting rights and liability). Although a stockholder’s interest in the
or not entitled beneficial ownership corporation may be attached by his personal creditor,
ownership"
to vote in the under SEC-MC No. 8
election of and the Gamboa corporate property cannot be used to satisfy his claim
directors. Decision and (Wise & Co. vs. Man Sun Lung, 1940)
Resolution.
May a corporation be held liable for tort? For
crime?
While SEC-MC No. 8 does not expressly mention the
Beneficial Ownership Test or full beneficial ownership As to tort. It may be held accountable for tort when the
of stocks requirement in the FIA, this will not render it act was committed by the officer or agent under the
invalid - meaning, it does not follow that the SEC will express direction or authority from the stockholders or
not apply this test in determining whether the shares members acting as a body or generally from the
claimed to be owned by Philippine nationals are directors as the governing body.
Filipino, i.e., are held by them by mere title or in full
beneficial ownership. The failure of the corporate employer to comply with
the law-imposed duty under the Labor Code to grant
Nowhere in the discussion of the definition of the term separation pay to employees in case of cessation of
"capital" in Section 11, Article XII of the 1987 operations constitutes tort and its stockholder who was
Constitution in the Gamboa Decision did the Court actively engaged in the management or operation of the
mention the 60% Filipino equity requirement to be business should be personally liable. (Naguiat vs. NLRC,
applied to each class of shares. The definition of 1997)
"Philippine national" in the FIA and expounded in its
IRR, which the Court adopted in its interpretation of the
term "capital", does not support such application. In As to crime. A corporation is an artificial being
fact, even the Final Word of the Gamboa Resolution does incapable of intent, and as such, it cannot commit
not even intimate or suggest the need for a clarification felonies punishable under the Revised Penal Code. It
or re-interpretation. cannot also be held liable for crimes punishable under
special laws because these crimes are personal in
To revisit or even clarify the unequivocal definition of
nature requiring personal performance of overt acts. A
the term "capital" as referring "only to shares of stock
corporation cannot be meted with the penalty of
entitled to vote in the election of directors" and apply
imprisonment because it exists by mere fiction of law.
the 60% Filipino ownership requirement to each class
of share is effectively and unwarrantedly amending or
Exceptions:
changing the Gamboa Decision and Resolution. The
By express provision of the Anti-Money Laundering
Gamboa Decision and Resolution Doctrine did NOT
Act, a corporation may be held criminally liable for
make any definitive ruling that the 60% Filipino
violation thereof. In such case, responsible officers
ownership requirement was intended to apply to each
would be criminally liable. (Dimaampao and Escalante,
class of share. (Roy III v. Herbosa, G.R. No. 207246, April 2017)
18, 2017, EN BANC)
If the crime is committed by a corporation, the
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY directors, officers, employees or other officers thereof
responsible for the offense shall be charged and
May a corporation own property and incur penalized for the crime, precisely because of the nature
obligation in its own name? of the crime and the penalty therefore. A corporation
cannot be arrested and imprisoned; hence, cannot be
YES. Stockholders merely have inchoate right over the penalized for a crime punishable by imprisonment.
properties of the corporation. Likewise, the properties However, a corporation may be charged and

prosecuted for a crime if the imposable penalty is fine finances but of policy and business practice in
(Ching vs. Secretary of Justice, 2006) respect to the transaction attacked so that the
corporate entity as to this transaction had at
When express provisions of law are enacted specifically the time no separate mind, will or existence of
providing that a corporation may be proceeded against its own (Instrumentality or Control test);
criminally, it is the responsible officer who will be held 2. Such control must have been used by the
personally liable for the crimes committed by the defendant to commit fraud or wrong, to
corporation. (Sia vs. CA, 1997) perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
DOCTRINE OF PIERCING THE CORPORATE VEIL in contravention of plaintiff’s legal right;
(Fraud test) and
What is the Doctrine of Piercing the Veil of 3. The aforesaid control and breach of duty must
Corporate Entity? have proximately caused the injury or unjust
loss complained of (Harm test). (Philippine
The Doctrine of Piercing the Corporate Veil is the National v. Hydro Resources Contractors
doctrine that allows the State to disregard for certain Corporation, 693 SCRA 294, March 133, 2013)
justifiable reasons the notion that a corporation has a
personality separate and distinct from the persons Kukan, Inc. conducted a bidding for the supply and
composing it. installation of signages in a building. Morales
tendered the winning bid and was awarded
NOTE: Any piercing of the corporate veil has to be done contract. Despite his compliance with his
with caution, albeit courts will not hesitate to disregard contractual undertakings, Morales was only paid
the corporate veil when it is misused or when necessary half of the contract, which Kukan, Inc. refused to
in the interest of justice. After all, the concept of pay despite demands. Morales filed a Complaint
corporate entity was not meant to promote unfair with the RTC against Kukan, Inc. for a sum of
objectives. (Sarona v. National Labor Relations money which was later on granted. Morales
Commission, 663 SCRA 394, January 18, 2012) secured a writ of execution against Kukan, Inc. The
sheriff then levied upon various personal
What are the tests in determining the applicability properties found at what was supposed to be
of the Doctrine of Piercing the Corporate Veil? Kukan, Inc.’s office. Alleging that it owned the
properties thus levied and that it was a different
(ECAO) corporation from Kukan, Inc., Kukan International
1. When the corporation is used to defeat public Corporation (KIC) filed an Affidavit of Third-Party
convenience as when the corporate fiction is Claim. Morales filed an Omnibus Motion praying to
used as a vehicle for the evasion of an existing apply the principle of piercing the veil of corporate
obligation; (Equity Cases) entity. Rule on the motion.
2. In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or The motion should be denied. A corporation not
defend a crime; (Control Test) impleaded in a suit cannot be subject to the court’s
3. In Alter ego cases, where a corporation is process of piercing the veil of its corporate fiction. In
merely a farce since it is a mere alter ego or that situation, the court has not acquired jurisdiction
business conduit of a person, or where the over the corporation and, hence, any proceedings
corporation is so organized and controlled and taken against that corporation and its property would
its affairs are so conducted as to make it merely infringe on its right to due process. The doctrine of
an instrumentality, agency, conduit or adjunct piercing the veil of corporate fiction comes to play only
of another corporation. (Timoteo H. Sarona v. during the trial of the case after the court has already
National Labor Relations Commission, Royale acquired jurisdiction over the corporation. Before this
Security Agency, et al., G.R. No. 185280, January doctrine can be applied:
18, 2012)
4. The Objective test where the end result in a. the court must first acquire jurisdiction over
piercing the veil of corporate fiction is to make the corporation or corporations involved
the stockholders liable for debts and before its or their separate personalities are
obligations of the Corporation not to make the disregarded; and
Corporation liable for the debts and b. the doctrine of piercing the veil of corporate
obligations of the stockholders. (Umali v CA, entity can only be raised during a full-blown
G.R. No. 89561, September 13, 1990) trial over a cause of action duly commenced
involving parties duly brought under the
Explain the Alter Ego Theory/Instrumentality authority of the court by way of service of
Theory. summons or what passes as such service.
(Kukan International Corporation v. Hon.
This theory espouses that the corporate entity is a mere Amor Reyes, G.R. No. 182729 September 29,
farce as it is the alter ego, business conduit or 2010)
instrumentality of a person or another entity. This
contemplates of: Distinguish a stock corporation from a non-stock
corporation
1. Control, not mere majority or complete stock
control, but complete domination, not only of

STOCK CORPORATION NON-STOCK

Exception to the rule that Corporation by Estoppel
CORPORATION
only applies when a third person is affected or
prejudiced
Organized under the All others are non-stock
Corporation Code corporation A person who has reaped the benefits of a contract
entered into by others with whom he previously had an
existing relationship is deemed to be part of said
It has capital stock association and is zovered by the scope of the doctrine
divided into shares and is of corporation by estoppel. (Lim Tong Lim vs. Philippine
authorized to distribute Fishing Gear Industries, Inc. 317 SCRA 728 1999)
to the holders of such
shares dividends or
allotment of the surplus When the petitioner is not trying to escape liability
profits on basis of the from the contract but rather the one claiming from the
share held. (CC, Sec. 3) contract, the doctrine of corporation by estoppel is not
applicable. This doctrine applies to a third party only
Even if there is a statement of capital stock, the when he tries to escape liability on a contract from
corporation is still NOT a stock corporation if dividends which he has benefited on the irrelevant ground of
are not supposed to be declared, that is, there is no defective incorporation. (International Express Travel &
distribution of retained earnings (CIR vs. Club Filipino Tour Services, Inc. vs. Hon. Court of Appeals, Henri Kahn,
de Cebu, 1962) Philippine Football Federation, G.R. No. 119002, October
19, 2000)
DE FACTO CORPORATION
What is a de facto corporation? BOARD OF DIRECTORS/TRUSTEES/OFFICERS
A Corporation where there exists a flaw in its In the November 2010 stockholders’ meeting of
incorporation. Greenville Corporation, 8 directors were elected to
the board. The directors assumed their posts in
Requisites: January 2011. Since no stockholders' meeting was
1. Organized under a valid Law. held in November 2011, the 8 directors served in a
2. Attempt in good faith to form a holdover capacity and thus continued discharging
corporation according to the their powers.
requirements of the law (Colorable
Compliance) In June 2012, 2 of Greenville Corporation's
NOTE: Issuance of Certificate of Incorporation by directors – Director A and Director B – resigned
SEC is a minimum requirement for the formation of from the board. Relying on Section 29 of the
the corporation in good faith. (Sundiang Sr. & Corporation Code, the remaining 6 directors
Aquino, 2009) elected 2 new directors to fill in the vacancy caused
3. Use of corporate Powers - The corporation by the resignation of Directors A and B.
must have performed the acts which are
peculiar to a corporation like entering into Stockholder X questioned the election of the new
a subscription agreement, adopting by- directors, initially, through a letter-complaint
laws, and electing directors (Actual User) addressed to the board, and later (when his letter-
complaint went unheeded), through a derivative
A corporation which has failed to file its by-laws within suit filed with the court. He claimed that the
the prescribed period does not ipso facto lose its vacancy in the board should be filled up by the vote
powers as such (Sawadjaan vs. CA, 2004) of the stockholders of Greenville Corporation.
Greenville Corporation's directors defended the
CORPORATION BY ESTOPPEL legality of their action, claiming as well that
Stockholder X's derivative suit was improper.
All persons who assume to act as a corporation
knowing it to be without authority to do so shall be Rule on the issues raised. (2013 BAR)
liable as general partners for all debts, liabilities and
damages incurred or arising as a result. The election of the new directors should be by voting of
One who assumes an obligation to an ostensible the stockholders, and not merely by the remaining
corporation as such, cannot resist performance thereof directors.
on the ground that there was in fact no corporation (CC,
Sec. 21) Term is the time during which the officer may claim to
hold the office as of right, and fixes the interval after
Where there is no third person involved and the which the several incumbents shall succeed one
conflict arises only among those assuming the form another. The term of office is not affected by the
of a corporation who know that the corporation has holdover. The term is fixed by statute and it does not
not been registered, there is NO corporation by change simply because the office may have become
estoppel. (Lozano v. Judge Delos Santos, G. R. No. vacant, nor because the incumbent holds over in office
125221, June 19, 1997)

beyond the end of the term due to the fact that a prior to his termination. It further argues that the
successor has not been elected and has failed to qualify. power to create corporate offices and to appoint
the individuals to assume the offices was delegated
Term is distinguished from tenure in that an officer’s by Matling’s Board of Directors to its President
tenure represents the term during which the through its By-Laws; and that any office the
incumbent actually holds office. The tenure may be President created, like the position of the Coros,
shorter (or, in case of holdover, longer) than the term was as valid and effective a creation as that made by
for reasons within or beyond the power of the the Board of Directors, making the office a
incumbent. corporate office. Is Coros a corporate officer of
Matling?
Based on the above discussion, when Section 23[9], CC
declares that the board of directors shall hold office for NO. Pursuant to Section 25 of the Corporation Code,
1 year until their successors are elected and qualified, whoever are the corporate officers enumerated in the
we construe the provision to mean that the term of the by-laws are the exclusive officers of the corporation
members of the board of directors shall be only for one and the Board has no power to create other offices
year; their term expires one year after election to the without amending first the corporate By-laws.
office. The holdover period that time from the lapse of However, the Board may create appointive positions
one year from a member’s election to the Board and other than the positions of corporate officers, but the
until his successor’s election and qualification is not persons occupying such positions are not considered as
part of the director’s original term of office, nor is it a corporate officers within the meaning of Sec. 25 of the
new term; the holdover period, however, constitutes Corporation Code and are not empowered to exercise
part of his tenure. Corollary, when an incumbent the functions of the corporate officers, except those
member of the board of directors continues to serve in functions lawfully delegated to them. Their functions
a holdover capacity, it implies that the office has a fixed and duties are to be determined by the Board of
term, which has expired, and the incumbent is holding Directors/Trustees. Moreover, the Board of Directors
the succeeding term. of Matling could not validly delegate the power to
create a corporate office to the President, in light of Sec.
It also bears noting that the vacancy referred to in 25 of the Corporation Code requiring the Board of
Section 29 contemplates a vacancy occurring within the Directors itself to elect the corporate officers. Verily,
director’s term of office. When a vacancy is created by the power to elect the corporate officers is a
the expiration of a term, logically, there is no more discretionary power that the law exclusively vested in
unexpired term to speak of. Hence, Section 29 declares the Board of Directors, and could not be delegated to
that it shall be the corporation’s stockholders who shall subordinate officers or agents. The office of Vice
possess the authority to fill in a vacancy caused by the President for Finance and Administration created by
expiration of a member’s term. Matling’s President pursuant to the By-Law was an
ordinary, not a corporate, office. (Matling Industrial and
With the expiration of the terms of office, a vacancy Commercial Corporation, et al., v. Ricardo R. Coros, G.R.
resulted which, by the terms of Section 29 of the CC, No. 157802, October 10, 2010, J. Bersamin)
must be filled by the stockholders in a regular or special
meeting called for the purpose. To assume that the Explain the contracts between corporations with
vacancy is caused by the resignation of Directors A and interlocking directors.
B in 2012, not by the expiration of their terms in 2011,
is both illogical and unreasonable. Their resignation as A contract between two or more corporations having
holdover directors did not change the nature of the interlocking directors shall not be invalidated on that
vacancy; the vacancy due to the expiration of A and B’s ground alone. Provided that:
term had been created long before their resignation.
(Valle Verde Country Club, Inc. v. Victor Africa, G.R. No. 1. Contract is not fraudulent;
151969, 11 August 2008) 2. Contract is fair and reasonable under the
circumstances; and
However, since the right to fill in a vacancy in the BOD 3. If the interest of the interlocking director in
belongs to the stockholders, the derivative suit to one corporation or corporations is merely
enforce such right is improper. (Reyes v. RTC of Makati, nominal (not exceeding 20% of the
561, SCRA 593, 11 August 2008, in Dimaampao and outstanding capital stock), he shall be subject
Escalante, 2017) to the provisions of Sec. 32 insofar as the latter
corporation or corporations are concerned.
Ricardo Coros was dismissed by Matling Industrial (CC, Sec. 33)
and Commercial Corporation (Matling) as its Vice
President for Finance and Administration. Coros DOCTRINE OF CENTRALIZED MANAGEMENT
filed a complaint for illegal suspension and illegal
dismissal against Matling and some of its corporate Unless otherwise provided in the Corporation Code, the
officers with the NLRC. Matling, et al., moved to corporate powers of all corporations shall be exercised,
dismiss the complaint, raising the ground, among all business conducted and all property of such
others, that the complaint pertained to the corporations controlled and held by the board of
jurisdiction of the SEC due to the controversy being directors or trustees to be elected from among the
intra-corporate inasmuch as Coros was a member holders of stocks, or where there is no stock, from
of Matling’s Board of Directors aside from being its among the members of the corporations, who shall hold
Vice-President for Finance and Administration

office for one (1) year and until their successors are The directors or trustees and officers to be elected shall
elected and qualified. (Sec. 23, Corporation Code) perform the duties enjoined on them by law and by the
by-laws of the corporation. Any director, trustee or
BUSINESS JUDGMENT RULE officer violating this duty is liable for ultra vires acts.
GR: Contracts intra vires entered into by the board of DUTY OF DILIGENCE
directors are binding upon the corporation beyond the
interference of courts. The courts are barred from Directors or trustees who (1) willfully and knowingly
intruding into business judgments of corporations, vote for, or assent to patently unlawful acts of the
when the same are made in good faith. (Ong v Tiu, G.R. corporation, (2) or who are guilty of gross negligence
No. 144476. April 8, 2003) or bad faith in directing the affairs of the corporation,
shall be liable jointly and severally for all the damages
XPNs: The director/trustee or officer is personally and resulting therefrom suffered by the corporation, its
solidary liable if he: stockholders or members and other persons. (Sec. 31,
1. Willfully and knowingly votes for or assent to Corporation Code)
patently unlawful acts of the corporation (Sec.
31, CC);
2. Is guilty of gross negligence or bad faith in RESPONSIBILITY FOR CRIMES
directing the affairs of the corporation (Sec.
31, CC); Since a corporation is a mere legal fiction, it cannot be
3. Acquires any personal or pecuniary interest in held liable for a crime committed by its officers, since it
conflict with his duty as such director or does not have the essential element of malice; in such
trustee (Sec. 31,CC); case, the responsible officers would be criminally liable.
4. Acquires a business opportunity which should The performance of the act is an obligation directly
belong to the corporation, thereby obtaining imposed by the law on the corporation. Since it is a
profits to the prejudice of such corporation responsible officer or officers of the corporation who
(Sec. 34,CC); actually perform the act for the corporation, they must
5. Consents to the issuance of watered stocks or of necessity be the ones to assume the criminal liability
who, having knowledge thereof, did not (People v. Tan Boon Kong, 54 Phil 607)
forthwith file with the corporate secretary his
written objection thereto; RESPONSIBILITY FOR CORPORATE OBLIGATIONS
6. Contractually agrees or stipulates to hold
himself personally and solidarily liable with Before a director or officer of a corporation can be held
the Corporation; personally liable for corporate obligations, however,
7. Is made, by specific provision of law, the following requisites must concur: (1) the
personally liable for his corporate action. complainant must allege in the complaint that the
(MAM Realty Development Corp. v. NLRC, 244 director or officer assented to patently unlawful acts of
SCRA 797, June 2, 1995 in Dimaampao and the corporation, or that the officer was guilty of gross
Escalante, 2017) negligence or bad faith; and (2) the complainant must
clearly and convincingly prove such unlawful acts,
Every Director requires at least one share of stock to be negligence or bad faith. (Heirs of Fe Tan Uy vs.
elected. If he transfers all his shares during his tenure, International Exchange Bank Feb 13, 2013)
he automatically ceases to be a director. This applies to
a Director who transfers all his shares to a trustee
under a Voting Trust Agreement. (Lee v. CA, 205 SCRA CORPORATE POWERS
752)
Enumerate the express or general powers of a
LIABILITY corporation (Theory of General Capacity).
A corporate director, trustee or officer shall be A corporation has no power except those expressly
personally liable when: conferred upon it by the Corporation Code and those
that are implied or incidental to its existence. Every
a. He affirms an unlawful act, or acts with bad faith or corporation has the following general powers:
gross negligence in directing its affairs, or for conflict of (SuSuCo-ABS-PEDRO)
interest resulting in damage to the corporation,
stockholders or other persons;
b. He consents to the issuance of watered stocks or does 1. To SUe and be sued;
not file with the secretary his written objection thereto;
c. He agrees to hold himself personally and solidarily 2. Of Succession;
liable with the corporation;
d. Law makes him personally liable for his corporate 3. To adopt and use of Corporate seal;
action. (Tramat Mercantile v. Court of Appeals, 238 SCRA
14) 4. To amend its Articles of Incorporation;
DUTY OF OBEDIENCE 5. To adopt its By-laws;

6. For Stock corporations: issue and sell stocks to b.) Corporate By-laws
subscribers and treasury stocks; for non-stock c.) Authorization from the board, either
corporations: admit members; expressly or impliedly by habit, custom or
acquiescence in the general course of
7. To Purchase, receive, take or grant, hold, business.
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and ULTRA VIRES DOCTRINE
bonds;
Explain ultra vires act.
8. To Enter into merger or consolidation;
An ultra vires act refers to an act outside or beyond
9. To make reasonable Donations for public express, implied and incidental corporate powers. The
welfare, hospital, charitable, cultural, concept also includes those acts that may ostensibly be
scientific, civic or similar purposes, provided within such powers but are, by general or special laws,
that no donation is given to any: either proscribed or declared illegal. (Rural Bank of
Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000)
a. Political party,
Acts which are clearly beyond the scope of the
b. Candidate and corporation’s authority are null and void and cannot be
given any effect. (Gancayco v. City Government of
c. Partisan political activity. Quezon City, 658 SCRA 853, October 11, 2011)
10. To establish pension, Retirement, and other May an ultra vires act be ratified?
plans for the benefit of its directors, trustees,
officers and employees – basis of which is the YES. For valid ratification, all the stockholders must
Labor code; give their consent to such ratification; the rights of the
State are not involved; the creditors are not prejudiced;
11. To exercise Other powers essential or and the act or contracts must be wholly executed.
necessary to carry out its purposes. (CC, Sec. (Dimaampao and Escalante, 2017)
36)
Q: Acoje Mining Company, Inc. wrote the Director of
Enumerate the specific powers of a corporation Posts requesting the opening of a post, telegraph
(Theory of Specific Capacity). and money order offices at its mining camp at Sta.
Cruz, Zambales, to service its employees and their
The specific powers of a corporation are the following: families that were living in said camp. Acting on the
1. extend or shorten corporate term (Sec. 37, CC); request, the Director of Posts wrote in reply stating
2. increase or decrease capital stock (Sec. 38, CC); that if aside from free quarters the company would
3. incur, create or increase bonded indebtedness provide for all essential equipment and assign a
(Sec. 38, CC); and responsible employee to perform the duties of a
4. deny pre-emptive rights (Sec. 39, CC); postmaster without compensation from his office
5. Sell, lease, exchange, mortgage, pledge or until such time as funds therefor may be available
otherwise dispose of all or substantially all of he would agree to put up the offices requested. The
its property, assets, and goodwill (Sec. 40); company in turn replied signifying its willingness
6. purchase or acquire own shares (Sec. 41, CC); to comply with all the requirements outlined in the
7. invest in another corporation or business or letter of the Director of Posts requesting at the
for any purpose other than the primary same time that it be furnished with the necessary
purpose (Sec. 42, CC); forms for the early establishment of a post office
8. declare dividends (Sec. 43,CC); branch. Is the resolution adopted by the board of
9. enter into management contract (Sec. 44, CC); directors is ultra vires
10. amend the Articles of Incorporation (Sec. 16,
CC). A: The establishment of the local post office is a
reasonable and proper adjunct to the conduct of the
HOW POWERS ARE EXERCISED business of appellant company. Indeed, such post office
is a vital improvement in the living condition of its
1. STOCKHOLDERS employees and laborers who came to settle in its
Stockholders have residual power of fundamental mining camp which is far removed from the postal
corporate changes in the exercise of their right to vote. facilities or means of communication accorded to
people living in a city or municipality. (Republic of the
2. BOARD OF DIRECTORS Philippines vs. Acoje Mining Company, Inc., G.R. No. L-
The BOD alone exercises the powers of the corporation. 18062, February 28, 1963)
The board exercises their power through board
meetings. TRUST FUND DOCTRINE
3. CORPORATE OFFICERS Explain the Trust Fund Doctrine.

Corporate officers may exercise corporate powers as
authorized by: The subscribed capital stock of the corporation is a
a.) Law trust fund for the payment of debts of the corporation

which the creditors have the right to look up to satisfy RIGHT TO DIVIDENDS
their credits, and which the corporation may not
dissipate. The creditors may sue the stockholders It is the right of the stockholder to demand payment of
directly for the latter’s unpaid subscription. dividends after the board’s declaration. Stockholders
are entitled to dividends pro rata based on the total
The assets of a corporation of the corporation as number of shares that they own and not on the amount
represented by its capital stock are “trust funds” to be paid for the shares. (SEC Opinion, October 10, 1992 and
maintained unimpaired and to be used to pay corporate July 16, 1996)
creditors in the sense that there can be no distribution
of such assets among the stockholders without Entitlement to receive dividends
provision being first made for the payment of the
GR: Those stockholders at the time of declaration are
corporate debts and that any such disposition of it is a
entitled to dividends. (Sundiang Sundiang Sr. & Aquino,
fraud on the creditors of a corporation who extend
2009, citing SEC Opinion, July 15, 1994)
credit on good faith of its outstanding capital stock and,
therefore, void. (Philippine Trust Co. v. Rivera) NOTE: Dividends declared before the transfer of shares
belong to the transferor and those declared after the
Exceptions to the trust fund doctrine transfer, belong to the transferee. (ibid)
The Code allows distribution of corporate capital only XPN: In case a record date is provided for.
in these instances:
A record date is the date fixed in the resolution
1. Amendment of the AOI to reduce authorized declaring dividends, when the dividend shall be
capital stock; payable to those who are stockholders of record on a
2. Purchase of redeemable shares by the specified future date or as of the date of the meeting
corporation regardless of existence of declaring said dividend. (De Leon, supra) Holders of
unrestricted retained earnings; shares not fully paid which are not delinquent shall
3. Dissolution and eventual liquidation of the have all the rights of a stock holder.
corporation;
4. Dividends from investments in wasting asset GR: Prior to the declaration of a dividend, a stockholder
corporation (one solely or principally engaged cannot maintain an action at law to recover his share of
in the exploitation of “wasting assets,” the accumulated profits because such stockholder has
distributing net proceeds from exploitation of no individual interest in the profits of a corporation
their holdings, such as mines, oil wells, without until a dividend has been declared.
allowance or deduction for depletion);
5. In close corporation, where there is a deadlock XPN: An action at law may be maintained where it is
(Sec. 104, CC) alleged that sufficient net profits have been earned to
6. Purchase own shares of stock obligate the corporation to pay, however, there must be
7. Payment for the fair value of the shares of a prior application with the directors for the relief
dissenting stockholders. (Dimaampao and sought. If it appears that the directors have wantonly
Escalante, 2017) violated their duty, and such application would be
inefficacious, such application need not be made.
STOCKHOLDERS AND MEMBERS
Doctrine of Equality of Shares Forms of Dividends
Where the articles of incorporation do not provide for 1. Cash- cash dividends due on delinquent stock
any distinction of the shares of stock, all shares issued shall be first be applied to the unpaid balance
by the corporation are presumed to be equal and enjoy on the subscription plus costs and expenses
the same rights and privileges and are also subject to (sec. 43)
the same liabilities. (CC, Sec. 6) 2. Property
3. Stock – declared by the Board; requires the
PROPRIETARY RIGHTS approval of 2/3 of the Outstanding Capital
Stock at a regular or special meeting duly
1. Right to Dividend called for such purpose
2. Right of Appraisal NOTE: Stock corporations are prohibited from

retaining surplus profits in excess of 100% of their
3. Right to Inspect paid-in capital stock
4. Pre-emptive Right XPN:
5. Right to Vote 1. When justified by a definite corporate
expansion projects or programs approved by
6. Right of First Refusal
the Board;
2. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor from declaring dividends without

his/her consent and such consent has not yet necessity for self-protection. Upon the death of a
been secured shareholder, the heirs do not automatically become
3. When it can be clearly shown that such stockholders of the corporation and acquire the rights
retention is necessary under special and privileges of the deceased as shareholder of the
circumstances obtaining in the corporation, corporation. The stocks must be distributed first to the
such as when there is a need for special reserve heirs in estate proceedings, and the transfer of the
for probable contingencies (sec. 43) stocks must be recorded in the books of the
corporation. During such interim period, the heirs
NOTE: no dividends may be declared out of capital stand as the equitable owners of the stocks, the
except liquidating dividends distributed at dissolution executor or administrator duly appointed by the court
(sec. 122) being vested with the legal title to the stock. (Puno v.
Puno Enterprises, Inc., G.R. No. 177066, September 11,
RIGHT TO INSPECT 2009)
Books required to be kept Liability for Refusal to Allow Inspection
1. Books that record all business transactions of To apply the penal provision under Section 144 of the
the corporation which shall include contract, Corporation Code the ff. elements must be present:
memoranda, journals, ledgers, etc.;
2. Minute book of meetings of 1. A director, trustee, stockholder or member has
stockholders/members; made a prior demand in writing for a copy or
3. Minute book for the meetings of the Board; excerpts from the corporation’s records or
4. Stock and transfer book minutes;
2. The officer or agent of the concerned
Place where the books and records shall be corporation has refused to allow the said
kept director, trustee, stockholder or member of the
corporation to examine and copy said
GR: All the above books and records must be kept
excerpts;
at the principal office of the corporation. 3. If such refusal is made pursuant to a resolution
XPN: The stock and transfer book may be kept in or order of the BOD of Trustees, the liability for
the principal office of the corporation or in the such action shall be imposed upon the the
office of its stock transfer agent, if one has directors or trustees who voted for such
refusal;
NOTE: minutes of meetings without the signature of 4. where the officer or agent of the corporation
the corporate secretary have no probative value, and sets up the defense that the person demanding
therefore cannot be demanded for inspection or to examine and copy excerpts from the
examination (Union of Supervisors- NATU vs. Sec of corporation’s records and minutes has
Labor, 109 SCRA 139) improperly used any information secured
through any prior examination of the books of
The Stockholder has a right to examine the books the corporation or of any other corporation, or
on the ff. conditions: was not acting in good faith or for a legitimate
purpose in making his demand, the contrary
1. That it be done during reasonable hours on must be shown of proved (Ang- Abaya vs Ang,
business days; 2008)
2. For good purpose which may be:
a. To investigate acts of management NOTE: A Board Resolution restricting the exercise to
b. To investigate financial conditions inspect and examine the corporate records to limited
c. Fix value of shares number of days before the annual stockholders’
d. Mailing list for proxies meeting is an unreasonable restriction and violates the
e. Information for litigation atutory right of stockholders to examine corporate
3. The person demanding the right has not records at reasonable hours (Pardo vs Hercules
improperly used any information obtained Lumber Co,)
through any previous examination of the
books and records of the corporation, or that
the person asking for such examination must
be acting in good faith and for legitimate PRE-EMPTIVE RIGHT
purpose in making his demand (Gonzaes vs
Explain the pre-emptive right of the stockholders.
PNB, 1983)
It is the preferential right of shareholders to subscribe
Q: May an heir of a deceased stockholder
to all issues or disposition of shares of any class in
automatically exercise the rights (inspection,
proportion to their present shareholdings. (CC, Sec. 39)
accounting, dividends) pertaining to the deceased?
Its purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain
A: NO. The stockholder’s right of inspection of the his equity in the surplus.
corporation’s books and records is based upon his
Suppose that “X” Corporation has already used the
ownership of shares in the corporation and the
1000 originally authorized shares of the

corporation so that its Board of Directors and May be exercised even Arises only by virtue of
stockholders wish to increase “X’s” authorized when there is no express contractual stipulation
capital stock. After complying with the provision of law but also granted under
requirements of the law on increase of capital the provisions of AOI in
stock, “X” issued an additional 1000 shares of the case of Close
same value. corporations
Pertains to the Exercisable against
a. Assume that the stockholder “A” presently unsubscribed portions of another stockholder of
holds 200 out of the 1000 original shares, the authorized capotal the corporation of his
would “A” have a preemptive right to 200 of the stock. Aright thar may be shares of stock
new issue of 1000 shares? Why? claimed against the
b. When should stockholder “A” exercise the corporation. It includes
preemptive right? (2001 BAR) treasury shares.
a. YES, “A” would have a preemptive right to 200 of
the new issue of 1000 shares. “A” is a stockholder
of record holding 200 shares in “X” Corporation. INTRA-CORPORATE CONTROVERSIES
According to the Corporation Code, each
stockholder has the preemptive right to all issues An intra-corporate controversy is one which arises
of shares made by the corporation in proportion to between a stockholder and the corporation and
the number of share he holds on record in the pertains to the enforcement of the parties’ correlative
corporation. rights and obligations under the Corporation Code and
b. Preemptive right must be exercised in accordance the internal and intra-corporate regulatory rules of the
with the Articles of Incorporation or the By-Laws. corporation. (Real v. Sangu Philippines Inc., G.R. No.
When the Articles of Incorporation and By-Laws 168757, January 19, 2011)
are silent, the Board may fix a reasonable time
within which the stockholders may exercise the The venue for actions involving intra-corporate
right. controversies is now under the jurisdiction of the RTC
acting as a special commercial court. (Sec. 5, A.M. NO.
01-2-04-SC)
RIGHT OF FIRST REFUSAL
It is the RTC and not the Sandiganbayan which has
A right that grants to the corporation or another jurisdiction over cases which do not involve a
stockholder the right to buy the shares of stock of sequestration-related incident but an intra-corporate
another stockholder at a fixed price and only valid if controversy. Issues regarding the propriety of the
made on reasonable terms and consideration. election of a party as a Director and his authority to act
Provisions in articles of incorporation requiring in that capacity should be determined only by the RTC
stockholders desiring to sell their stocks to offer them pursuant to the pertinent law on jurisdiction because
first to the corporation or to the existing stockholders they do not concern the recovery of ill-gotten wealth.
at a given reasonable date before disposing of them to
third persons may be considered valid and enforceable.
(SEC Opinion, Feb. 23, 1993) Right of first refusal is
TESTS TO DETERMINE INTRA-CORPORATE
Right of first refusal is not a substantive right under CONTROVERSY
the Corporation Code
1. Relationship Test – No doubt exists that the parties
GR: The right of first refusal can only arise by means of were members of the same association, but this
a contractual stipulation, or when it is provided for in conclusion must still be supplemented by the
the AOI controversy test before it may be considered as an
intra-corporate dispute.
XPN: In the case of a close corporation, the right of first 2. Controversy Test – The dispute must be rooted in
refusal is required to be found in the AOI. When only the existence of an intra-corporate relationship,
the by-laws provide a right of first refusal without the and must refer to the enforcement of the parties’
corresponding provision in the AOI and not printed in correlative rights and obligations under the
the stock certificate, it is null and void. There is no Corporation Code, as well as the internal and intra-
authority to create property restrictions in by-laws corporate regulatory rules of the corporation, in
provisions. (Hodges v. Lezama, G.R. No. L-17327, order to be an intra-corporate dispute (Gulfo v.
August 30, 1963) Ancheta, G.R. No. 175301, August 15, 2012).
AOI may validly grant a right of first refusal in favor of REMEDIAL RIGHTS
other stockholders The SEC, as a matter of policy,
allows restrictions on transfer of shares in the AOI if the What are the actions that the stockholders or
same is necessary and convenient to the attainment of members can bring?
the objective for which the company was incorporated,
unless palpably unreasonable under the circumstances. 1. Derivative suit – one brought by one or more
(SEC Opinion, Feb. 20, 1995) stockholders or members in the name and on
behalf of the corporation to redress wrongs
PREEMPTIVE RIGHT RIGHT OF FIRST committed against it or to protect or vindicate
REFUSAL corporate rights, whenever the officials of the

corporation refuse to sue or are the ones to be sued The phrase "doing business in the Philippines" under
or hold control of the corporation. the FIA include soliciting orders, service contracts,
2. Individual suit – an action brought by a opening offices, whether called "liaison" offices or
stockholder against the corporation for direct branches; appointing representatives or distributors
violation of his contractual rights as such domiciled in the Philippines or who in any calendar
individual stockholder, such as the right to vote and year stay in the country for a period or periods totalling
be voted for, the right to share in the declared 180 days or more; participating in the management,
dividends, the right to inspect corporate books and supervision or control of any domestic business, firm,
records, and others. entity or corporation in the Philippines; and any other
3. Representative suit – one brought by a person in act or acts that imply a continuity of commercial
his own behalf and on behalf of all similarly dealings or arrangements, and contemplate to that
situated. extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the
State the requisites for the existence of a derivative purpose and object of the business organization;
suit. provided that passive equity investment shall not be
construed as doing business.
(C-SENA)
1. Corporate cause of action: the cause of action must

devolve upon the corporation itself; the What are the jurisdictional tests of “doing or
wrongdoing or harm having been caused to the transacting business” in the Philippines for foreign
corporation and not to the particular stockholder corporations?
brining the suit (Reyes v. Hon. RTC of Makati Br. 142,
G.R. No. 165744, August 11, 2008); 1. Twin Characterization Test
2. Stockholder: the party bringing the suit must be a a. Continuity Test – Doing business implies a
stockholder continuity of commercial dealings and
a. At the time the acts or transactions subject of arrangements, and contemplates to some
the action occurred and extent the performance of acts or works or the
b. at the time the action was filed exercise of some functions normally incident
NOTE: if the cause of action is continuing in nature, to and in progressive prosecution of, the
the only requisite is that the party is a stockholder purpose and object of its organization.
at the time the action was filed. (Dean Divina’s b. Subsequent Test – a foreign corporation is
Lecture, April 29, 2015) doing business in the country if it is continuing
the body or substance of the enterprise of
3. Exhaustion of all intra-corporate remedies business for which it was organized (Sundiang
available under the AOI, By-Laws, laws or rules Sr. & Aquino, 2009
governing the corporation or partnership to obtain 2. Contract Test - Whether the contracts entered into
the relief he desires; by the foreign corporation, or by an agent acting
4. Not a Nuisance or Harassment suit; under the control and direction of the foreign
5. Appraisal right is not available (Rule 8 of the corporation, are consummated in the Philippines.
Interim Rules of Procedure Governing Intra-
Corporate Controversies, cited in Anthony S. Yu, et
al., v. Joseph S. Yukayguan, et al., G.R. No. 177549, NOTE: Actual transaction of business within the
June 18, 2009) Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
NOTE: A derivative suit is an intra-corporate corporation and thus require the foreign corporation to
controversy hence under the jurisdiction of the RTC secure a Philippine business license. (B. Van Zuiden
acting as a special commercial court. Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007)
FOREIGN CORPORATIONS
Define a foreign corporation. What is the legal test for determining if an

unlicensed foreign corporation is doing business in
A foreign corporation is one, formed, organized or the Philippines? (2002 BAR)
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and The test is whether or not the unlicensed foreign
corporations to do business in its own country or State. corporation has performed an act or acts that imply a
(CC, Sec. 123) continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts
or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of,
DOCTRINE OF DOING BUSINESS commercial gain or of the purpose and object of the
business corporation.
What does doing business in the Philippines under
the Foreign Investment Act of 1991 (FIA) mean?
(2016 BAR

A foreign corporation which is not licensed to do GR: only foreign corporations that have been issued a
business in the Philippines is not absolutely license to operate business in the Philippines have the
incapacitated from filing a suit in local courts personality to sue (CC, Sec. 133)
Only when that foreign corporation is “transacting” or XPN: Under the rule on estoppel, a party is estopped to
“doing business” in the country will a license be challenge the personality of a foreign corporation to
necessary before it can institute suits. It may, however, sue, even if it has no license, after having acknowledged
bring suits on isolated business transactions, which is the same by entering to a contract with it.
not prohibited under Philippine law. Thus, a foreign
insurance company may sue in Philippine courts upon One who has dealt with a corporation of foreign origin
the marine insurance policies issued by it abroad to as a corporate entity is estopped to deny its corporate
cover international-bound cargoes shipped by a existence.
Philippine carrier, even if it has no license to do
business in this country. It is the act of engaging in NOTE: a foreign corporation has a right to maintain
business without the prescribed license which bars a action in Philippine courts even if it is not licensed to do
foreign corporation from access to our courts. (Aboitiz business or is not actually doing business in the
Shipping Corp. v. Insurance Co. of North America, G.R. No. Philippines on its own to protect its corporate or trade
168402, August 6, 2008, in Divina, 2010) name (Converse Rubber vs Unicersal Rubber Products,
1987)
NOTE: Foreign Corporations may bring suits on

Any foreign corporation not doing business in the isolated business transactions. A foregin insurance
Philippines may maintain an action in our courts upon company may sue in Philippine Courts upon the marine
any cause of action, provided that the subject matter insurance policies issued by it abroad to cover
and the defendant are within the jurisdiction of the international-bound cargoes shipped by a Philippine
court. It is not the absence of the prescribed license but carrier, even if it has no license to do business in this
"doing business" in the Philippines without such license country. It is the act of engaging in business without the
which debars the foreign corporation from access to prescribed license which bars a foreign corporation
our courts. In other words, although a foreign from access to our courts (Aboitiz Shipping Corp. vs
corporation is without license to transact business in Insurance Co. of NA, 2010)
the Philippines, it does not follow that it has no capacity
to bring an action. Such license is not necessary if it is
not engaged in business in the Philippines. (Columbia
MERGERS AND CONSOLIDATIONS
Pictures v. CA, G.R. No. 110318, August 28, 1996)
PERSONALITY TO SUE AND SUABILITY BASIS MERGER CONSOLIDATION

Definition Two or more Two or more
Discuss the underlying reason in requiring foreign corporations corporations
corporation to obtain license to do business in the unite, one unite, giving rise
Philippines. corporation to a new
which retains corporate body
The purpose of the law is to subject the foreign its corporate and dissolving the
corporation doing business in the Philippines to the existence constituent
jurisdiction of the courts. absorbing or corporations
merging in which cease to
A foreign corporation doing business in the Philippines itself the exist as separate
with a license may sue and can be sued in the other which corporations. (De
Philippines. If it is doing business without a license, it disappears as Leon, 2010)
cannot sue but may be sued in the Philippines. (Sec. 133, a separate
CC) corporation.
It is the
A foreign corporation not doing business, but merely absorption of
transacts in an isolated transaction or on a cause of one
action entirely independent of its business transaction, corporation
need not obtain a license and may sue and be sued in by another
our courts. which
survives. (De
If a foreign corporation does business in the Philippines Leon, 2010)
without a license, a Philippine citizen or entity which
has contracted with said corporation may be estopped Consequent All of the All consolidated
from challenging the foreign corporation’s corporate dissolution of constituent corporations are
personality in a suit brought before Philippine courts. corporation/s corporations dissolved without
(Agilent Technologies Singapore [Pte.] Ltd. V. Integrated
involved are exception
Silicon Technology Philippines Corporation, G.R. No. dissolved
154618, 14 April 2004, in Dimaampao and Escalante, except one
2017)

Consequent No new A new that the transferor corporation is rendered incapable of

creation os a corporation corporation continuing its business or its corporate purpose.
new is created emerges
corporation
Acquisition of The all assets,
Assets, surviving liabilities and EFFECTS OF MERGER OR CONSOLIDATION
Liabilities, corporation capital stock of all
1. The constituent corporations shall become a single
Capital Stock acquires all consolidated
corporation which:
the assets, corporations are
liabilities and transferred to the a. In case of merger, shall be the surviving corporation
capital stock new corporation designated in the plan of merger.
of all
constituent b. In case of consolidation, shall be the consolidated
corporations corporation designated in the plan of consolidation.
2. The separate existence of the constituent

Where one corporation sells or otherwise transfers corporations shall cease, except that of the surviving or
all of its assets to another corporation, is the latter the consolidated corporation.
liable for the debts and liabilities of the transferor?
3. The surviving or the consolidated corporation shall
GR: No. possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and
XPNs: liabilities of a corporation organized under this Code.
1. Where the purchaser expressly or impliedly agrees 4. The surviving or the consolidated corporation shall
to assume such debts; thereupon and thereafter possess:
2. Where the transaction amounts to a consolidation
or merger of the corporations; a. All the rights, privileges, immunities and franchises
3. Where the purchasing corporation is merely a of each of the constituent corporations;
continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently b. All property, real or personal, and all receivables due
to escape liability for such debts. (Edward J. Nell Co. on whatever account, including subscriptions to shares
v. Pacific Farms, Inc., G.R. No. L-20850, November 29, and other choses in action, and all and every other
1965) interest of, or belonging to, or due to each constituent
corporation.
The Nell Doctrine states the general rule that the 5. These shall be deemed transferred to and vested in
transfer of all the assets of a corporation to another such surviving or consolidated corporation without
shall not render the latter liable to the liabilities of the further act or deed.
transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume 6. The surviving or consolidated corporation shall:
the liabilities of the transferor.
a. Be responsible and liable for all the liabilities and
The legal basis of the last in the four (4) exceptions to obligations of each of the constituent corporations in
the Nell Doctrine, where the purchasing corporation is the same manner as if such surviving or consolidated
merely a continuation of the selling corporation, is corporation had itself incurred such liabilities or
challenging to determine. Dean Cesar Villanueva obligations;
explained that this exception contemplates the
“business-enterprise transfer.” In such transfer, the b. Any pending claim, action or proceeding brought by
transferee corporation’s interest goes beyond the or against any of such constituent corporations may be
assets of the transferor’s assets and its desires to prosecuted by or against the surviving or consolidated
acquire the latter’s business enterprise, including its corporation
goodwill.
c. The rights of creditors or liens upon the property of
Section 40 suitably reflects the business-enterprise any of such constituent corporations shall not be
transfer under the exception of the Nell Doctrine impaired by such merger or consolidation. (CC, Sec. 80;
because the purchasing or transferee corporation BPI v. Lee, G.R. No. 190144, August 1, 2012)
necessarily continued the business of the selling or
transferor corporation. Given that the transferee
corporation acquired not only the assets but also the
SECURITIES REGULATION CODE
business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the
former. Section 40 refers to the sale, lease, exchange or
The SRC is the law that regulates securities (its
disposition of all or substantially all of the corporation's
issuance, distribution and sale) and the person who
assets, including its goodwill. The sale under this
deals with such securities. It is enacted to protect the
provision does not contemplate an ordinary sale of all
public from unscrupulous promoters, who stake
corporate assets; the transfer must be of such degree
business or venture claims which have really no basis,

and sell shares or interests therein to investors. The XPNs: the following need not be registered:
SRC also serves to protect investors, promote investor
confidence, and stabilize the financial markets. 1. Exempt securities
2. Securities sold in exempt transactions
SECURITIES REQUIRED TO BE REGISTERED

EXEMPT SECURITIES
(PC-RIBO)
What are securities? (1996 BAR)
Securities are shares, participation or interests in a 1. Any security issued or guaranteed by the
corporation or in a commercial enterprise or profit- Government of the Philippines, or by any
making venture and evidenced by a certificate, political subdivision or agency thereof, or by
contract, instrument, whether written or electronic in any person controlled or supervised by, and
character. It includes: (DO DIET) acting as an instrumentality of said
government.
2. Any security issued or guaranteed by the
government of any Country with which the
1. Debt instruments – bonds, debentures, notes, Philippines maintains diplomatic relations, or
evidence of indebtedness, asset-backed securities by any state, province or political subdivision
2. Other instruments as may in the future be thereof on the basis of reciprocity. Provided,
determined by the SEC. that the SEC may require compliance with the
3. Derivatives– options and warrants form and content of disclosures the
4. Investments instruments – Investment contracts, Commission may prescribe.
fractional undivided interests in oil, gas, or other 3. Certificates issued by a Receiver or by a trustee
mineral rights in bankruptcy duly approved by the proper
5. Equity instruments – Shares of stock, certificates of adjudicatory body.
interest or participation in a profit sharing 4. Any security or its derivatives the sale or
agreement, certificates of deposit for a future transfer of which, by law, is under the
subscription, proprietary or non-proprietary supervision and regulation of the Office of
membership certificates in corporations. Insurance Commission, Housing and Land Use
6. Trust instruments – Certificates of assignments, Regulatory Board, or the Bureau of Internal
certificates of participation, trust certificates, Revenue.
voting trust certificates or similar instruments. 5. Any security issued by a Bank except its own
(SRC, Sec. 3) shares of stock (which serves to promote the
sale of securities issued by heavily regulated
banks).
Test on determining whether or not it is a security: 6. Other securities as determined by the SEC by
Does it represent a share, participation, or interest in a rule or regulation, after public hearing. (SRC,
commercial enterprise or any profit making venture? If Sec. 9)
yes, then, it is a security. If it is a security, then, it cannot
be sold, or offered for sale or distribution within the Being an issuer of an exempt security does NOT exempt
Philippines without a registration statement duly filed such issuer from the requirement of submission of
with and approved by the SEC. (Divina, 2014) reports under the regime of full and fair disclosure.
RATIONALE: The listed securities are exempted

What is the requirement before securities are sold because they are either guaranteed by the government
or offered for sale or distribution within the or they are already regulated by another government
Philippines? agency or body other than the SEC.
EXEMPT TRANSACTIONS
They are required to be registered with and approved (JuDe ISCaRIOT’S Ex-20-QB’s)
by the SEC. Registration also includes the disclosure to
SEC of all material and relevant information about the 1. Any JUdicial sale, or sale by an executor,
issuer of the security. Prior to the sale, the information administrator, guardian, receiver or trustee in
on the securities, in such form and with such substance insolvency or bankruptcy.
as the SEC may prescribe, shall be made available to 2. Those sold by a pledge holder, mortgagee, or any
each prospective purchaser. (SRC, Sec. 8) other similar lien holder, to liquidate a bona fide
debt a security pledged in good faith as security for
such Debt.  
3. Those sold or offered for sale in an Isolated
GR: securities must be registered with and approved by
SEC to protect the public from fraud transaction for the owner’s account and the owner
not being an underwriter.  
4. Distribution by the corporation of Securities to its

stock holders or other security holders as stock e. investment companies; and

dividends or distribution out of surplus. f. other persons or entities ruled qualified by the SEC
5. Sale of CApital stock of a corporation to its own on the basis of such factors such as financial
stockholders exclusively wherein no commission sophistication, net worth, knowledge and
or remuneration is paid or given directly or experience in financial and business matters or
indirectly in connection with the sale of such amount of assets under management (SRC, Sec.
capital stock.   10.1)
NOTE: Also, this sale must not involve an underwriter RATIONALE: Although the securities themselves must
or financial advisor. still be registered, the sale or issue need not be
registered because the investors involved herein are
6. Bonds or notes secured by a mortgage upon Real considered as highly sophisticated investors or
estate or tangible personal property, where the specialized investors and as such, have a greater risk
entire mortgage together with all the bonds or tolerance or do not need strict protection from the
notes secured thereby are sold to a single Commission.
purchaser at a single sale.  
7. Issue and delivery of any security in exchange for PROHIBITIONS ON FRAUD, MANIPULATIONS
any other security of the same Issuer pursuant to
the right of conversion entitling the holder of the AND INSIDER TRADING
security surrendered in exchange to make such
Explain the manipulation of security prices. (2001
conversion.  
BAR)
8. Broker’s transactions executed upon customer’s
Orders, on any registered Exchange or other The price of securities should be dictated by market
Trading market.   forces. It cannot be pegged or stabilized. The following
9. Share Subscriptions in capital stock prior to acts are considered as manipulation of security prices
incorporation or in pursuance of an increase in its and are therefore prohibited:
authorized capital stock under the Corporation
Code when no expense is incurred, or no 1. Transactions intended to create a false or
commission, compensation or remuneration is misleading appearance of active trading in any
paid or given in connection with the sale or listed security traded in an Exchange or any other
disposition of such securities, and only when the trading market:
purpose for soliciting, giving or taking of such a. Wash Sale – is a transaction in which there is
subscriptions is to comply with the requirements no genuine change in the beneficial (or actual)
of such law as to the percentage of the capital stock ownership of a security;
of a corporation which should be subscribed before b. Matched Sale – is a change of ownership in the
it can be registered and duly incorporated, or its securities by entering an order for the
authorized capital increased.   purchase or sale of a security with the
10. EXchange of securities by the issuer with its knowledge that a simultaneous order of
existing security holders exclusively, when no substantially the same size, time, and price, for
commission or other remuneration is paid or given the sale or purchase of any such security, has
directly or indirectly for soliciting such exchange.   or will be entered by or for the same or
11. Sale by issuer to fewer than 20 persons in the different parties;
Philippines during any 12 month period, otherwise c. Similar transactions where there is no change
known as private placement transactions. (19 of beneficial ownership.
Lender Rule)   2. Effecting a series of transactions that will raise or
depress the price of securities to induce the
Requisites: purchase or sale of securities respectively, or
creating active trading to induce transactions
1. Sale to not more than 19 non-institutional retail through manipulative devices:
investors; a. Marking the close – buying and selling of
2. The security is made payable to a specific person;   securities at the close of the market in an effort
to alter the closing price of these securities.
3. Security is non-negotiable and non- assignable; and
b. Painting the tape – engaging in a series of
4. It is in an amount not exceeding fifty (50) million
transactions effected by brokers in securities
pesos.  
that are reported publicly to give the
impression or illusion of activity or price
12. Sale of securities to any number of the following movement in a security, which may trick
Qualified Buyers: investors into trading in these securities
because of the alleged trading volume or
a. banks; indications of interest.
b.registered investment houses; c. Squeezing the float – refers to taking advantage
c. insurance companies; of a shortage of securities in the market by
d.pension funds or retirement plans maintained by the controlling the demand side and exploiting
Government of the Philippines or any political market congestion during such shortages in a
subdivision thereof or managed by a bank or other way to create artificial prices. This prevents
persons authorized by the BSP to engage in trust the actual market from determining the price
functions, investment companies; of these securities.

d. Hype and dump – engaging in buying activity at 1. Information about the issuer or the security has not
increasingly higher prices and then selling been generally disclosed to the public and would
securities in the market at the higher prices. likely affect the market price of the security after
e. Boiler room operations – refers to activities being disseminated to the public and the lapse of a
that involve the use of high pressure sale reasonable time for the market to absorb the
tactics such as direct mail offers or telephone information; or
follow-ups to investors to promote purchase 2. Would be considered by a reasonable person
and sale of securities wherein there is important under the circumstances in determining
misrepresentation in these securities. This is a his course of action whether to buy, sell or hold a
fraudulent transaction that tricks investors security. (SRC, Sec. 27.2)
into trading in a fake market.
f. Daisy chain – refers to a series of purchase and
sales of the same issue at successively higher In insider trading, what is a fact of special
prices by the same group of people with the significance? (1991 BAR)
purpose of manipulating prices are drawing
unsuspecting investors into the market leaving It is, in addition to being material, such fact as would
them defrauded of their money and securities. likely, on being made generally available, to affect the
g. Front-Running – is the prohibited practice of a market price of a security to a significant extent, or
broker-dealer executing its proprietary order which a reasonable person would consider as
before the customer’s order for the same especially important under the circumstances in
security. This violates the fiduciary determining his course of action in the light of such
responsibility by the broker-dealer to its factors as the degree of its specificity, the extent of its
customer accounts as well as placing the difference from information generally available
customer’s order first. previously, and its nature and reliability. (RSA, Sec. 30
h. Churning – involves the excessive trading of [c])
securities by a broker-dealer in a customer’s
discretionary account in order to generate
commissions, without regard to the customer’s What is a tender offer? (2016, 2010, 2002 BAR)
investment objective.
3. Circulating or disseminating information that the Tender offer means a publicly announced intention by
price of any security listed in an Exchange will or is a person acting alone or in concert with other persons
likely to rise or fall because of manipulative market to acquire equity securities of a public company. It is
operations of any one or more persons conducted also an offer by the acquiring person to stockholders of
for the purpose of raising or depressing the price of a public company for them to tender their shares
that security for the purpose of inducing the therein on the terms specified in the offer. Tender offer
purchase or sale of such security. is in place to protect their minority shareholders
4. To make false or misleading statement with against any scheme that dilutes the share value of any
respect to any material fact, which he knew or had investments. It gives the minority shareholders the
reasonable ground to believe was so false or chance to exit the company under reasonable terms,
misleading, for the purpose of inducing the giving them opportunity to sell their shares at the same
purchase or sale of any security listed or traded in price as those of the majority shareholders. (CEMCO
an Exchange. HOLDINGS, INC. v. National Life Insurance Company, Inc.
5. To effect, either alone or with others, any series of G.R. No. 171815, August 7, 2007)
transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of In what instances is a tender offer required to be
pegging, fixing or stabilizing the price of such made? (2002 BAR)
security, unless otherwise allowed by the Code or
by rules of the Commission. Tender offer is required to be made in the following
instances:
What is insider trading? 1. Any person or group of persons acting in concert

who intends to acquire 35% or more of any class of
A purchase or sale made by an insider, or such insider’s equity shares in a public company shall disclose
spouse or his relative by affinity or consanguinity such intention and contemporaneously make a
within the second degree, legitimate or common-law, tender offer for the percent sought to all
shall be presumed to be effected while in possession of shareholders of such class.
material non-public information if transacted after
such information came into existence but prior to the
public dissemination of such information, and lapse of NOTE: In the event that the tender offer is
reasonable time for the market to absorb such oversubscribed, the aggregate amount of securities to
information. (Bar 2015) be acquired at the close of such tender offer shall be
proportionately distributed across both selling
What is material non-public information? (1995 shareholder with whom the acquirer may have been in
BAR) private negotiations and the minority shareholders.

2. Any person or group of persons acting in concert Requisites for valid proxy solicitation
who intends to acquire 35% or more of any class of
equity shares of a public company (corporation 1. It must be in writing
with assets of at least P 50,000,000.00 and having 2. It must be signed by the stockholder or his duly
200 or more stockholders with at least 100 shares authorized representative
for each stockholder) pursuant to an agreement 3. It must be filed before the scheduled meeting with
made between or among the person or group of the corporate secretary (SRC, Sec. 20.2)
persons and one or more sellers.
3. Any person or group of persons acting in concert NOTE: for public companies, the period to submit
intends to acquire 35% or more of equity shares of proxy solicitation should not be later than 5 days before
a public company in one or more transactions the meeting unless the by-laws provides for a longer
within a period of 12 months shall be required to period.
make a tender offer to all holders of such class for
Unless otherwise provided in the proxy, the proxy shall
the number of shares so acquired within the same
be valid only for the meeting for which it is intended.
period.
No proxy shall be valid and effective for a period longer
4. If any acquisition of even less than 35% would
than five (5) years at one time.
result in ownership of over 51% of the total
outstanding equity securities of a public company,
the acquirer shall be required to make a tender
offer under this Rule for all the outstanding equity Rules on Proxy Solicitation with regard to a broker
securities to all remaining stockholders of the said or dealer
company at a price supported by a fairness opinion
provided by an independent financial advisor or 1. No broker or dealer shall give any proxy,
equivalent third party. The acquirer in such tender consent or authorization, in respect of any
offer shall be required to accept any and all security carried for the account of a
securities thus tendered. customer, to a person other than the
5. In any transaction covered by this Rule, the sale of customer, without express written
shares pursuant to the private transaction shall not authorization of such customer.
be completed prior to the closing and completion 2. A broker or dealer who holds or acquires
of the tender offer. Transactions with any of the the proxy for atleast 10% or such
seller/s of significant block of shares with whom percentage as the Commissionmay
the acquirers may have been in private negotiation prescribe of the outstanding share of the
shall close at the same time and upon the same issuer, shall submit report identifying the
terms as the tender offer made to the public under beneficial owner within 10 days after such
this Rule. For paragraph (2)(B), the last sale acquisition, for its own account or
meeting the threshold shall not be consummated customer, to tge issuer of the security, to
until the closing and completion of the tender offer. the Exchange where the security is traded
and to the Commission (SRC, Sec. 20.4,
20.5)
Coverage of the application of tender offer
DISCLOSURE RULE
The mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or “any type of Beginning of disclosure requirement
acquisition.” The legislative intent of Section 19 of the
Code is to regulate activities relating to acquisition of It begins at registration and continues periodically
control of the listed company and for the purpose of through the regular filing of periodic report.
protecting the minority stockholders of a listed
corporation. Whatever may be the method by which Suspension of disclosure
control of a public company is obtained, either through
the direct purchase of its stocks or through an indirect It may be suspended for any fiscal year after the year
means, mandatory tender offer applies. What is such registration became effective if such issuer, as of
decisive is the determination of the power of control. the first day of any such fiscal year, has less than 100
The legislative intent behind the tender offer rule shareholders of such class of securities and it notifies
makes clear that the type of activity intended to be the Commission of such. (SRC IRR, Rule 17.1)
regulated is the acquisition of control of the listed
company through the purchase of shares. Control may End of disclosure requirement
be effected through a direct and indirect acquisition of
stock, and when this takes place, irrespective of the GR: Disclosure does not end because once an issuer
means, a tender offer must occur. (Cemco Holdings v. becomes a reporting company, it remains as such even
National Life Insurance Company, G.R. No. 171815, when the registration of securities has been revoked.
August 7, 2007) (SRC IRR, Rule 13)
XPN: If the primary license is revoked.

RULES ON PROXY SOLICITATION
XPN to the XPN: In the case of hospitals and
educational institutions if the primary license is
revoked, the disclosure requirement still continues

because of public interest.

Bangko Sentral may buy and sell credit instruments
with maturities of not more than 180 days from their
BANKING LAWS acquisition. [Sec. 82(a)] It may also buy and sell credit
instruments with maturities of not more than 360 days
THE NEW CENTRAL BANK ACT from their acquisition, if they are related to the
(NCBA, R.A. 7653) production and processing of agricultural, animal,
mineral or industrial products. [Sec. 82(b)]
BANKO CENTRAL NG PILIPINAS
Bangko Sentral may extend loands to banks for not
Responsibilities (1992, 1998 BAR) more than 7 days without any collateral to provide
liquidity (Sec. 83)
1. To provide policy directions in the areas of money,
banking, and credit CONSERVATORSHIP
2. To supervise bank operations
3. To regulate the operations of finance companies The officers of X Bank entered into a contract with
and non-bank financial institutions performing Y Corporation. Later, the bank was placed under
quasi-banking functions, and similar institutions conservatorship. The conservator took charge of
(NCBA, Sec. 3). and managed the assets and liabilities of the bank.
It likewise revoked the contract of X Bank with Y
How BSP handles crisis Corporation. Was the revocation proper?
To protect the international reserves of the Bangko NO. The powers of a conservator relates only to the
Sentral in the imminence of, or during an exchange preservation of the assets of the bank, management
crisis, or in time of national emergency and to give the thereof, and restoration to viability. The conservator
Monetary Board and the Government time in which to may not revoke a contract already perfected and
take constructive measures to forestall, combat, or enforceable at the time he was appointed. The only
overcome such a crisis or emergency, the Monetary remaining remedy available to the conservator is to file
Board, with the concurrence of at least five (5) of its a case to revoke or nullify the contract. (Dimaampao,
members and with the approval of the President of the 2017)
Philippines, may:
Powers of a conservator (CARe BEAr)
1. temporarily suspend or restrict sales of exchange
by the Bangko Sentral, and 1. Collect all monies and debts due to the said bank
2. may subject all transactions in gold and foreign 2. To take charge of the Assets, liabilities, and the
exchange to license by the Bangko Sentral, and management thereof
3. may require that any foreign exchange thereafter 3. REorganize, the management thereof
obtained by any person residing or entity 4. And such other powers as the monetary Board
operating in the Philippines be delivered to the deems necessary
Bangko Sentral or to any bank or agent designated 5. Exercise all powers necessary to restore its
by the Bangko Sentral for the purpose, at the viability, with the power to overrule or revoke the
effective exchange rate or rates: actions of the previous management and board of
directors of the bank or quasi-bank
Provided, however, that foreign currency deposits 6. To bring court actions to Assail or Repudiate
made under Republic Act No. 6426 shall be exempt contracts entered into by the bank. (First Philippine
from these requirements. (NCBA, Sec. 72) International Bank v. CA, G.R. No. 115849, Jan. 24,
1996).
How does the BSP extend help to banks in distress
or banks with liquidity problems? Grounds for closure of a bank or a quasi-bank
The BSP may help banks having liquidity problems by: 1. Cash Flow test – Inability to pay liabilities as they
become due in the ordinary course of business
1. Granting emergency loans in an amount not (NCBA, Sec. 30 [a], 1997 Bar).
exceeding 50% of its total deposits and deposit 2. Balance sheet test – Insufficiency of realizable
substitutes; assets to meet its liabilities (NCBA, Sec 30 [b], 1997
2. Appointing a conservator; Bar).
3. Appointing a receiver and order liquidation of the 3. Inability to continue business without involving
bank. (Dimaampao, 2017) probable losses to its depositors and creditors
(NCBA, Sec 30 [c], 1997 Bar).
The relationship between a bank and its depositor is 4. Willful violation of a cease and desist order under
that of creditor and debtor. For this reason, a bank has Section 37 that has become final, involving acts or
the right to set-off the deposits in its hands for the transactions which amount to fraud or a
payment of a depositor’s indebtedness (Equitable PCI dissipation of the assets (NCBA, Sec 30 [d], 1997
Bank v. Ng Sheung Ngor, et al., 171545, December 19, Bar).
2007). 5. Notification to the BSP or public announcement of
a bank holiday (GBL, Sec 53).
Loan to Banks

6. Suspension of payment of its deposit liabilities than its competence in

continuously for more than 30 days (GBL, Sec 53). liabilities but its banking or
7. Persisting in conducting its business in an unsafe or assets are not finance (NCBA,
unsound manner (GBL, Sec 56). liquid or not in Sec. 30).
cash thus it
The Monetary Board may preventively suspend any cannot pay its
director or officer of a bank or quasi-bank pending obligation when
investigation up to 120 days but any delay due to the it falls due. The
fault of the director or offcer shall not be counter in bank, not the
computing the period of suspension. BSP, pays for
fees.
Close now-hear later doctrine
Role Restores the To rehabilitate
It is to prevent unwarranted dissipation of the bank’s viability of an the bank and
assets and as a valid exercise of police power to operating bank bound to gather
protect the depositors, creditors, stockholders and the suffering and take charge
general public. No prior hearing is necessary in liquidity of all the assets
appointing a receiver and in closing the bank. It is problems and liabilities of
enough that subsequent judicial review is provided for. the institution,
administer the
Injunction does not lie against BSP in the exercise of the same for the
power and function. A contrary rule may lead to benefit of the
dissipation of assets and trigger bank run. Judicial creditors and
review comes only after action of the Monetary Board exercise the
if the same was attended with bad faith and grave abuse general powers
of discretion (Bangko Sentral ng Pilipinas v. Valenzuela, of a receiver
G.R. No. 184778, October 2, 2009). under the Rules
of Court
However, the closure and liquidation of a bank, (Villanueva vs.
which is considered an exercise of police power CA, GR No.
may be the subject of judicial inquiry. The order of 114870, May 26,
closure (receivership or conservatorship) may be 1995)
assailed:
Limitation Powers of a A receiver can
a. by the stockholders representing at least s conservator do only perform
majority of the outstanding capital stock; not extend to acts of
b. within ten days from receipt by the board of the revocation administration
directors of the order; of valid and and not acts of
c. thru a petition for certiorari on the ground that perfected dominion. The
the action taken by the BSP was in excess of contracts. The receiver cannot
jurisdiction or with grave abuse of discretion law merely approve an
as to amount to lack of jurisdiction. gives the option to
conservator purchase real
Designation of conservator is not a precondition to power to revoke property. He has
the designation or receiver. (Sec. 31) contracts that only the
are deemed to authority to
CONSERVATO RECEIVER be defective – administer the
R void, voidable, same for the
When Appointed One appointed if unenforceable benefit of its
Appointed when an the bank is or rescissible. creditors (Abacu
institution is in already insolvent Hence, the s Real Estate
a state of which means conservator Development
continuing that its liabilities merely takes Center, Inc. v.
inability or are greater than the place of the Manila Banking
unwillingness its assets. bank’s board. Corp, G.R. No.
to maintain a 162270, Apr. 6,
condition of NOTE: For banks, 2005).
liquidity the receiver
deemed would be the Duration Conservator is The bank may be
adequate to Philippine tasked to placed under
protect the Deposit restore viability receivership for a
interest of Insurance within 1 year maximum period
depositors and Corporation; for of 90 days from
creditors. quasi-banks, it Note: The MB take over.
could be any can, however, at (Dimaampao,
The bank still person of any time before 2017)
has more assets recognized the expiration

of 1 year, NOTE: under R.A.

terminate the 11211 (took Liquidator of a distressed bank can prosecute and
conservatorshi effect beyond the defend suits against the bank
p on any of the cut-off date): the
following MB shall Prosecution of suits, collection and the foreclosure of
grounds: direct the PDIC mortgages against debtors of the bank by the liquidator
to proceed with are among the usual and ordinary transactions
a.The the liquidation of pertaining to the administration of a bank (Banco
institution can the Filipino v. Central Bank, ibid).
continue to closed bank
operate on its pursuant to this Filing of the claims against the insolvent bank
own and section and the
conservatorshi relevant GR: All claims against the insolvent bank should be filed
p is no longer provisions in the liquidation proceeding. It is not necessary that a
necessary; or of Republic Act claim be initially disputed in a court or agency before it
No. 3591, as is filed with the liquidation court (Ong v. CA, G.R. No.
b. On the amended. The 112830, Feb. 1, 1996).
basis of the 90-day period to
report of the place the bank XPN: Where it is the bank that files a claim against
conservator or under another person or legal entity, the claim should be filed
findings of MB, receivership is in the regular courts.
determine that eliminated STAY ORDER
the continuance
in business of After the Monetary Board has declared that a bank is
the institution insolvent and has ordered it to cease operations, the
would involve assets of the insolvent bank are held in trust for the
probable loss to equal benefit of all creditors. One cannot obtain an
its depositors or advantage or preference over another by attachment,
creditors, the execution or otherwise. The final judgment against the
bank will go bank should be stayed as to execute the judgment
under would unduly deplete the assets of the banks to the
liquidation obvious prejudice of other depositors and creditors
(Lipana v. Development Bank of Rizal, G.R. No. L-73884,
Sept. 24, 1987).
Note: The Court has no authority to appoint a receiver
for a bank if the latter will function as such under BSP Rationale: The reason behind the indiscriminate
law. The power to appoint belongs to BSP. suspension or stay order in relation to the creditors’
claim is to expedite the rehabilitation of the distressed
corporation by enabling the management committee or
the rehabilitation receiver to effectively exercise its/his
LIQUIDATION powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent the
Acts of liquidation are those which constitute the rescue of the debtor company. It also recognizes the
conversion of the assets of the banking institution to assets of a corporation under rehabilitation held under
money or the sale, assignment or disposition of the trust for the equal benefit of all creditors under the
same to creditors and other parties for the purpose of doctrine equality is equity, whereby all the creditors
paying debts of such institution (Banco Filipino v. ought to stand on equal footing, and not one of them
Central Bank, G.R. No. 70054, December 11, 1991). should be paid ahead of others. (2006 BAR)
If the receiver determines that the institution can no Appointment of receiver operates to suspend the
longer be rehabilitated, the Monetary Board shall notify authority of the bank and its officers over its
the board of directors and direct the receiver to properties and effects.
proceed with its liquidation.
CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

Grounds 1. Continuing inability 1. Inability to pay liabilities as they 1. Insolvency
2. Unwillingness to fall due e.g: bank run, rumors, etc. 2. Bank cannot be rehabilitated
maintain condition of 2. Assets are less than its liabilities
liquidity 3. Cannot continue business
4. without causing damage;
5. Violation of a cease and desist
order
6. “Bank holiday” for more than 30
days (NCBA, Sec. 30).
Effects 1. Juridical personality is 1. Juridical personality is retained Same with conservatorship
retained. 2. Suspension of operation
/stoppage of business

2. Perfected transactions 3. Assets deemed in custodia legis

cannot be repudiated (Domingo v. NLRC, G.R. 156761,
October 17, 2006).

purportedly acquired illegally. (Ejercito vs.

LAW ON SECRECY OF BANK DEPOSITS Sandiganbayan, G.R. No. 157294, Nov. 30, 2006)
(R.A. 1405, AS AMENDED) c. In a special proceeding to settle the estate of
deceased depositor, his bank deposits may be
PROHIBITED ACTS inquired into, since his bank deposits are
subject matter of the case, because all of his
1. Examination/inquiry/looking into all deposits of assets are supposed to be collated. (Sy v RTC
whatever nature with banks or banking Judge of Iloilo)
institutions in the Philippines (including
investment in bonds issued by the government) by 5. Upon order of the Commissioner of Internal
any person, government official or office (RA 1405, Revenue:
Sec. 2). a. A decedent to determine his estate; and
2. Disclosure by any official or employee of any b. Any taxpayer who has filed for an application
banking institution to any unauthorized person of for compromise of his tax liability
any information concerning said deposit (RA 1405, c. A specific taxpayer upon request for tax
Sec. 3). information from a foreign tax authority
pursuant to an international convention or
However, non-bank official or employee is not covered agreement on tax matters to which the
by the prohibition. Neither is disclosure by a bank Philippines is a party. (NIRC, Sec. 6 [f])
official or employee of information about bank deposit 6. In case of dormant accounts/deposits for at least
in favor of a co-employee in the course of the 10 years under the Unclaimed Balances Act (Act No.
performance of his duties covered by the prohibition. 3936, Sec. 2)
7. Presidential Commission on Good Government
Confidentiality granted by RA 1405 does NOT (PCGG) may require the production of bank
extend to Letters of Credit and Trust Receipts records material to its investigation (Opinion of the
Secretary of Justice, February 27, 1987)
DEPOSITS COVERED 8. The Anti-Money Laundering Council (AMLC)
may inquire into any deposit with any bank in case
1. All deposits of whatever nature with banks or of violation of the RA 9160 or the AMLA if there is
banking institutions found in the Philippines; or probable cause that it is related to an unlawful
2. Investments in bonds issued by the Philippine activity (RA 9160, as amended, Sec. 11)
government, its branches, and institutions. (R.A. 9. The PDIC and the BSP may examine deposit
1405, Sec. 2) accounts and all information related to them in
3. Trust accounts are included in the scope of the law. case of a finding of unsafe or unsound banking
practices (RA 3591, as amended, Sec. 8)
Instances where examination or disclosure of 10. With court order:
information about deposits can be allowed a. In cases of unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt Practices Act (PNB
1. Upon written consent of the depositor (RA 1405, v. Gancayco, L-18343, September 30, 1965)
Sec. 2) 11. Without court order: If the AMLC determines that a
2. In cases of impeachment (ibid) particular deposit or investment with any banking
3. Upon order of competent court in cases of bribery institution is related to the following (HK-MADS):
or dereliction of duty of public officials (ibid) a. Hijacking,
4. In cases where the money deposited or invested is b. Kidnapping,
the subject matter of the litigation (ibid) c. Murder,
a. In an action filed by the bank to recover the d. Destructive Arson, and
money transmitted by mistake, necessarily, an e. Violation of the Dangerous Drugs Act.
inquiry into the whereabouts of the amount f. Acts of Terrorism or in violation of Human
extends to whatever is concealed by being held Security Act.
or recorded in the name of the persons other
than the one responsible for the illegal Improper cases:
acquisition. (1992 Bar) 1. The examination of bank account to which the
b. In a case of plunder, it necessarily involves an money paid by an insurance company for treasury
inquiry into the whereabouts of the amount bills it purchased was deposited is improper, even
if the insurance company sued the seller for failure

to deliver treasury bills. The money paid is not if there is probable cause that it is related to an
subject matter of litigation. (Onate v. Abrogar) unlawful activity (RA 9160, Sec. 11). AMLC can
2. A collecting bank which sued the drawee bank to investigate (a) any property of funds related to
recover the deficiency for the payment of a check financing terrorism; (b) property or funds of any
for failure of the drawee bank to notify the person if there is probable cause to believe he is
collecting bank that it had erroneously undercoded committing or attempting or conspiring to commit
the amount of the check presented for clearing is terrorism or financing terrorism (RA 10168, Sec.
not entitled to examination because the money in 10).
the account of the drawee is not the subject matter 4. Upon ex parte application by a law enforcer
of the case. The subject matter is the deficiency of authorized by the Anti-Terrorism Council, the
payment. (Union Bank of the Philippines v. Court of justices of the CA designated as special court to
Appeals) handle anti-terrorism cases may authorize the
3. Ombudsman cannot inspect an account as there is examination of deposits in a financial institution
yet no pending litigation before any court of upon finding probable cause of the commission of
competent authority. Mere investigation of terrorism or conspiracy to commit terrorism (RA
Ombudsman is not enough, inspection during an 9372, Sec. 27-28).
investigation merely amounts to a fishing 5. PDIC and BSP may examine deposit accounts and
expedition. (Marquez vs. Desierto) all information related to them in case of a finding
of unsafe or unsound banking practices (RA 3591,
FOREIGN CURRENCY DEPOSIT as amended, Sec. 8).
(R.A. 6426, AS AMENDED)
Based on jurisprudence
GR: Foreign currency deposits cannot be inquired or 1. Where the funds deposited in a joint foreign
looked into. All foreign currency deposits are currency savings account belonged exclusively to
absolutely confidential (RA 6426, Sec. 8). one of the depositors and were held in trust for him
by the other depositor and the other depositor
The surety which issued a bond to secure the obligation unilaterally closed the joint account and
of the principal debtor cannot inquire into the foreign transferred the funds to her personal account, the
currency deposits of the debtor even if its purpose is to latter cannot invoke the exemption from court
determine whether or not the loan proceeds were used processes under RA 6426 because she is not the
for the purpose specified in the surety agreement. The owner of the deposit in the account. (Van Twest v.
foreign currency deposits cannot be examined without Court of Appeals, G.R. No. 106235, February 10,
the consent of the depositor. The subpoena issued by 1994).
the bank should be quashed because foreign currency 2. A father who sued his daughter for illegally
deposits are not subject to court order except for withdrawing funds from his foreign currency
violation of the anti-money laundering law (GSIS v. deposit and transferring to another bank in the
Court of Appeals, G.R. No. 189206, June 8, 2011). name of her sister, can inquire into the deposit of
the sister, because the money deposited belongs to
XPNs: him (China Banking Corp. v. CA, G.R. No. 140687,
Based on law December 18, 2006).
1. The depositor has given his written permission 3. The exemption from court process of foreign
(ibid.) currency deposits under RA 6426 cannot be
2. The Commissioner of Internal Revenue is invoked by a foreign transient who raped a minor,
authorized to inquire into bank deposits of the escaped and was held liable for damages to the
following: victim. The garnishment of his foreign currency
a. A decedent to determine his estate; and deposit should be allowed to prevent an injustice
b. Any taxpayer who has filed for an application for and for equitable grounds. The law was enacted to
compromise of his tax liability encourage foreign currency deposit and not to
c. A specific taxpayer upon request for tax benefit a wrongdoer (Salvacion v. Central Bank of
information from a foreign tax authority the Philippines, G.R. No. 94723, August 21, 1997).
pursuant to an international convention or
agreement on tax matters to which the During a preliminary investigation for estafa, the
Philippines is a party. (NIRC, Sec. 6 [f]) investigating fiscal issued subpoena for production
3. AMLC may inquire into any deposit with a bank or of bank account. Is this proper?
financial institution in case of violation of RA 9160

NO. The investigating fiscal may not issue a subpoena financial resources and technical expertise and
to inquire into the bank deposit. It is only a court of intergrity of banks before they may be allowed to
competent jurisdiction which may do so. There is no operate.
case yet filed before the court since it is still in the
preliminary investigation stage.
Classifications of banks (2002, 2010 BAR)
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN
DEPOSITS 1. Universal banks – Primarily governed by the GBL.
They can exercise the powers of an investment
The prohibition against examination or inquiry does house and invest in non-allied enterprises and have
not preclude its being garnished for satisfaction of the highest capitalization.
judgment. The disclosure is purely incidental to the 2. Commercial banks – Ordinary banks governed by
execution process and it was not the intention of the the GBL which have a lower capitalization
legislature to place bank deposits beyond the reach of requirement than universal banks and can neither
judgment creditor (PCIB v. CA, G.R. No. 84526, January exercise the powers of an investment house nor
28, 1991). invest in non-allied enterprises.
3. Thrift banks – These are a) Savings and mortgage
With respect to foreign deposits, they shall be exempt banks; b) Stock savings and loan associations; and
from attachment, garnishment, or any other order or c) Private development banks, which are primarily
process of any court, legislative body, government governed by the Thrift Banks Act (RA 7906).
agency or any administrative body whatsoever (RA 4. Rural banks – These are mandated to make needed
6426, Sec 8). credit available and readily accessible in the rural
areas on reasonable terms and which are primarily
XPN: The garnishment of a foreign currency deposit governed by the Rural Banks Act of 1992 (RA 7353).
should be allowed to prevent injustice and for equitable 5. Cooperative banks – Banks whose majority shares
grounds are owned and controlled by cooperatives
primarily to provide financial and credit services to
GENERAL BANKING LAW OF 2000 (RA 8791) cooperatives. It shall include cooperative rural
banks. They are governed primarily by the
Banks refer to entities engaged in the lending of funds Cooperative Code (RA 6938).
obtained in the form of deposits. 6. Islamic banks – Banks whose business dealings and
activities are subject to the basic principles and
Quasi-bank are entities engaged in the borrowing of rulings of Islamic Shari’ a, such as the Al Amanah
funds through the issuance, endorsement or Islamic Investment Bank of the Philippines which
assignment with recourse or acceptance of deposit was created by RA 6848.
substitutes for purposes of re-lending or purchasing of 7. Other classification of banks as determined by the
receivables and other obligations (GBL, Sec 4). Monetary Board of the BSP.
Unlike banks, quasi-banks do not accept deposits. Directors

Neither are funds obtained insured with the PDIC.
1. Composition: 5 to 15
Ownership of a bank 2. At least 2 directors shall be independent
3. Foreigners may become directors to the extent of
Individuals and non-bank corporations, whether foreign participation in the equity of the bank
foreign or Filipino, ay own or control up to 40% of the 4. In case of bank merger or consolidation. Directors
voting stock of a domestic bank. shall not exceed 21.
i. The percentage of foreign-owned stocks shall be
determined by the citizenship of the individual
stockholder. ACQUISITION OF REAL ESTATE
ii. The citizenship of the non-bank corporation shall
follow the citizenship of its controlling For its own use: Total investment in real estate and
stockholders. improvements, including equipment, for the own use of
the bank shall not exceed 50% of combined capital
FIT AND PROPER RULE: The Monetary Board shall account
take into consideration the capability in terms of

For satisfaction of debt: Real property acquired by DOS is a partner or a corporation where DOS
bank because of a mortgage, conveyance in satisfaction owns at least 20%.
of debt, or under judgement shall be dispoed within 5
years. (Sec. 52) RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND
SINGLE BORROWER’S LIMIT THEIR RELATED INTERESTS)
Limitations imposed upon banks with respect to its Requirements that must be complied with in case of
loan function DOSRI accounts (2002 BAR)
1. GR: Single borrower’s limit – The total amount of APPROVAL REQUIREMENT: Loan must be approved
loans, credit accommodations and guarantees that by the majority of all the directors not including the
the bank could grant should at no time exceed 25% director concerned.
of the bank’s net worth (GBL, Sec 35.1, 2002, 2015
BAR). REPORTORIAL REQUIREMENTS:
a. Loan must be entered in the books of the
XPN: corporation (GBL, Sec. 36)
a. As the Monetary Board may otherwise b. CB must be informed of the prior to the transaction.
prescribe for reasons of national interest
b. Deposits of rural banks with GOCC financial CEILING REQUIREMENT: The amount of the loan shall
institutions like LBP, DBP, and PNB. not exceed the book valued of the paid-in contribution
and the amount of the unencumbered deposits. (Go v.
2. The total amount of loans, credit accommodations Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23,
and guarantees prescribed in (a) may be increased 2009)
by an additional 10% of the net worth of such bank
provided that additional liabilities are adequately ARMS-LENGTH RULE: It provides that any dealings of
secured by trust receipt, shipping documents, a bank with any of its DOSRI shall be upon terms not
warehouse receipts and other similar documents less favorable to the bank than those offered to others
which must be fully covered by an insurance (GBL, (GBL, Sec. 36 [2]).
Sec. 35.2).
3. Loans and other credit accommodations secured by Effect of non-compliance with the foregoing
REM shall not exceed 75% of the appraised value of requirement: Violation of DOSRI is a crime and carries
the real estate security plus 60% of the appraised with it penal sanction. It does not make the transaction
value of the insured improvements (GBL, Sec. 37) void but only renders the responsible officers and
CM/intangible property such as patents, directors criminally liable. (Republic v. Sandiganbayan,
trademarks, etc. shall not exceed 75% of the G.R. No. 166859, 169203, 180702, April 12, 2011).
appraised value of the security (GBL, Sec. 38).
4. Loans being contractual, the period of payment A bank officer violates the DOSRI law when he acquires
may be subject to stipulation by the parties. In the bank funds for his personal benefit, even if such
case of amortization, the amortization schedule has acquisition was facilitated by a fraudulent loan
no fixed period as it depends on the project to be application. Directors, officers, stockholders, and their
financed such that if it was capable of raising related interests cannot be allowed to interpose the
revenues, it should be at least once a year with a fraudulent nature of the loan as a defense to escape
grace period of 3 years if the project to be financed culapability or their circumvention of the law. The
is not that profitable which could be deferred up to prohibition under the law covers loan by a bank
5 years if the project was not capable of raising director or officer which are made directly, indirectly,
revenues (GBL, Sec. 44). for himself or as the representative or agent of others.
5. Loans granted to DOSRI: At the same time, he is liable for estafa through
a. Director falsification of commercial documents. The bank
b. Officer money which came to his possession as a result of the
c. Stockholder, having at least 1% ownership fraudulent loan application was not his. He remained
over the bank bank’s fiduciary with respect to that money, which
d. Related Interests, such as DOS’s spouses, their makes it capable of misappropriation or conversion in
relatives within the first degree whether by his hands (Soriano v. People of the Philippines, et al., G.R.
consanguinity or affinity, partnership whereby No. 162336, February 1, 2010)

PHILIPPINE DEPOSIT INSURANCE The deposit must give rise to creditor-debtor

CORPORATION ACT (RA 3591, as amended by relationship between the bank and the depositor.
10846) Deposits in a branch of domestic bank outside the
Philippines shall not be covered unless the insured
bank elects to include the same for insurance subject to
MAXIMUM DEPOSIT INSURANCE COVERAGE approval of the PDIC.
A joint account regardless of whether the conjunction
‘and’, ‘or’, ‘and/or’ is used, shall be insured separately Note: Foreign currency deposits included, branches of
from any individually-owned deposit account: foreign banks in the Phil likewise included. Change in
definition of deposit under RA 1405 does not apply to
If the account is held jointly by two or more PDIC. Trust fund is not insured with PDIC.
natural persons, or by two or more juridical
persons or entities Deposit accounts not entitled to payment
PDIC shall not pay deposit insurance for the
The maximum insured deposit shall be divided following accounts or transactions whether
denominated, documented, recorded or
into as many equal shares as there are individuals,
booked as deposit by the bank;
juridical persons or entities, unless a different 1. investment products such as bonds and
sharing is stipulated in the document of deposit, securities, trust accounts, and other similar
and instruments;
2. deposit accounts or transactions which are
If the account is held by a juridical person or unfunded, or that are fictitious or fraudulent
entity jointly with one or more natural persons 3. deposit accounts or transactions constituting
The maximum insured deposit shall be presumed unsafe and unsound banking practices as
to belong entirely to such juridical person or entity determined by PDIC, in consultation with BSP,
after due notice and hearing, and publication of
a cease and desist order issued by the PDIC
Note: The aggregate of the interest of each co-
against such deposit accounts or transactions;
owner over several joint accounts, whether owned and
by the same or different combinations of 4. deposits that are determined to be the
individuals, juridical persons or entities, shall proceeds of an unlawful activity as defined
likewise be subject to the maximum insured under the Anti-Money Laundering law.
deposit of Five hundred thousand pesos
(P500,000.00) PAYMENT OF INSURED DEPOSITS
INSURED DEPOSIT Whenever an insured bank shall have been closed by

the Monetary Board pursuant to Section 30 of Republic
Amount due to any bonafide depositor for legitimate Act No. 7653, or upon expiration or revocation of a
deposits in an insured bank as of the date of closure but bank’s corporate term, payment of the insured deposits
not to exceed five hundred thousand pesos (P500,000). on such closed bank shall be made by the Corporation
as soon as possible either by cash or by making
In determining such amount due to any depositor, there available to each depositor a transferred deposit in
shall be added together all deposits in the bank another insured bank in an amount equal to insured
maintained in the same right and capacity for his or her deposit of such depositor
benefit either in his or her own name or in the name of
others. Provided, however, That the Corporation, in its
discretion, may require proof of claims to be filed
Deposit liabilities required to be insured with PDIC before paying the insured deposits, and that in any case
where the Corporation is not satisfied as to the validity
The term “ deposit “ means the unpaid balance of of a claim for an insured deposit, it may require final
money or its equivalent received by a bank in the usual determination of a court of competent jurisdiction
course of business and for which it has given or is before paying such claim: Provided, further, That
obliged to give credit to a commercial, checking, savings failure to settle the claim, within six (6) months from
time or thrift account. the date of filing of claim for insured deposit, where
such failure was due to grave abuse of discretion, gross

negligence, bad faith, or malice, shall, upon conviction, 1. immediately preceding or during
subject the directors, officers or employees of the a bank-declared bank holiday, or
Corporation responsible for the delay, to imprisonment 2. immediately preceding a closure
from six (6) months to one (1) year: Provided, order issued by the Monetary
furthermore, That the period shall not apply if the Board of the Bangko Sentral ng
validity of the claim requires the resolution of issues of Pilipinas for the purpose of availing
facts and or law by another office, body or agency of the maximum deposit insurance
including the case mentioned in the first proviso or by coverage;”
the Corporation together with such other office, body
or agency. (Sec 19, RA 10846)
Power of the PDIC Prohibition against issuance of TRO
No court, except the Court of Appeals, shall issue any

PDIC was created under RA 3591 as an insurer of
temporary restraining order, preliminary injunction or
deposits in all banks entitled to the benefits of
preliminary mandatory injunction against PDIC for any
insurance under the said Act to promote and safeguard
action on its part under the PDIC charter.The Supreme
the interests of the depositing public. As such, PDIC has
Court may issue a temporaryrestraining order or
the duty and authority to determine the validity of and
injunction when the matter is of extreme urgency
grant or deny deposit insurance claims. Section 16(a) of
involving a constitutional issues such that unless a TRO
its Charter, as amended, provides that PDIC shall
is issued, grave injustice or irreparable injury will arise.
commence the determination of insured deposits due
the depositors of a closed bank upon its actual take over The actions of PDIC with respect to determination of
of the closed bank. Also, Section 1 of PDIC's Regulatory insured deposit accounts shall be final and executory
Issuance No. 2011-03, provides that as it is tasked to and may not be set aside or restrained by the court
promote and safeguard the interests of the depositing except on petition for certiorari on the ground that the
public by way of providing permanent and continuing action was taken in excess of jurisdiction or with grave
insurance coverage on all insured deposits, and in abuse of discretion as to amount to lack or excess of
helping develop a sound and stable banking system at jurisdiction. The petition for certiorari may only be filed
all times, PDIC shall pay all legitimate deposits held by within 30 days from notice of denial of claim for deposit
bona fide depositors and provide a mechanism by insurance. (So vs Philippine Deposit Insurance
which depositors may seek reconsideration from its Corporation, GR No. 230020, March 19, 2018 ).
decision, denying a deposit insurance claim.
Note: The Regional Trial Court has no jurisdiction to
Further, it bears stressing that as stated in Section 4(f) nullify the action of PDIC in denying insurance claim.
of its Charter, as amended, PDIC's action, such as (Spouses Chugani vs PDIC, ibid.)
denying a deposit insurance claim, is considered as
final and executory and may be reviewed by the court
only through a petition for certiorari on the ground of
grave abuse of discretion. Failure to settle claim of insured depositor
SPLITTING OF DEPOSITS The failure to settle the claim within six months from
date of filing of the claim for insured deposit whether
SEC. 11. Section 21, paragraph (f)(5) is hereby such failure was due to grave abuse of discretion , gross
amended to read as follows: REPUBLIC ACT NO. 9576 negligence, bad faith or malice shall, upon conviction,
Splitting of deposits occurs whenever a deposit subject the directors, officers or employees of PDIC
account with an outstanding balance of more responsible for the delay, to imprisonment from six
than the statutory maximum amount of months to one year; provided that the period shall not
insured deposit maintained under the name of apply if the validity of the claim requires the resolution
natural or juridical persons is broken down of issues of facts and/or law by PDIC or another office,
and transferred into two (2) or more accounts subject further to the remedy of PDIC to require final
in the name/s of natural or juridical persons or determination of a court of competent jurisdiction if
entities who have no beneficial ownership on PDIC is no satisfied as to the viability of the claim for
transferred deposits in their names within insured deposit.
one hundred twenty (120) days
Failure of depositor to claim insured deposits

Unless otherwise waived by PDIC, if the depositor in the organisms and non-biological and microbiological
closed bank shall fail to claim his insured deposit with processes
PDIC within two years from actual take over of the 2. Aesthetic creations
closed bank by the receiver or does not enforce his 3. Discoveries, scientific theories and mathematical
claim filed with PDIC within two years after the two methods
year period to file a claim, all rights of the depositor 4. Schemes, rules and methods of performing mental
against the PDIC with respect to the insured deposit acts, playing games or doing business, and
shall be barred; however, all rights of the depositor programs for computers
against the closed bank and its shareholders or the 5. Anything which is contrary to public order or
receivership estate to which the PDIC may have become morality (IPC as amended by R.A. 9502, Sec. 22).
subrogated shall thereupon revert to the depositor. 6. Methods for treatment of the human or animal
body
7. In the case of drugs and medicines, mere discovery
of a new form or new property of a known
INTELECTUAL PROPERTY LAW substance which does not result in the
enhancement of the efficacy of that substance
8. Computer programs are not patentable but are
copyrightable. However, they can be patentable if
PATENTS they are part of a process (e.g. business process
Any technical solution of a problem in any field of with a step involving the use of a computer
human activity which is new, involves an inventive step program).
and is industrially applicable. It may be, or may relate to,
a product, or process, or an improvement of any of the OWNERSHIP OF PATENT
foregoing (IPC, Sec. 21). 1. Inventor, his heirs, or assigns (IPC, Sec 28);
2. Joint invention – Jointly by the inventors (IPC, Sec.
Criteria for Patentability: 28);
1. Novelty – An invention shall not be considered new 3. Two or more persons invented separately and
if it forms part of a prior art (Sec. 23, IPC). independently of each other – To the person who
Prior Art: Everything which has been made filed an application;
available to the public anywhere in the world, 4. Two or more applications are filed – the applicant
before the filing date or the priority date of the who has the earliest filing date or, the earliest
application claiming the invention and The whole priority date. (First-to-file rule) (IPC, Sec. 29).
contents of an earlier published Philippine Where two or more applications are filed for the
application or application with earlier priority date same invention, to the applicant which has the
of a different inventor. earliest filing date
5. If made pursuant to a commission – person who
2. Inventive Step –if, having regard to prior art, it is commissions the work shall own the patent, unless
not obvious to a person skilled in the art at the time otherwise provided in the contract.
of the filing date or priority date of the application 6. If made pursuant to an employment – In case the
claiming the invention. employee made the invention in the course of his
In the case of drugs and medicines, there is no employment contract, the patent shall belong to:
inventive step if the invention results from the a. The employee, if the inventive activity is not a
mere discovery of a new form or new property of a part of his regular duties even if the employee
known substance which does not result in the uses the time, facilities and materials of the
enhancement of the known efficacy of that employer;
substance b. The employer, if the inventive activity is the
result of the performance of his regularly-
3. Industrially Applicable – An invention that can be assigned duties, unless there is an agreement,
produced and used in any industry [in a practical express or implied, to the contrary (IPC, Sec.
and not in a theoretical sense] (IPC, Sec. 27). 30).
NON-PATENTABLE INVENTIONS GROUNDS FOR CANCELLATION OF A PATENT

1. Plant varieties or animal breeds or essentially 1. The invention is not new or patentable;
biological process for the production of plants or
animals. This provision shall not apply to micro-

2. The patent does not disclose the invention in a or anywhere else in the world by the patent
manner sufficiently clear and complete for it to be owner, or by any party authorized to use the
carried out by any person skilled in the art; or invention.
3. Contrary to public order or morality (IPC, Sec. 61.1). 2. Prior user - Person other than the applicant,
4. Patent is found invalid in an action for infringement who in good faith, started using the invention
(IPC, Sec. 82); in the Philippines, or undertaken serious
5. The patent includes matters outside the scope of preparations to use the same, before the filing
the disclosure contained in the application (IPC, Sec date or priority date of the application shall
21, Regulations on Inter Partes Proceeding, Sec.1). have the right to continue the use thereof, but
this right shall only be transferred or assigned
REMEDIES AVAILABLE further with his enterprise or business.
1. Persons with a right to a patent - If a person other 3. Non-Commercial – Acts done privately and on
than the applicant is declared by final court order or a non-commercial scale or for a non-
decision as having the right to a patent, he may within commercial purpose PROVIDED THAT this
3 months after such decision has become final: does not significantly prejudice the economic
a. Prosecute the application as his own interest of the owner of the patent
b. File a new patent application 4. Experimental Use – Consisting of making or
c. Request the application to be refused; or using exclusively for experimental use of the
d. Seek cancellation of the patent (IPC, Sec. 67.1). invention for scientific, or educational
purposes and other activities directly related
2. True and actual inventor - If a person, who was to said purposes.
deprived of the patent without his consent or through 5. Use by Government – a Government agency
fraud is declared by final court order or decision to be or third person authorized by the Government
the true and actual inventor, the court shall order for his may exploit the invention even without
substitution as patentee, or at the option of the true agreement of the patent owner where:
inventor, cancel the patent, and award actual damages a. The public interest, in particular, national
in his favor if warranted by the circumstances (IPC, Sec. security, nutrition, health or the
68). development of other sectors, as determined
by the appropriate agency of the government,
These actions must be filed within one (1) year from the so requires; or
date of publication. (IPC, Sec. 70). b. A judicial or administrative body has
determined that the manner of exploitation,
RIGHTS CONFERRED BY A PATENT by the owner of the patent or his licensee, is
1. In case of Product – Right to restrain, prohibit and anti- competitive; or
prevent any unauthorized person or entity from c. In the case of drugs and medicines, there is a
making, using, offering for sale, selling or national emergency or other circumstance of
importing the product. extreme urgency requiring the use of the
2. In case of Process – Right to restrain, prohibit and invention; or
prevent any unauthorized person or entity from d. In the case of drugs and medicines, there is a
manufacturing, dealing in, using, offering for sale, public non-commercial use of the patent by
selling or importing any product obtained directly the patentee, without satisfactory reason; or
or indirectly from such process. (IPC, Sec. 71) e. In the case of drugs and medicines, the
3. Right to assign the patent, to transfer by demand for the patented article in the
succession, and to conclude licensing contracts. Philippines is not being met to an adequate
(IPC, Sec. 71.2) extent and on reasonable terms, as
determined by the Secretary of the
The rights conferred by a patent application take effect Department of Health.
after publication in the Official Gazette. (IPC, Sec 46)
PATENT INFRINGEMENT
LIMITATIONS OF PATENT RIGHTS Tests in Patent Infringement:
1. Parallel imporation – In case of drugs and 1. Literal Infringement - Resort must be had, in
medicine, the owner of a patent has NO RIGHT the first instance, to the words of the claim. If
to prevent third parties from making, using, accused matter clearly falls within the claim,
offering for sale, importing a patented product, infringement is made out and that is the end of
when it has been introduced in the Philippines it. To determine whether the particular item

falls within the literal meaning of the patent Trade name means the name or designation
claims, the Court must juxtapose the claims of identifying or distinguishing an enterprise (IPC, Sec.
the patent and the accused product within the 121.1, 121.2, 121.3)
overall context of the claims and specifications,
to determine whether there is exactly identity ACQUISITION OF OWNERSHIP
of all material elements (Godines v. The Only the owner of the trademark, trade name or service
Honorable Court of Appeals, G.R. No. 97343, mark used to distinguish his goods, business or service
September 13, 1993). from the goods, business or service of others is entitled
to register the same. An exclusive distributor does not
2. Doctrine of Equivalents – There is acquire any proprietary interest in the principal's
infringement when a device appropriates a trademark and cannot register it in his own name
prior invention by incorporating its innovative unless it is has been validly assigned to him (Superior
concept and, despite some modification and Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
change, performs substantially the same No. 169974, April 20, 2010).
function in substantially the same way to
achieve substantially the same result. (Ibid.). 1. Concept of Actual Use – Prior use in the
Philippines is NO LONGER REQUIRED BEFORE
The doctrine of equivalents thus requires REGISTRATION. However, there must be actual use
satisfaction of the function-means-and-result after registration.
test, the patentee having the burden to show
that all three components of such equivalency The registrant shall file a declaration of actual use
test are met (Smithkline Beckman Corporation of the mark with evidence to that effect within 3
v. CA, G.R. No. 126627, August 14, 2003). years from the filling of date of application or shall
show valid reasons for non-use within one year
3. Doctrine of file wrapper estoppel: It from fifth anniversary date of registration,
balances the doctrine of equivalents. Patentee otherwise it may be cancelled.
is precluded from claiming as part of patented
product that which he had to excise or modify 2. Effect of Registration - The rights in a mark shall
in order to avoid patent office rejection, and he be acquired through registration made validly in
may omit any additions that he was compelled accordance with the provisions of the IP Code.
to add by patent office regulations. a. It also provides that a certificate of
registration of a mark shall be prima facie
Contributory Infringement - Anyone who actively evidence of the validity of the registration,
induces the infringement of a patent or provides the ownership, and the exclusive right to use
infringer with a component of a patented product or of same;
a product produced because of a patented process b. The filing date of an application shall be
knowing it to be especially adopted for infringing the considered since the first to file the
patented invention and not suitable for substantial application will be preferred over the
non-infringing use shall be liable as a contributory junior applicants, PROVIDED THAT, it
infringer and shall be jointly and severally liable with contains the following indications and
the infringer (Sec. 76.6, IPC). elements (1) express or implicit indication
that registration is sought; (2) identity of
TRADEMARK applicant; (3) indications sufficient to
Mark means any visible sign capable of distinguishing contact the applicant or his
the goods (trademark) or services (service mark) of an representative; (4) reproduction of the
enterprise and shall include a stamped or marked mark; (5) list of goods or services for
container of goods. which registration is sought.
c. Registration is necessary before one can
Collective mark means any visible sign designated as file an action for infringement;
such in the application for registration and capable of
distinguishing the origin or any other common Ownership of trade name may be acquired not
characteristic, including the quality of goods or services necessarily by registration but by adoption and use in
of different enterprises which use the sign under the trade or commerce. As between actual use of a mark
control of the registered owner of the collective mark. without registration, and registration of the mark
without actual use thereof, the former prevails over the

latter. (Shangri-la Hotel Management Ltd. v. Developers mark which is considered by the competent authority
Group of companies, March 31, 2006 G.R. No. 159938). of the Philippines to be well-known internationally and
in the Philippines, whether or not it is registered here,
NON-REGISTRABLE MARKS as being already the mark of a person other than the
1. Consists of immoral, deceptive or scandalous matter applicant for registration, and used for identical or
or falsely suggest a connection with persons, similar goods or services: Provided, That in
institutions, beliefs, or national symbols; determining whether a mark is well-known, account
2. Consists of the flag or coat of arms or other insignia shall be taken of the knowledge of the relevant sector
of the Philippines or any of its political subdivisions, of the public, rather than of the public at large, including
or of any foreign nation; knowledge in the Philippines which has been obtained
3. Consists of a name, portrait or signature identifying as a result of the promotion of the mark;
a particular living individual except by his written
consent, or the name, signature, or portrait of a A mark cannot be registered if it is identical with, or
deceased President of the Philippines, during the confusingly similar to, or constitutes a translation of a
life of his widow except by written consent of the mark considered well-known in accordance with the
widow; preceding paragraph, which is registered in the
4. Identical with a registered mark belonging to a Philippines with respect to goods or services which
different proprietor or a mark with an earlier filing are NOT similar to those with respect to which
or priority date, in respect of: registration is applied for: Provided, That use of the
a. The same goods or services, or mark in relation to those goods or services would
b. Closely related goods or services, or indicate a connection between those goods or services,
c. If it nearly resembles such a mark as to be likely and the owner of the registered mark: and That the
to deceive or cause confusion interests of the owner of the registered mark are likely
The law does not prohibit or enjoin every to be damaged by such use (Sec. 123.IPC).
similarity. The similarity must be such that the
ordinary purchaser will be deceived into the belief PRIORITY RIGHT
that the goods are those of another
5. FOR 5-6, See Well-Known Mark Below An application for registration of a mark filed in the
7. Is likely to mislead the public as to the nature, Philippines by a person referred to in Section 3 of the
quality, characteristics or geographical origin of IPC, and who previously duly filed an application for
the goods or services; registration of the same mark in one of those countries,
8. Consists exclusively of signs that are generic for the shall be considered as filed as of the day the application
goods or services that they seek to identify; was first filed in the foreign country. No registration of
9. Consists exclusively of signs that have become a mark shall be granted until such mark has been
customary or usual to designate the goods or registered in the country of origin of the applicant (Sec.
services in everyday language and established 131, IPC).
trade practice;
10. Consists exclusively that may serve in trade to The owner of a mark seeking priority right is not
designate the kind, quality, quantity, intended entitled to sue for acts committed prior to the date on
purpose, value, geographical origin, time or which his mark was registered in the Philippines:
production of the goods or rendering of the except in the case of an owner of a well-known mark.
services, or other characteristics of the goods or
RIGHTS CONFERRED
services;
11. Consists of shapes that may be necessitated by 1. The right to the exclusive use of the mark for one’s
technical factors or by the nature of the goods own goods or services;
themselves or factors that affect their intrinsic 2. The right to prevent others from the use of the
value;
same mark for identical goods or services in the
12. Consists of color alone, unless defined by a given course of trade;
form; or 3. The right to the exclusive use of one’s already
13. Is contrary to public order or morality (IPC, Sec. registered marke even for goods or services into
123). which one’s venture expands, if used by others for
dissimilar products is likely to damage the business
WELL-KNOWN MARKS interest of the first venturer (Sec. 147, IPC)
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of a

CANCELLATION OF TRADEMARK REGISTRATION whether or not a registered mark is employed, has a

property right in the goodwill of the said goods,
A trademark registration may be cancelled by any business or services so identified, which will be
person who believes that he will be damaged by the protected in the same manner as other property rights
registration of the mark: (IPC, Sec. 168.1).
1. Within five (5) years from the date of the Elements of unfair competition
registration of the mark; or a) Confusing similarity in the general appearance of
2. At any time; the goods, and
a. If the registered mark becomes the generic name b) Intent to deceive the public and defraud a
for the goods or services, or a portion thereof, for competitor which may be inferred from the
which it is registered; similarity of the appearance of the goods as offered
b. If the mark has been abandoned; for sale to the public (McDonalds Corporation vs. L.
c. If its registration was obtained fraudulently or C. Big Mak Burger, Inc., G.R. No. 143993, August 18,
contrary to the provisions of the IPC; 2004).
d. If the registered mark is being used by, or with
the permission of, the registrant so as to The element of passing-off - In order to prove a case of
misrepresent the source of the goods or services on unfair competition, it is sufficient to show that such
or in connection with which the mark is used; or e. deception will be the natural and probable cause of
Non-use of the mark within the Philippines, defendants acts.
without legitimate reason, for an uninterrupted
period of 3 years. TESTS TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS
TRADEMARK INFRINGEMENT AND UNFAIR DOMINANCY TEST – it focuses on the similarity of the
COMPETITION prevalent features of the competing marks. If the
Trademark Infringement - Use without consent of the competing trademark contains the main or essential or
trademark owner of any reproduction, counterfeit, dominant features of another, and confusion and
copy or colorable limitation of any registered mark or deception are likely to result, infringement takes place.
trade name. Such use is likely to cause confusion or Duplication or imitation is not necessary; nor is it
mistake or to deceive purchasers or others as to the necessary that the infringing label should suggest an
source or origin of such goods or services, or identity of effort to imitate. The question is whether the use of
such business marks involved is likely to cause of confusion or
Elements of trademark infringement: mistake in the mind of the public or deceive purchasers.
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated by the HOLISTIC TEST – Confusing similarity is to be
infringer; determined on the basis of visual, aural, connotative
b. The infringing mark or trade name is used in comparisons and overall impressions engendered by
connection with the sale, offering for sale, or the marks in controversy as they are encountered in the
advertising of any goods, business or services; or marketplace. The trademarks in their entirety as they
the infringing mark or trade name is applied to appear in their respective labels are considered in
labels, signs, prints, packages, wrappers, relation to the goods to which they are attached.
receptacles or advertisements intended to be used
upon or in connection with such goods, business or COPYRIGHT
services; A right over literary and artistic works which are
c. The use or application of the infringing mark or original intellectual creations in the literary and artistic
trade name is likely to cause confusion or mistake domain protected from the moment of creation (IPC,
or to deceive purchasers or others as to the goods Sec. 171.1).
or services themselves or as to the source or origin
of such goods or services or the identity of such Principle of automatic protection: Works are
business; and protected by the sole fact of their creation irrespective
d. It is without the consent of the trademark or trade of their content, quality or purpose. Such rights are
name owner or the assignee thereof conferred from the moment of creation. (IPC, Sec. 172.2)
Elements of copyrightability
Unfair Competition - A person who has identified in 1. Originality – Must have been created by the
the mind of the public the goods he manufactures or author’s own skill, labor, and judgment without
deals in, his business or services from those of others,

directly copying or evasively imitating the work of 4. Pleadings

another 5. Decisions of courts and tribunals – this refers to
2. Expression – Must be embodied in a medium original decisions and not to annotated decisions
sufficiently permanent or stable to permit it to be such as the SCRA or SCAD as these already fall
perceived, reproduced or communicated for a under the classification of derivative works, hence
period more than a transitory duration. copyrightable
6. Any work of the government of the Philippines
COPYRIGHTABLE WORKS 7. TV programs, format of TV programs (Joaquin v.
1. Literary and Artistic Works Drilon, G.R. No. 108946, Jan. 28, 1999)
a. Books, pamphlets, articles and other writings 8. Systems of bookkeeping; and
b. Lectures, sermons, addresses, dissertations 9. Statutes.
prepared for Oral delivery, whether or not
reduced in writing or other material form RIGHTS OF COPYRIGHT OWNER
c. Letters 1. Economic rights – The right to carry out, authorize
d. Dramatic, choreographic works or prevent the following acts:
e. Musical compositions a. Reproduction of the work or substantial
f. Works of Art portion thereof
g. Periodicals and Newspapers b. Carry-out derivative work (dramatization,
h. Works relative to Geography, topography, translation, adaptation, abridgement,
architecture or science arrangement or other transformation of the
i. Works of Applied art work)
j. Works of a Scientific or technical character c. First distribution of the original and each copy
k. Photographic works of the work by sale or other forms of transfer
l. Audiovisual works and cinematographic of ownership
works d. Rental right
m. Pictorial illustrations and advertisements e. Public display
n. Computer programs; and f. Public performance
o. Other literary, scholarly, scientific and artistic g. Other communications to the public.
works (IPC, Sec. 172.1). 2. Moral rights – For reasons of professionalism and
propriety, the author has the right:
2. Derivative Works a. To require that the authorship of the works be
a. Dramatizations, translations, adaptations, attributed to him (attribution right)
abridgements, arrangements, and other b. To make any alterations of his work prior to, or
alterations of literary or artistic works; to withhold it from publication
b. Collections of literary, scholarly, or artistic c. To preserve integrity of work, object to any
works and compilations of data and other distortion, mutilation or other modification
materials which are original by reason of the which would be prejudicial to his honor or
selection or coordination or arrangement of reputation; and
their contents (IPC, Sec. 173). d. To restrain the use of his name with respect to
Derivative works shall be protected as new works, any work not of his own creation or in a
provided that such new work shall not affect the distorted version of his work (IPC, Sec.193).
force of any subsisting copyright upon the original 3. Droit de suite or “art proceeds right” is the artist’s
works employed or any part thereof, or be resale right, which requires that a percentage of the
construed to imply any right to such use of the resale price of an artistic work is paid to the author.
original works, or to secure or extend copyright in The right is exercisable even after the author’s
such original works (IPC, Sec. 173.2). death, provided the work is still in copyright (David
Bainbridge, Intellectual Property, 3rd Ed., p. 220
NON-COPYRIGHTABLE WORKS 1996, also cited in Copyright Law of the Philippines
1. Idea, procedure, system, method or operation, by D. Funa).
concept, principle, discovery or mere data as such
2. News of the day and other items of press OWNERSHIP OF COPYRIGHT
information 1. Original and literary artistic works – author
3. Any official text of a legislative, administrative or 2. Joint authorship – co-authors, but if work of joint
legal nature, as well as any official translation authorship consists of parts that can be used
thereof separately, then the author of each part shall be the

original owner of the copyright in the part that he purposes and has not been expressly reserved:
has created (IPC, Sec. 178.2). Provided, That the source is clearly indicated;
3. Audiovisual work – Producer, the author of the 4) The reproduction and communication to the
scenario, the composer of the music, the film public of literary, scientific or artistic works as
director, and the author of the work so adapted part of reports of current events by means of
4. Anonymous and Pseudonymous works – publishers photography, cinematography or broadcasting
shall be deemed to represent the authors of articles to the extent necessary for the purpose;
and other writings published without the names of 5) The inclusion of a work in a publication,
the authors or under pseudonyms, unless the broadcast, or other communication to the
contrary appears, or the pseudonyms or adopted public, sound recording or film, if such
name leaves no doubt as to the author's identity, or inclusion is made by way of illustration for
if the author of the anonymous works discloses his teaching purposes and is compatible with fair
identity (IPC, Sec. 179). use: Provided, That the source and of the name
5. Commissioned work – The person who of the author, if appearing in the work, are
commissioned the work shall own the work but the mentioned;
copyright thereto shall remain with the creator, 6) The recording made in schools, universities, or
unless there is a written stipulation to the contrary educational institutions of a work included in a
(IPC, Sec. 178.4). broadcast for the use of such schools,
6. Collective works – When an author contributes to a universities or educational institutions:
collective work, his right to have his contribution Provided, That such recording must be deleted
attributed to him is deemed waived unless he within a reasonable period after they were first
expressly reserves it. (IPC, Sec. 196). broadcast: Provided, further, That such
7. In the course of employment – recording may not be made from audiovisual
a. The employee, if not a part of his regular works which are part of the general cinema
duties even if the employee uses the time, repertoire of feature films except for brief
facilities and materials of the employer. excerpts of the work;
b. The employer, if the work is the result of the 7) The making of ephemeral recordings by a
performance of his regularly-assigned duties, broadcasting organization by means of its own
unless there is an agreement, express or facilities and for use in its own broadcast;
implied, to the contrary. (IPC, Sec. 178.3). 8) The use made of a work by or under the
8. Letters – the writer subject to the provisions of direction or control of the Government, by the
Article 723 of the Civil Code. (IPC, Sec. 178.6). National Library or by educational, scientific or
professional institutions where such use is in
LIMITATIONS ON COPYRIGHT the public interest and is compatible with fair
use;
1) The recitation or performance of a work, once 9) The public performance or the communication
it has been lawfully made accessible to the to the public of a work, in a place where no
public, if done privately and free of charge or if admission fee is charged in respect of such
made strictly for a charitable or religious public performance or communication, by a
institution or society; club or institution for charitable or educational
2) The making of quotations from a published purpose only, whose aim is not profit making,
work if they are compatible with fair use and subject to such other limitations as may be
only to the extent justified for the purpose, provided in the Regulations;
including quotations from newspaper articles 10) Public display of the original or a copy of the
and periodicals in the form of press work not made by means of a film, slide,
summaries: Provided, That the source and the television image or otherwise on screen or by
name of the author, if appearing on the work, means of any other device or process:
are mentioned; Provided, That either the work has been
3) The reproduction or communication to the published, or, that the original or the copy
public by mass media of articles on current displayed has been sold, given away or
political, social, economic, scientific or otherwise transferred to another person by
religious topic, lectures, addresses and other the author or his successor in title; and
works of the same nature, which are delivered 11) Any use made of a work for the purpose of any
in public if such use is for information judicial proceedings or for the giving of
professional advice by a legal practitioner.

DOCTRINE OF FAIR USE The Act applies to any kind of data message and
“Fair use” permits a secondary use that “serves the electronic document used in the context of commercial
copyright objective of stimulating productive thought and non-commercial activities (Sec. 4, RA 8792).
and public instruction without excessively diminishing
the incentives for creativity”. The fair use of a Electronic Data Message
copyrighted work for criticism, comment, news
reporting, teaching including limited number of copies This refers to information generated, sent, received or
for classroom use, scholarship, research, and similar stored by electronic, optical or similar means [Sec. 5(c),
purposes is not an infringement of copyright. RA 8792; Sec. 1(g), Rule 2, A.M. No. 01-7-01-SC].
The fact that a work is unpublished shall not by itself Legal Recognition of Electronic Data Message
bar a finding of fair use if such finding is made upon
consideration of several factors (IPC, Sec. 182.2). If you Information shall not be denied legal effect, validity or
copy to the extent that you reduce the marketability of enforceability solely on the grounds that it is in the data
the book, it is no longer fair use. message purporting to give rise to such legal effect, or
that it is merely referred to in that electronic data
Substantial reproduction: It is not necessarily message (Sec. 6, RA 8792).
required that the entire copyrighted work, or even a
large portion of it, be copied. If so much is taken that the Electronic Document
value of the original work is substantially diminished,
This refers to information or the representation of
COPYRIGHT INFRIGEMENT information, data, figures, symbols or other modes of
There is an infringement of copyright and to an written expression, described or however represented,
injurious extent, the work is appropriated. It is no by which a right is established or an obligation
defense that the pirate did not know whether or not he extinguished, or by which a fact may be prove and
was infringing any copyright; he at least knew that affirmed, which is received, recorded, transmitted,
what he was copying was not his, and he copied at his stored, processed, retrieved or produced electronically
peril. In cases of infringement, copying alone is not [Sec. 5(f), RA 8792].
what is prohibited. The copying must produce an
“injurious effect” (Habana v. Robles, G.R. No. 131522, It includes digitally signed documents and any print-
July 19, 1999). out or output, readable by sight or other means, which
accurately reflects the electronic data message or
A person infringes a right protected under this Act electronic document [Sec. 1(h), Rule 2, A.M. No. 01-7-01-
when one: SC].
a. Directly commits an infringement;
b. Benefits from the infringing activity of another Legal Recognition of Electronic Document
person who commits an infringement if the person
benefiting has been given notice of the infringing (a) Where the law requires a document to be in writing,
activity and has the right and ability to control the that requirement is met by an electronic document if
activities of the other person; the said electronic document maintains its integrity
c. With knowledge of infringing activity, induces, and reliability and can be authenticated so as to be
causes or materially contributes to the infringing usable for subsequent reference, in that –
conduct of another (IPC, Sec. 216, as amended by
R.A. No. 10372). (i) The electronic document has remained
complete and unaltered, apart from the
addition of any endorsement and any
authorized change, or any change which arises
ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO. in the normal course of communication,
8792) AND A.M. NO. 01-7-01-SC OR THE RULES ON storage and display; and
ELECTRONIC EVIDENCE
(ii) The electronic document is reliable in the
light of the purpose for which it was generated
SPHERE OF APPLICATION and in the light of all relevant circumstances.

(b) Paragraph (a) applies whether the requirement (c) It is necessary for the party sought to be bound, in
therein is in the form of an obligation or whether the or order to proceed further with the transaction, to
law simply provides consequences for the document have executed or provided the electronic signature; and
not being presented or retained in its original form.
(d) The other party is authorized and enabled to verify
(c) Where the law requires that a document be the electronic signature and to make the decision to
presented or retained in its original form, that proceed with the transaction authenticated by the
requirement is met by an electronic document if – same. (Sec. 8, RA 8792)
(i) There exists a reliable assurance as to the Presumption Relating to Electronic Signature
integrity of the document from the time when
it was first generated in its final form; and In any proceedings involving an electronic signature, it
shall be presumed that –
(ii) That document is capable of being
displayed to the person to whom it is to be (a) The electronic signature is the signature of the
presented. No provision of this Act shall apply person to whom it correlates; and
to vary any and all requirements of existing
laws on formalities required in the execution of (b) The electronic signature was affixed by that person
documents for their validity. with the intention of signing or approving the
electronic document unless the person relying on the
NOTE: For purposes of the Rules on Electronic electronically signed electronic document knows or has
Evidence, the term "electronic document" may be used noticed of defects in or unreliability of the signature or
interchangeably with "electronic data message." reliance on the electronic signature is not reasonable
under the circumstances. (Sec. 9, RA 8792)
Electronic Signature
ADMISSIBILITY AND EVIDENTIAL WEIGHT OF
This refers to any distinctive mark, characteristic ELECTRONIC DATA MESSAGE OR ELECTRONIC
and/or sound in electronic form, representing the DOCUMENT
identity of a person and attached to or logically
associated with the electronic data message or Admissibility
electronic document or any methodology or
procedures employed or adopted by a person and In any legal proceedings, nothing in the application of
executed or adopted by such person with the intention the rules on evidence shall deny the admissibility of an
of authenticating or approving an electronic data electronic data message or electronic document in
message or electronic document [Sec. 5(e), RA 8792]. evidence:
Legal Recognition of Electronic Signature (a) On the sole ground that it is in electronic form; or
An electronic signature on the electronic document (b) On the ground that it is not in the standard written
shall be equivalent to the signature of a person on a form, and the electronic data message or electronic
written document if that signature is proved by document meeting, and complying with the
showing that a prescribed procedure, not alterable by requirements under Sections 6 or 7 hereof shall be the
the parties interested in the electronic document, best evidence of the agreement and transaction
existed under which – contained therein. (Sec. 12, RA 8792)
(a) A method is used to identify the party sought to be Evidential Weight

bound and to indicate said party's access to the
electronic document necessary for his consent or The following shall be given due regard In assessing the
approval through the electronic signature; evidential weight of an electronic data message or
electronic document:
(b) Said method is reliable and appropriate for the
purpose for which the electronic document was (a) The reliability of the manner in which it was
generated or communicated, in the light of all generated, stored or communicated,
circumstances, including any relevant agreement;

(b) The reliability of the manner in which its originator

was identified, and
(c) Other relevant factors. (Sec. 12, RA 8792)
OBLIGATION OF CONFIDENTIALITY
Except for the purposes authorized under this Act, any

person who obtained access to any electronic key,
electronic data message or electronic document, book,
register, correspondence, information, or other
material pursuant to any powers conferred under this
Act, shall not convey to or share the same with any
other person (Sec. 32, RA 8792).

DATA PRIVACY ACT

(R.A. NO. 10173)
PERSONAL VS. SENSITIVE INFORMATION

PERSONAL INFORMATION SENSITIVE PERSONAL INFORMATION
Any information whether recorded in a material form or Any information:

not from which the identity of an individual is apparent 1. About an individual’s race, ethnic origin, marital
or can be reasonably and directly ascertained by the status, age, color, and religious, philosophical or
entity holding the informationor when put together political affiliations.
with other information would directly and certainly 2. About an individual’s health, education, genetic or
identify an individual. sexual life of a person, or to any proceeding for any
offense committed or alleged to have been committed
It must be: by such person, the disposal of such proceedings, or
the sentence of any court in such proceedings;
1) Collected for specified and legitimate purposes 3. Issued by government agencies peculiar to an
determined and declared before, or as soon as individual which includes, but not limited to, social
reasonably practicable after collection, and later security numbers, previous or current health records,
processed in a way compatible with such declared, licenses or its denials, suspension or revocation, and
specified and legitimate purposes only; tax returns; and
2) Processed fairly and lawfully; 4. Specifically established by an executive order or an
3) Accurate, relevant and, where necessary for act of Congress to be kept classified.
purposes for which it is to be used the processing of
personal information, kept up to date; inaccurate or GR: The processing of sensitive personal information and
incomplete data must be rectified, supplemented, privileged information shall be prohibited,
destroyed or their further processing restricted;
4) Adequate and not excessive in relation to the XPN:
purposes for which they are collected and (a) The data subject has given his or her consent, specific
processed; to the purpose prior to the processing, or in the case of
5) Retained only for as long as necessary for the privileged information, all parties to the exchange have
fulfillment of the purposes for which the data was given their consent prior to processing;
obtained or for the establishment, exercise or (b) The processing of the same is provided for by existing
defense of legal claims, or for legitimate business laws and regulations: Provided, That such regulatory
purposes, or as provided by law; and enactments guarantee the protection of the sensitive
6) Kept in a form which permits identification of data personal information and the privileged
subjects for no longer than is necessary for the information: Provided, further, That the consent of the
purposes for which the data were collected and data subjects are not required by law or regulation
processed: Provided, That personal information permitting the processing of the sensitive personal
collected for other purposes may lie processed for information or the privileged information;
historical, statistical or scientific purposes, and in (c) The processing is necessary to protect the life and
cases laid down in law may be stored for longer health of the data subject or another person, and the data
periods: Provided, further, That adequate subject is not legally or physically able to express his or
safeguards are guaranteed by said laws authorizing her consent prior to the processing;
their processing. (Sec. 11, R.A. 10173) (d) The processing is necessary to achieve the lawful and
noncommercial objectives of public organizations and
their associations: Provided, That such processing is only
confined and related to the bona fide members of these
organizations or their associations: Provided, further, That
the sensitive personal information are not transferred to
third parties: Provided, finally, That consent of the data
subject was obtained prior to processing;
(e) The processing is necessary for purposes of medical

treatment, is carried out by a medical practitioner or a
medical treatment institution, and an adequate level of
protection of personal information is ensured; or
(f) The processing concerns such personal information as
is necessary for the protection of lawful rights and
interests of natural or legal persons in court proceedings,
or the establishment, exercise or defense of legal claims,
or when provided to government or public authority. (Sec.
13, R.A. 10173)
Q: Juan Dela Cruz, a Filipino citizen, filled up a This information as specifically provided by law under
survey form. Such survey form only asked about his the Rules of Court (such as doctor-patient or attorney-
favorite coffee flavors and how much he spends per client privilege) or statute (such as arbitration
week for coffee. The survey also asked for his first proceedings and awards under the Domestic
name. Is the survey collecting personal Arbitration Law), being confidential in nature
information? generally, has the effect of making such information
inadmissible in any court or in any proceeding.
A: No. First name by itself cannot reasonably identify
an individual. Juan cannot be identified from other Privileged Information
persons named “Juan”. Neither does the information
about his favorite coffee flavors and how much he This refers to any and all forms of data which under the
spends for coffee even if taken together with his first Rules of Court and other pertinent laws constitute
name cannot be said to reasonably identify Juan. privileged communication.
NOTE: However, if the survey asked for his full name, SCOPE
even if there is more than one (1) Juan Dela Cruz in the
Philippines, it is still considered as collecting personal This Act applies to the processing of all types of
information. personal information and to any natural and juridical
person involved in personal information processing
Q: Pedro Delos Santos, a Filipino took test for HIV, including those personal information controllers and
knowing that it is free and no ID was required of processors who, although not found or established in
him, and out of fear, he filled up the application the Philippines, use equipment that are located in the
form with incorrect information. He purports to be Philippines, or those who maintain an office, branch or
Juan De Vega who is 25 years old. Is such health agency in the Philippines subject to the immediately
information a sensitive personal information? succeeding paragraph: Provided, That the requirements
of Section 5 are complied with.
A: No. health information such as medical diagnosis or
prognosis by itself is not sensitive personal information Requisites: (ProNE-Act)
unless there is a Patient ID or name of the patient 1) It must involve any processing of personal
together with the health information that be used to information
trace back to an individual. 2) By either natural or juridical persons
3) Whether or not found in the Philippines that uses
BIR, SSS, GSIS, PhilHealth and other government equipment or maintains an office, branch or agency
records are also classified as Sensitive Personal in the Philippines.
Information. 4) Either acting as a controller or processor
This Act does not apply to the following:
a. Information about any individual who is or

Confidential Information was an officer or employee of a government

institution that relates to the position or with the laws of those foreign jurisdictions,
functions of the individual, including: including any applicable data privacy laws,
(1) The fact that the individual is or was which is being processed in the Philippines.
an officer or employee of the
government institution; Protection Afforded to Journalists and Their
(2) The title, business address and office Sources
telephone number of the individual;
(3) The classification, salary range and Nothing in this Act shall be construed as to have
responsibilities of the position held by amended or repealed the provisions of Republic Act No.
the individual; and 53, which affords the publishers, editors or duly
(4) The name of the individual on a accredited reporters of any newspaper, magazine or
document prepared by the individual periodical of general circulation protection from being
in the course of employment with the compelled to reveal the source of any news report or
government; information appearing in said publication which was
b. Information about an individual who is or was related in any confidence to such publisher, editor, or
performing service under contract for a reporter. (Sec. 5, R.A. 10173)
government institution that relates to the
services performed, including the terms of the Extraterritorial Application
contract, and the name of the individual given
in the course of the performance of those This Act applies to an act done or practice engaged in
services; and outside of the Philippines by an entity if:
c. Information relating to any discretionary
benefit of a financial nature such as the 1. The act, practice or processing relates to personal
granting of a license or permit given by the information about a Philippine citizen or a
government to an individual, including the resident;
name of the individual and the exact nature of 2. The entity has a link with the Philippines, and the
the benefit; entity is processing personal information in the
d. Personal information processed for Philippines or even if the processing is outside the
journalistic, artistic, literary or research Philippines as long as it is about Philippine citizens
purposes; or residents such as, but not limited to, the
e. Information necessary in order to carry out the following:
functions of public authority which includes a. A contract is entered in the Philippines;
the processing of personal data for the b. A juridical entity unincorporated in the
performance by the independent, central Philippines but has central management and
monetary authority and law enforcement and control in the country; and
regulatory agencies of their constitutionally c. An entity that has a branch, agency, office or
and statutorily mandated functions. Nothing in subsidiary in the Philippines and the parent or
this Act shall be construed as to have amended affiliate of the Philippine entity has access to
or repealed Republic Act No. 1405, otherwise personal information; and
known as the Secrecy of Bank Deposits Act; 3. The entity has other links in the Philippines such as,
Republic Act No. 6426, otherwise known as the but not limited to:
Foreign Currency Deposit Act; and Republic a. The entity carries on business in the
Act No. 9510, otherwise known as the Credit Philippines; and
Information System Act (CISA); b. The personal information was collected or held
by an entity in the Philippines. (Sec. 6, R.A.
f. Information necessary for banks and other 10173)
financial institutions under the jurisdiction of
the independent, central monetary authority PROCESSING OF PERSONAL INFORMATION
or Bangko Sentral ng Pilipinas to comply with
Republic Act No. 9510, and Republic Act No. General Data Privacy Principles
9160, as amended, otherwise known as the
Anti-Money Laundering Act and other The processing of personal information shall be
applicable laws; and allowed, subject to compliance with the requirements
g. Personal information originally collected from of this Act and other laws allowing disclosure of
residents of foreign jurisdictions in accordance information to the public and adherence to the

principles of transparency, legitimate purpose and b. Legitimate purpose. The processing of

proportionality. information shall be compatible with a
Personal information must, be: declared and specified purpose which must not
be contrary to law, morals, or public policy.
1. Collected for specified and legitimate purposes c. Proportionality. The processing of
determined and declared before, or as soon as information shall be adequate, relevant,
reasonably practicable after collection, and later suitable, necessary, and not excessive in
processed in a way compatible with such declared, relation to a declared and specified purpose.
specified and legitimate purposes only; Personal data shall be processed only if the
2. Processed fairly and lawfully; purpose of the processing could not
3. Accurate, relevant and, where necessary for reasonably be fulfilled by other means.(Sec 18
purposes for which it is to be used the processing IRR of DPA)
of personal information, kept up to date; inaccurate
or incomplete data must be rectified, Criteria for Lawful Processing of Personal
supplemented, destroyed or their further Information
processing restricted;
4. Adequate and not excessive in relation to the The processing of personal information shall be
purposes for which they are collected and permitted only if not otherwise prohibited by law, and
processed; when at least one of the following conditions exists:
5. Retained only for as long as necessary for the 1) The data subject has given his or her consent;
fulfillment of the purposes for which the data was 2) The processing of personal information is
obtained or for the establishment, exercise or necessary and is related to the fulfillment of a
defense of legal claims, or for legitimate business contract with the data subject or in order to take
purposes, or as provided by law; and steps at the request of the data subject prior to
6. Kept in a form which permits identification of data entering into a contract;
subjects for no longer than is necessary for the 3) The processing is necessary for compliance with a
purposes for which the data were collected and legal obligation to which the personal information
processed: Provided, That personal information controller is subject;
collected for other purposes may lie processed for 4) The processing is necessary to protect vitally
historical, statistical or scientific purposes, and in important interests of the data subject, including
cases laid down in law may be stored for longer life and health;
periods: Provided, further, That adequate 5) The processing is necessary in order to respond to
safeguards are guaranteed by said laws authorizing national emergency, to comply with the
their processing. requirements of public order and safety, or to fulfill
functions of public authority which necessarily
Note: The personal information controller must ensure includes the processing of personal data for the
implementation of personal information processing fulfillment of its mandate; or
principles set out herein. 6) The processing is necessary for the purposes of the
Principles of Transparency, Legitimate Purpose legitimate interests pursued by the personal
and Proportionality information controller or by a third party or parties
to whom the data is disclosed, except where such
The processing of personal data shall be allowed interests are overridden by fundamental rights and
subject to adherence to the principles of transparency, freedoms of the data subject which require
legitimate purpose, and proportionality. protection under the Philippine Constitution.(Sec.
12, R.A. 10173)
a. Transparency. The data subject must be
aware of the nature, purpose, and extent of the Sensitive Personal Information and Privileged
processing of his or her personal data, Information
including the risks and safeguards involved,
the identity of personal information controller, The processing of sensitive personal information and
his or her rights as a data subject, and how privileged information shall be prohibited, except in
these can be exercised. Any information and the following cases:
communication relating to the processing of 1) The data subject has given his or her consent,
personal data should be easy to access and specific to the purpose prior to the processing, or
understand, using clear and plain language. in the case of privileged information, all parties to

the exchange have given their consent prior to Personal information controllers may invoke the
processing; principle of privileged communication over privileged
2) The processing of the same is provided for by information that they lawfully control or process.
existing laws and regulations: Provided, That such Subject to existing laws and regulations, any evidence
regulatory enactments guarantee the protection of gathered on privileged information is inadmissible.
the sensitive personal information and the (Sec. 15, R.A. 10173)
privileged information: Provided, further, That the
consent of the data subjects are not required by law RIGHTS OF DATA SUBJECT
or regulation permitting the processing of the
sensitive personal information or the privileged Rights of the Data Subject
information;
3) The processing is necessary to protect the life and The data subject is entitled to: (AIREI)
health of the data subject or another person, and 1) Information - Be informed whether personal
the data subject is not legally or physically able to information pertaining to him or her shall be, are
express his or her consent prior to the processing; being or have been processed;
4) The processing is necessary to achieve the lawful 2) Be furnished the information indicated hereunder
and noncommercial objectives of public before the entry of his or her personal information
organizations and their into the processing system of the personal
associations: Provided, That such processing is only information controller, or at the next practical
confined and related to the bona fide members of opportunity:
these organizations or their associations: Provided, a) Description of the personal information to be
further, That the sensitive personal information are entered into the system;
not transferred to third parties: Provided, b) Purposes for which they are being or are to be
finally, That consent of the data subject was processed;
obtained prior to processing; c) Scope and method of the personal information
5) The processing is necessary for purposes of processing;
medical treatment, is carried out by a medical d) The recipients or classes of recipients to whom
practitioner or a medical treatment institution, and they are or may be disclosed;
an adequate level of protection of personal e) Methods utilized for automated access, if the
information is ensured; or same is allowed by the data subject, and the
6) The processing concerns such personal extent to which such access is authorized;
information as is necessary for the protection of f) The identity and contact details of the personal
lawful rights and interests of natural or legal information controller or its representative;
persons in court proceedings, or the establishment, g) The period for which the information will be
exercise or defense of legal claims, or when stored; and
provided to government or public authority.(Sec. h) The existence of their rights, i.e., to access,
13, R.A. 10173) correction, as well as the right to lodge a
complaint before the Commission.
Subcontract of Personal Information i) Any information supplied or declaration made
to the data subject on these matters shall not
A personal information controller may subcontract the be amended without prior notification of data
processing of personal information: Provided, That the subject: Provided, That the notification under
personal information controller shall be responsible for subsection (b) shall not apply should the
ensuring that proper safeguards are in place to ensure personal information be needed pursuant to
the confidentiality of the personal information a subpoena or when the collection and
processed, prevent its use for unauthorized purposes, processing are for obvious purposes, including
and generally, comply with the requirements of this Act when it is necessary for the performance of or
and other laws for processing of personal information. in relation to a contract or service or when
The personal information processor shall comply with necessary or desirable in the context of an
all the requirements of this Act and other applicable employer-employee relationship, between the
laws. (Sec. 14, R.A. 10173) collector and the data subject, or when the
information is being collected and processed
Extension of Privileged Communication as a result of legal obligation;
3) Access - Reasonable access to, upon demand, the
following:

a) Contents of his or her personal information is an heir or assignee at any time after the death of the
that were processed; data subject or when the data subject is incapacitated
b) Sources from which personal information or incapable of exercising the rights as enumerated in
were obtained; the immediately preceding section. (Sec. 17, R.A. 10173)
c) Names and addresses of recipients of the
personal information; Right to Data Portability
d) Manner by which such data were processed;
e) Reasons for the disclosure of the personal The data subject shall have the right, where personal
information to recipients; information is processed by electronic means and in a
f) Information on automated processes where structured and commonly used format, to obtain from
the data will or likely to be made as the sole the personal information controller a copy of data
basis for any decision significantly affecting or undergoing processing in an electronic or structured
will affect the data subject; format, which is commonly used and allows for further
g) Date when his or her personal information use by the data subject. The Commission may specify
concerning the data subject were last accessed the electronic format referred to above, as well as the
and modified; and technical standards, modalities and procedures for
h) The designation, or name or identity and their transfer. (Sec. 18, R.A. 10173)
address of the personal information controller;
4) Rectification - Dispute the inaccuracy or error in Non-Applicability
the personal information and have the personal
information controller correct it immediately and The immediately preceding sections are not applicable
accordingly, unless the request is vexatious or if the processed personal information are used only for
otherwise unreasonable. If the personal the needs of scientific and statistical research and, on
information have been corrected, the personal the basis of such, no activities are carried out and no
information controller shall ensure the decisions are taken regarding the data
accessibility of both the new and the retracted subject: Provided, That the personal information shall
information and the simultaneous receipt of the be held under strict confidentiality and shall be used
new and the retracted information by recipients only for the declared purpose. Likewise, the
thereof: Provided, That the third parties who have immediately preceding sections are not applicable to
previously received such processed personal processing of personal information gathered for the
information shall he informed of its inaccuracy and purpose of investigations in relation to any criminal,
its rectification upon reasonable request of the data administrative or tax liabilities of a data subject. (Sec.
subject; 19, R.A. 10173)
5) Erasure/Blocking/Objection - Suspend,
withdraw or order the blocking, removal or Right to be Forgotten
destruction of his or her personal information from
the personal information controller’s filing system Personal data must be erased immediately where the
upon discovery and substantial proof that the data are no longer needed for their original processing
personal information are incomplete, outdated, purpose, or the data subject has withdrawn his consent
false, unlawfully obtained, used for unauthorized and there is no other legal ground for processing, the
purposes or are no longer necessary for the data subject has objected and there are no overriding
purposes for which they were collected. In this legitimate grounds for the processing, or erasure is
case, the personal information controller may required to fulfil a statutory obligation under the EU
notify third parties who have previously received law or the right of the Member States. In addition, data
such processed personal information; and must naturally be erased if the processing itself was
6) Indemnification - Be indemnified for any damages against the law in the first place.The controller is
sustained due to such inaccurate, incomplete, therefore on the one hand automatically subject to
outdated, false, unlawfully obtained or statutory erasure obligations, and must, on the other
unauthorized use of personal information.(Sec. 16, hand, comply with the data subject’s right to erasure.
R.A. 10173) The law does not describe how the data must be erased
in individual cases. The decisive element is that as a
Transmissibility of Rights of the Data Subject result it is no longer possible to discern personal data
without disproportionate effort. It is sufficient if the
The lawful heirs and assigns of the data subject may data media has been physically destroyed, or if the data
invoke the rights of the data subject for, which he or she is permanently over-written using special software.

The right to be forgotten is not unreservedly A: No. The Court did not accept the lawyer’s argument
guaranteed. It is limited especially when colliding with that the statements were private since he had restricted
the right of freedom of expression and information. access to the page to ‘Friends Only,’ further observing
Other exceptions are if the processing of data which is that ‘even if the Court were to accept the [lawyer’s]
subject to an erasure request is necessary to comply allegation that his posts were limited to or viewable by
with legal obligations, for archiving purposes in the his ‘Friends’ only, there is no assurance that the same
public interest, scientific or historical research […] will be safeguarded as within the confines of
purposes or statistical purposes or for the defence of privacy.’ It noted the social media platform’s goal of
legal claims.(Google Spain SL, Google Inc v Agencia allowing ‘the world to be more open and connected […]
Española de Protección de Datos, Mario Costeja González in every conceivable way,’ the implied message being
2014) that a person who shares information on social media
shouldn’t be surprised or angry if that information
Q: Nenita and Julienne were graduating high school actually does get shared.(Belo-Henares v. Guevarra, AC
students at St. Theresa’s College (STC), Cebu City. No. 11394, dated 1 December 2016.)
While changing into their swimsuits for a beach
party they were about to attend, Julia and Julienne, FINANCIAL REHABILITATION AND INSOLVENCY
along with several others, took digital pictures of ACT (R.A. 10142)
themselves clad only in their undergarments.
These pictures were then uploaded by Angela on A. Basic concepts
her Facebook profile. Back at the school, Escudero,
a computer teacher at STC’s high school Declaration of Policy
department, learned from her students that some
seniors at STC posted pictures online, depicting It is the policy of the State to encourage debtors, both
themselves from the waist up, dressed only in juridical and natural persons, and their creditors to
brassieres. Escudero reported the matter and, collectively and realistically resolve and adjust
through one of her student’s Facebook page, competing claims and property rights. In furtherance
showed the photos to Tigol, STC’s Discipline-in- thereof, the State shall ensure a timely, fair,
Charge, for appropriate action. Were unlawful transparent, effective and efficient rehabilitation or
means used by STC in gathering information about liquidation of debtors. The rehabilitation or liquidation
the photo? shall be made with a view to ensure or maintain
certainly and predictability in commercial affairs,
A: NO. Even assuming that the photos in issue are preserve and maximize the value of the assets of these
visible only to the sanctioned students’ Facebook debtors, recognize creditor rights and respect priority
friends, respondent STC can hardly be taken to task for of claims, and ensure equitable treatment of creditors
the perceived privacy invasion since it was the minors’ who are similarly situated. When rehabilitation is not
Facebook friends who showed the pictures to Tigol. feasible, it is in the interest of the State to facilities a
Respondents were mere recipients of what were speedy and orderly liquidation of these debtor's assets
posted. They did not resort to any unlawful means of and the settlement of their obligations.
gathering the information as it was voluntarily given to
them by persons who had legitimate access to the said Nature of Proceedings
posts. Clearly, the fault, if any, lies with the friends of
the minors. Curiously enough, however, neither the
In Rem The proceedings shall be in rem. Jurisdiction
minors nor their parents imputed any violation of
over all persons affected by the proceedings shall be
privacy against the students who showed the images to
Escudero (Vivares v. St. Theresa’s College, G.R. No. considered as acquired upon publication of the notice
of the commencement of the proceedings in any
202666, September 29, 2014).
newspaper of general circulation in the Philippines in
Q: Atty. X faces suspension from the practice of law the manner prescribed by the rules of procedure to be
promulgated by the Supreme Court.
for his ‘Facebook posts maligning and insulting’ the
complainant, a famous beauty doctor who counted
local movie stars as clients. His defense was that his Summary/Non-Adversarial The proceedings shall be
Facebook page had restricted access to ‘Friends conducted in a summary and non-adversarial manner
Only.’ Is his argument tenable? consistent with the declared policies of the Act and in
accordance with the rules of procedure that the
Supreme Court may promulgate.

Substantive and Procedural Consolidation. (a) Dispose or cause to be disposed of any

property of the debtor other than in the
Each juridical entity shall be considered as a separate ordinary course of business or authorize or
entity under the proceedings. The assets and liabilities approve any transaction in fraud of creditors
of a debtor may not be commingled or aggregated with or in a manner grossly disadvantageous to the
those of another, unless the latter is a related enterprise debtor and/or creditors; or
that is owned or controlled directly or indirectly by the
same interests: Provided however, that the (b) Conceal or authorize or approve the
commingling or aggregation of assets and liabilities of concealment, from the creditors, or embezzles
the debtor with those of a related enterprise may only or misappropriates, any property of the
be allowed where: debtor.
(a) there was commingling in fact of assets and The court shall determine the extent of the liability of
liabilities of the debtor and the related an owner, partner, director or officer under this section.
enterprise prior to the commencement of the In this connection, in case of partnerships and
proceedings; corporations, the court shall consider the amount of the
shareholding or partnership or equity interest of such
(b) the debtor and the related enterprise have partner, director or officer, the degree of control of such
common creditors and it will be more partner, director or officer over the debtor, and the
convenient to treat them together rather than extent of the involvement of such partner, director or
separately; debtor in the actual management of the operations of
the debtor (Sec. 10, FRIA).
(c) the related enterprise voluntarily accedes
to join the debtor as party petitioner and to
commingle its assets and liabilities with the 1. Rehabilitation
debtor's; and
Rehabilitation refers to the restoration of the debtor to
(d) The consolidation of assets and liabilities of a condition of successful operation and solvency, if it is
the debtor and the related enterprise is shown that its continuance of operation is economically
beneficial to all concerned and promotes the feasible and its creditors can recover by way of the
objectives of rehabilitation. present value of payments projected in the plan, more
if the debtor continues as a going concern than if its
immediately liquidated. (Dimaampao, 2017)
Provided, finally, that nothing in the section shall
prevent the court from joining other entities affiliated Can a distressed corporation file a petition for
with the debtor as parties pursuant to the rules of corporate rehabilitation after the dismissal of its
procedure as may be promulgated by the Supreme earlier petition for liquidation? Explain.
Court. (Sec.7, FRIA)
YES. The dismissal of a petition for liquidation does not
Liability of Individual Debtor, Owner of a Sole preclude the distressed corporation from filing a
Proprietorship, Partners in a Partnership, or petition for corporate rehabilitation. The dismissal of
Directors and Officers. the petition for liquidation implies that corporation
may still be restored to successful operation and
Individual debtor, owner of a sole proprietorship, solvency. (Dimaampao, 2017)
partners in a partnership, or directors and officers of a
debtor shall be liable for double the value of the Can the corporation file a petition for rehabilitation
property sold, embezzled or disposed of or double the first, and after it is dismissed, file a petition for
amount of the transaction involved, whichever is higher liquidation?
to be recovered for benefit of the debtor and the
creditors, if they, having notice of the commencement YES. The dismissal of a petition for rehabilitation
of the proceedings, or having reason to believe that connotes that the corporation can no longer be
proceedings are about to be commenced, or in restored. Ergo, it can file a petition for liquidation.
contemplation of the proceedings, willfully commit the (Dimaampao, 2017)
following acts:

Explain the phrase “equality is equity” in corporate

rehabilitation proceedings.
Voluntary Proceedings
“Equality is Equity” means that once the corporation is
taken over by a receiver, all the creditors stand on equal An insolvent debtor may initiate voluntary
footing and no one may be paid ahead of the others. proceedings by filing a petition for
This is consistent with the “pari passu” principle in that rehabilitation with the court, approved by:
all assets of a corporation under rehabilitation a. Sole Proprietor- by the owner
receivership are held in trust for the benefit of all b. Partnership- by majority of the
creditors, precluding one from obtaining an advantage partners
or preference over another by the expediency of c. Stock Corporation- by a majority
attachment, execution or otherwise. (Dimaampao, vote of the board of directors or
2017) trustees and authorized by the vote of
the stockholders representing at least
two-thirds (2/3) of the outstanding
2. Insolvent capital stock in a meeting called for the
purpose
Refer to the financial condition of a debtor that is d. Non-Stock Corporation- by the vote
generally unable to pay its or his liabilities as they fall of at least two-thirds (2/3) of the
due in the ordinary course of business or has liabilities members, in a stockholder's or
that are greater than its or his assets. member's meeting duly called for the
purpose.
3. Liquidation The petition shall be verified to establish
the insolvency of the debtor and the
In a broad sense, it is equivalent to winding up, that is, viability of its rehabilitation.
the comprehensive process of settling accounts,
ascertaining and adjusting debts, collecting assets and
paying off claims. It is a declaration by the trial court of
Involuntary Proceedings
the corporation’s insolvency so that its creditors may
be able to file their claims in the settlement of
corporation’s debts and obligations. (Pacific Banking Circumstances Necessary to Initiate
Corporation Employees Oraganization v. CA, 312 Phil. Involuntary Proceedings
578, 592-593)
Any creditor or group of creditors with a
claim of, or the aggregate of whose claims
4. Suspension of payments is, at least One Million Pesos
(Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital
An individual debtor who, possessing sufficient stock or partners' contributions,
property to cover all his debts but foreseeing the whichever is higher, may initiate
involuntary proceedings against the
impossibility of meeting them when they respectively
fall due, may file a verified petition that he be declared debtor by filing a petition for
rehabilitation with the court if:
in the state of suspension of payments by the court of
the province or city in which he has resides for six (6)
months prior to the filing of his petition. He shall attach (a) there is no genuine issue of fact on law
on the claim/s of the petitioner/s, and that
to his petition, as a minimum: (a) a schedule of debts
and liabilities; (b) an inventory of assess; and (c) a the due and demandable payments
proposed agreement with his creditors. (Sec 94, FRIA) thereon have not been made for at least
sixty (60) days or that the debtor has failed
generally to meet its liabilities as they fall
B. Modes of rehabilitation due; or
1. Court-supervised rehabilitation
(b) a creditor, other than the petitioner/s,
a. Voluntary vs. involuntary has initiated foreclosure proceedings

against the debtor that will prevent the (a)A citizen of the Philippines or a resident of
debtor from paying its debts as they the Philippines in the six (6) months
become due or will render it insolvent. immediately preceding his nomination;
b. Commencement order (b)Of good moral character and with

(including stay order) acknowledged integrity, impartiality and
independence;
The rehabilitation proceedings shall commence upon
the issuance of the Commencement Order which shall (c)Has the requisite knowledge of insolvency
include the appointment of Rehabilitation Officer and a and other relevant commercial laws, rules and
Stay/Suspension Order which shall: procedures, as well as the relevant training
and/or experience that may be necessary to
(1) suspend all actions or proceedings, in court or enable him to properly discharge the duties
otherwise, for the enforcement of claims against the and obligations of a rehabilitation receiver;
debtor; and
(2) suspend all actions to enforce any judgment, (d)Has no conflict of interest: Provided, That
attachment or other provisional remedies against the such conflict of interest may be waived,
debtor; expressly or impliedly, by a party who may be
prejudiced thereby.
3) prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its Other qualifications and disqualification’s of the
properties except in the ordinary course of business; rehabilitation receiver shall be set forth in procedural
and rules, taking into consideration the nature of the
business of the debtor and the need to protect the the
(4) prohibit the debtor from making any payment of its interest of all stakeholders concerned.
liabilities outstanding as of the commencement date
except as may be provided. interest of all stakeholders concerned.
Powers, Duties and Responsibilities of

a. Rehabilitation receiver and Rehabilitation Receiver
management committee
The rehabilitation receiver shall be deemed an officer
Rehabilitation Receiver of the court with the principal duty of preserving and
Any qualified natural or juridical person may maximizing the value of the assets of the debtor during
serve as a rehabilitation the rehabilitation proceedings, determining the
receiver: Provided, That if the rehabilitation viability of the rehabilitation of the debtor, preparing
receiver is a juridical entity, it must designate and recommending a Rehabilitation Plan to the court,
a natural person/s who possess/es all the and implementing the approved Rehabilitation Plan.
qualifications and none of the disqualification’s
as its representative, it being understood that The rehabilitation receiver shall have the following
the juridical entity and the representative/s powers, duties and responsibilities:
are solidarily liable for all obligations and
responsibilities of the rehabilitation receiver.
(a)To verify the accuracy of the factual
allegations in the petition and its annexes;
Qualifications of a Rehabilitation Receiver (b)To verify and correct, if necessary, the

inventory of all of the assets of the debtor, and
The rehabilitation receiver shall have the their valuation;
following minimum qualifications:
(c)To verify and correct, if necessary, the
schedule of debts and liabilities of the debtor;

(d)To evaluate the validity, genuineness and motion of any creditor. or as may be provided,
true amount of all the claims against the in the Rehabilitation Plan.
debtor;
Unless appointed by the court, pursuant to Section 36,
(e)To take possession, custody and control, the rehabilitation receiver shall not take over the
and to preserve the value of all the property of management and control of the debtor but may
the debtor; recommend the appointment of a management
committee over the debtor in the cases provided by the
(f)To sue and recover, with the approval of the Act.
court, all amounts owed to, and all properties
pertaining to the debtor; Removal of Rehabilitation Receiver
(g)To have access to all information necessary, The rehabilitation receiver may be removed at any time
proper or relevant to the operations and
business of the debtor and for its a. by the court either motu proprio or
rehabilitation; b. upon motion by any creditor/s holding more
than fifty percent (50%) of the total obligations
(h) To sue and recover, with the. approval of of the debtor, on such grounds as the rules of
the court, all property or money of the debtor procedure may provide which shall include,
paid, transferred or disbursed in fraud of the but are not limited to, the following:
debtor or its creditors, or which constitute
undue preference of creditor/s; (a) Incompetence, gross negligence, failure to
perform or failure to exercise the proper
(i) To monitor the operations and the business degree of care in the performance of his duties
of the debtor to ensure that no payments or and powers;
transfers of property are made other than in
the ordinary course of business; (b) Lack of a particular or specialized
competency required by the specific case;
(j) With the court's approval, to engage the
services of or to employ persons or entities to (c) Illegal acts or conduct in the performance of
assist him in the discharge of his functions; his duties and powers;
(k) To determine the manner by which the (d) Lack of qualification or presence of any
debtor may be best rehabilitated, to review) disqualification;
revise and/or recommend action on the
Rehabilitation Plan and submit the same or a (e) Conflict of interest that arises after his
new one to the court for approval; appointment; and
(1) To implement the Rehabilitation Plan as (f) Manifest lack of independence that is
approved by the court, if 80 provided under detrimental to the general body of the
the Rehabilitation Plan; stakeholders.
(m) To assume and exercise the powers of Oath and Bond of the Rehabilitation Receiver
management of the debtor, if directed by the
court pursuant to Section 36 hereof;
Prior to entering upon his powers, duties and
responsibilities, the rehabilitation receiver shall take an
(n) To exercise such other powers as may, from oath and file a bond, in such amount to be fixed by the
time to time, be conferred upon him by the court, conditioned upon the faithful and proper
court; and discharge of his powers, duties and responsibilities.
To submit a status report on the rehabilitation Management Committee

proceedings every quarter or as may be
required by the court motu proprio. or upon

The management committee shall take the place of the ii. Material financial
management and the governing body of the debtor and commitments
assume their rights and responsibilities. iii. Liquidation analysis
f. Creditor approval and
The specific powers and duties of the management confirmation
committee, whose members shall be considered as
officers of the court, shall be prescribed by the The rehabilitation receiver shall notify the creditors
procedural rules. and stakeholders that the Plan is ready for their
examination. Within twenty (20) days from the said
Qualifications of Members of the Management notification, the rehabilitation receiver shall convene
Committee. the creditors, either as a whole or per class, for
purposes of voting on the approval of the Plan. The Plan
The qualifications and disqualification’s of the shall be deemed rejected unless approved by all classes
members of the management committee shall be set of creditors whose rights are adversely modified or
forth in the procedural rules, taking into consideration affected by the Plan. The Plan is deemed to have been
the nature of the business of the debtor and the need to approved by a class of creditors if members of the said
protect the interest of all stakeholders concerned. class holding more than fifty percent (50%) of the total
claims of the said class vote in favor of the Plan. The
votes of the creditors shall be based solely on the
amount of their respective claims based on the registry
d. Determination of claims of claims submitted by the rehabilitation receiver
pursuant to Section 44.
Registry of Claims
Court’s Confirmation of Rehabilitation Plan
Within twenty (20) days from his assumption into
office, the rehabilitation receiver shall establish a Notwithstanding the rejection of the Rehabilitation
preliminary registry of claims. The rehabilitation Plan, the court may motu propio or upon motion of any
receiver shall make the registry available for public interested party within ten (10) days from notice of the
inspection and provide publication notice to the debtor, rejection, confirm the Plan if all the following
creditors and stakeholders on where and when they circumstances are present:
may inspect it. All claims included in the registry of
claims must be duly supported by sufficient evidence. (a)The Rehabilitation Plan complies with the
requirements specified.
Rehabilitation plan i. Concept of feasibility ii. Material
financial commitments iii. Liquidation analysis f. (b) The rehabilitation receiver recommends
Creditor approval and confirmation g. Failure of the confirmation of the Rehabilitation Plan;
rehabilitation
(c) The shareholders, owners or partners of
e. Rehabilitation plan the juridical debtor lose at least their
controlling interest as a result of the
Rehabilitation Plan; and
Refer to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using (d) The Rehabilitation Plan would likely
various means including, but not limited to, debt provide the objecting class of creditors with
forgiveness, debt rescheduling, reorganization or compensation which has a net present value
quasi-reorganization, dacion en pago, debt-equity greater than that which they would have
conversion and sale of the business (or parts of it) as a received if the debtor were under liquidation.
going concern, or setting-up of new business entity as
prescribed in Section 62, or other similar arrangements The court shall issue an order confirming the
as may be approved by the court or creditors. rehabilitation Plan in any of the following instances:
i. Concept of feasibility a. no objections filed within the twenty (20) day

period from receipt of notice from the court

that a Rehabilitation Plan has been submitted incurred huge financial liabilities. He remained
to the court; afloat only because of the properties inherited from
b. the court finds the objections lacking in merit; his parents who had both come from landed
c. the basis of the objection has been cured; or families in Laguna. His main creditor was
d. the debtor has complied with the order to cure Puresilver Company (Puresilver), the principal
the objection. supplier of the merchandise sold in his store. To
secure his credit with Puresilver, he executed a real
estate mortgage with a dragnet clause involving his
g. Failure of rehabilitation family's assets worth several millions of pesos.
The court may declare a failure of rehabilitation if it Nonetheless, Hortencio, while generally in the
finds that there is no substantial likelihood that the black, now faces a situation where he is unable to
debtor can be rehabilitated. pay his liabilities as they fall due in the ordinary
course of business. What will you advise him to do
to resolve his dire financial condition?
Explain your answer. (5%) (2017 BAR)
Wyatt, an Internet entrepreneur, engaged in a
sideline business of creating computer programs Suggested Answer:
for selected clients on a per project basis and for
servicing basic computer problems of his friends If Hortencio is doing business as a registered sole
and family members. His main job was being an IT proprietorship he can file a petition for rehabilitation.
consultant at Futures Co., a local computer Under FRIA, a sole proprietorship can now file a
company. petition for rehabilitation. The remedy may be availed
of in case of actual or technical insolvency. In the
Because of his ill-advised investments in the stock petition, he can pray for the issuance of a
market and the fraud perpetrated against him by commencement order which includes a stay order. The
his trusted confidante, Wyatt was already drowning stay order, once issued, has the effect of enjoining the
in debt, that is, he had far more liabilities than his enforcement of claim against Hortencio. If Hortencio is
entire assets. not registered as a sole proprietorship, he can file a
petition for suspension of payments in the city or
What legal recourse remained available to Wyatt? province in which he has resided for six months prior
Explain your answerr. (5%) (2017 BAR) to the filing of the petition, a remedy available to an
individual debtor who has more assets than liabilities
Suggested Answer: but foresees the Impossibility of paying his debts when
If Wyatt is registered as sole proprietorship, he may file they respectively fall due (Section 94, FRIA).
a petition for rehabilitation or voluntary liquidation.
Under FRIA, an insolvent debtor may file a petition for
rehabilitation even if the assets are less than DMP Corporation (DMP) obtained a loan of P20 M
liabilities.The petition should include a rehabilitation from National Bank (NB) secured by a real estate
plan and nominee for rehabilitation receiver. He can mortgage over a 63,380-square meter land situated
also file a petition for voluntary liquidation since his in Cabanatuan City. Due to the Asian Economic
liabilities exceed his assets. The objective of liquidation Crisis, DMP experienced liquidity problems
is to get discharge, maximize recovery of assets and disenabling it from paying its loan on time. For that
effect equitable distribution of such assets based on the reason, NB sought the extrajudicial foreclosure of
rules on concurrence and preference of credit. the said mortgage by filing a petition for sale on
June 30, 2003. On September 4, 2003, the
If he is not registered as a sole proprietorship, he may mortgaged property was sold at public auction,
only file petition for voluntary liquidation since his which was eventually awarded to NB as the highest
assets are less than liabilities (Section 103 of FRIA). bidder. That same day, the Sheriff executed a
Petition for suspension of payments is not available as Certificate of Sale in favor of NB.
a remedy to an individual debtor not registered as a
sole proprietorship On October 21, 2003, DMP filed a Petition for
Rehabilitation before the RTC. Pursuant to this, a
Hortencio owned a modest grocery business in Stay Order was issued by the RTC on October 27,
Laguna. Because of the economic downturn, he 2003.

b. Period and effect of approval

On the other hand, NB caused the recording of the
Sheriff’s certificate of Sale on December 3, 2003 The court shall have a maximum period of one
with the Register of Deeds of Cabanatuan City. NB hundred twenty (120) days from the date of
executed an Affidavit of Consolidation of the filing of the petition to approve the
Ownership and had the same annotated on the title Rehabilitation Plan. If the court fails to act
of DMP. Consequently, the Register of Deeds within the said period, the Rehabilitation Plan
cancelled DMP’s title and issued a new title in the shall be deemed approved.
name of NB on December 10, 2003.
Effect of Approval
NB also filed on March 17, 2004 an Ex-Parte Petition
for Issuance of Writ of Possession before the RTC of Approval of a Plan under this chapter shall
Cabanatuan City. After hearing, the RTC issued on have the same legal effect as confirmation of a
September 6, 2004 an Order directing the Issuance Plan under Court-Supervised Rehabilitation
of the Writ of Possession, which was issued on
October 4, 2004.
DMP claims that all subsequent actions pertaining 3. Out-of-Court or Informal Restructuring
to the Cabanatuan property should have been held Agreement or Rehabilitation Plan
in abeyance after the Stay Order was issued by the
rehabilitation court. Is DMP correct? (2014 BAR)
An out-of-court or informal restructuring agreement or
Suggested Answer: Rehabilitation Plan shall comply with both
No. DMP is not correct. Since the foreclosure of the requirements:
mortgage and the issuance of the certificate of sale in
favor of the mortgagee were done prior to the a. approval by the
appointment of a Rehabilitation Receiver and the 1. debtor;
issuance of the Stay Order, all the actions taken with 2. creditors representing at least 67% of
respect to the foreclosed mortgaged property which the secured obligations of the debtor
were subsequent to the issuance of the Stay Order were 3. creditors representing at least 75% of
not affected by the Stay Order. Thus, after the the unsecured obligations of the
redemption period expired without the mortgagor debtor
redeeming the foreclosed property, the mortgagee 4. creditors holding at least 85% of the
becomes the absolute owner of the property and it was total liabilities, secured and unsecured
within its right to ask for consolidation of title and the obligations of the debtor and
issuance of new title in its favor. The writ of possession
procured by the mortgagee despite the subsequent b. Publication of the notice of the OCRA once
issuance of Stay Order in the rehabilitation proceeding a week for at least 3 consecutive weeks in
instituted is also valid. newspaper of general circulation.
2. Pre-negotiated rehabilitation
a. How initiated a. Minimum requirements
An insolvent debtor, by itself or jointly with
any of its creditors, may file a verified petition For an out-of-court or informal restructuring/workout
with the court for the approval of a pre- agreement or Rehabilitation Plan to qualify under this
negotiated Rehabilitation Plan which has been chapter, it must meet the following minimum
endorsed or approved by creditors holding at requirements:
least two-thirds (2/3) of the total liabilities of
the debtor, including secured creditors holding (a) The debtor must agree to the out-of-court or
more than fifty percent (50%) of the total informal restructuring/workout agreement or
secured claims of the debtor and unsecured Rehabilitation Plan;
creditors holding more than fifty percent
(50%) of the total unsecured claims of the
debtor (Sec. 76, FRIA).

(b) It must be approved by creditors representing at C. Liquidation

least sixty-seven (67%) of the secured obligations of 1. Voluntary liquidation vs. involuntary liquidation
the debtor; vs. conversion
(c) It must be approved by creditors representing at Voluntary Liquidation

least seventy-five percent (75%) of the unsecured
obligations of the debtor; and An insolvent debtor may apply for liquidation by filing
a petition for liquidation with the court. The petition
(d) It must be approved by creditors holding at least shall be verified, shall establish the insolvency of the
eighty-five percent (85%) of the total liabilities, debtor (Sec. 90, FRIA).
secured and unsecured, of the debtor.
An individual debtor whose properties are not
sufficient to cover his liabilities, and owing debts
b. Standstill period exceeding Five hundred thousand pesos
(Php500,000.00), may apply to be discharged from his
debts and liabilities by filing a verified petition with the
A standstill period that may be agreed upon by the court of the province or city in which he has resided for
parties pending negotiation and finalization of the out- six (6) months prior to the filing of such petition. He
of-court or informal restructuring/workout agreement shall attach to his petition a schedule of debts and
or Rehabilitation Plan contemplated herein shall be liabilities and an inventory of assets. The filing of such
effective and enforceable not only against the petition shall be an act of insolvency. (Sec. 103, FRIA).
contracting parties but also against the other
creditors: Provided, That (a) such agreement is Under the Financial Rehabilitation and Insolvency
approved by creditors representing more than fifty Act (FRIA), the filing of a petition for voluntary
percent (50%) of the total liabilities of the debtor; (b) rehabilitation must be approved by:
notice thereof is publishing in a newspaper of general A. A majority vote of the Board of Directors
circulation in the Philippines once a week for two (2) and authorized by the vote of the
consecutive weeks; and (c) the standstill period does stockholders representing at least a
not exceed one hundred twenty (120) days from the majority of the outstanding capital stock.
date of effectivity. The notice must invite creditors to B. A majority vote of the Board of Directors
participate in the negotiation for out-of-court and authorized by the vote of the
rehabilitation or restructuring agreement and notify stockholders representing at least 2/3 of
them that said agreement will be binding on all the outstanding capital stock.
creditors if the required majority votes prescribed in C. 2/3 vote of the Board of Directors and
Section 84 of this Act are met. authorized by the vote of the stockholders
representing at least a majority of the
outstanding capital stock.
c. Cram down effect D. 2/3 vote of the Board of Directors and
authorized by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock. (2014 BAR)
A restructuring/workout agreement or Rehabilitation
Plan that is approved pursuant to an informal workout Suggested Answer:
framework referred to in this chapter shall have the b. A majority vote of the Board of Directors and
same legal effect as confirmation of a Plan under authorized by the vote of the stockholders representing
Section 69 hereof. The notice of the Rehabilitation Plan at least 2/3 of the outstanding capital stock.
or restructuring agreement or Plan shall be published
once a week for at least three (3) consecutive weeks in
a newspaper of general circulation in the Philippines.
The Rehabilitation Plan or restructuring agreement
shall take effect upon the lapse of fifteen (15) days from Involuntary Liquidation
the date of the last publication of the notice thereof.
Three (3) or more creditors the aggregate of whose
claims is at least either One million pesos
(Php1,000,000,00) or at least twenty-five percent

(25%) of the subscribed capital stock or partner's (h) authorize the payment of administrative
contributions of the debtor, whichever is higher, may expenses as they become due;
apply for and seek the liquidation of an insolvent debtor
by filing a petition for liquidation of the debtor with the (i) state that the debtor and creditors who are
court. not petitioner/s may submit the names of
other nominees to the position of liquidator;
and
Conversion by the Court into Liquidation (j) set the case for hearing for the election and
Proceedings appointment of the liquidator, which date shall
not be less than thirty (30) days nor more than
During the pendency of court-supervised or pre- forty-five (45) days from the date of the last
negotiated rehabilitation proceedings, the court may publication.
order the conversion of rehabilitation proceedings to
liquidation proceedings or at any other time upon the Effects of the Liquidation Order
recommendation of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible. Thereupon,
Upon the issuance of the Liquidation Order:
the court shall issue the Liquidation Order mentioned
in Section 112 of FRIA.
(a) the juridical debtor shall be deemed
dissolved and its corporate or juridical
existence terminated;
2. Procedure
a. Liquidation order; effects
(b) legal title to and control of all the assets of
the debtor, except those that may be exempt
from execution, shall be deemed vested in the
The Liquidation Order shall:
liquidator or, pending his election or
appointment, with the court;
(a) declare the debtor insolvent;
(c) all contracts of the debtor shall be deemed
(b) order the liquidation of the debtor and, in terminated and/or breached, unless the
the case of a juridical debtor, declare it as liquidator, within ninety (90) days from the
dissolved; date of his assumption of office, declares
otherwise and the contracting party agrees;
(c) order the sheriff to take possession and
control of all the property of the debtor, except (d) no separate action for the collection of an
those that may be exempt from execution; unsecured claim shall be allowed. Such actions
already pending will be transferred to the
(d) order the publication of the petition or Liquidator for him to accept and settle or
motion in a newspaper of general circulation contest. If the liquidator contests or disputes
once a week for two (2) consecutive weeks; the claim, the court shall allow, hear and
resolve such contest except when the case is
(e) direct payments of any claims and already on appeal. In such a case, the suit may
conveyance of any property due the debtor to proceed to judgment, and any final and
the liquidator; executor judgment therein for a claim against
the debtor shall be filed and allowed in court;
(f) prohibit payments by the debtor and the and
transfer of any property by the debtor;
(e) no foreclosure proceeding shall be allowed
(g) direct all creditors to file their claims with for a period of one hundred eighty (180) days.
the liquidator within the period set by the rules
of procedure;
3. Determination of claims

Within twenty (20) days from his assumption into E. Remedies

office the liquidator shall prepare a preliminary
registry of claims of secured and unsecured creditors. 1. Motion for reconsideration
Secured creditors who have waived their security or
lien, or have fixed the value of the property subject of A party may file a motion for reconsideration of a
their security or lien by agreement with the liquidator Suspension of Payments Order or any order issued by
and is admitted as a creditor for the balance , shall be the court prior its order conforming or disapproving
considered as unsecured creditors. The liquidator shall the proposed agreements.
make the registry available for public inspection and
provide publication notice to creditors, individual
debtors owner/s of the sole proprietorship-debtor, the 2. Petition for certiorari
partners of the partnership-debtor and shareholders or
members of the corporation-debtor, on where and. An order issued after the approval of the Rehabilitation
when they may inspect it. All claims must be duly Plan can be reviewed only through a special civil action
proven before being paid. for certiorari under Rule 65 of the Rules of Court.
D. Suspension of Payments; Suspension of Payment

Order
An individual debtor who, possessing sufficient

property to cover all his debts but foreseeing the
impossibility of meeting them when they respectively
fall due, may file a verified petition that he be declared
in the state of suspension of payments by the court of
the province or city in which he has resides for six (6)
months prior to the filing of his petition. He shall attach
to his petition, as a minimum: (a) a schedule of debts
and liabilities; (b) an inventory of assess; and (c) a
proposed agreement with his creditors. (Sec 94, FRIA)
Suspension of Payment Order
Upon motion filed by the individual debtor, the court

may issue an order suspending any pending execution
against the individual debtor. Provide, That properties
held as security by secured creditors shall not be the
subject of such suspension order. The suspension order
shall lapse when three (3) months shall have passed
without the proposed agreement being accepted by the
creditors or as soon as such agreement is denied.
No creditor shall sue or institute proceedings to collect

his claim from the debtor from the time of the filing of
the petition for suspension of payments and for as long
as proceedings remain pending except:
(a) those creditors having claims for personal

labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor
incurred in the sixty (60) days immediately
prior to the filing of the petition; and
(b) secured creditors.



Ust Law Pre-Week Notes 2019: Kinds of Bank Role Liability

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UST LAW PRE-WEEK NOTES 2019

LETTERS OF CREDIT the beneficiary is the one who in compliance with

KINDS OF ROLE LIABILITY

2. After negotiation – A contractual relationship will then

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substantive due process, there being no physical

What is Negotiable Instrument? When is an instrument payable to bearer? (ENaF

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g. The electronic messages (known in the banking XPN:

 Payable to bearer – the party whose

1. Wholly inoperative and Parties prior to forgery, including the maker,

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instrument relating to the obligation of a party. In other

The accommodation party, as surety, is deemed an

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Rights of Holder (Sec.51)

Indorsement must be of Entire Instrument The holder of a negotiable instrument may:

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rights as such holder to the latter and acquires the right

It is a bill of exchange drawn on a bank and payable on

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A: It is an agreement whereby one undertakes for a

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A: YES. BD has insurable interest in his bank deposit. In 2. Insurable Interest

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NOTE: The existence of insurable interest is a matter of 1. The person insured is

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insurers in such order as he may select, up to the

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constitutes theft under the insurance policy that is

The main purpose of this clause is to require a person Incontestability Clause

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Instances wherein a contract of insurance may be 1. Concealment

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NOTE: In the absence of evidence that the insured has

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GR: It will not avoid the policy. Loss in insurance

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What is a private carrier? Once a passenger in the course of travel is injured, or

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Passengers must take such risks incident to the mode of

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carrier but the amount of damages shall be equitably

Defenses available in culpa contractual (FEC) WARSAW CONVENTION OF 1929 (WC)

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Philippine Courts have no jurisdiction over a tortuous

1. The court where the carrier is domiciled;

The WC shall also apply to fortuitous transportation by

Transportation to be performed by several successive

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